Corporate result: Fauji Fertilizer’s profit down 30%

Earnings per share declined to Rs2.2 as low urea sales took their toll

KARACHI: Fauji Fertilizer Company (FFC) Wednesday announced a net profit of Rs2.8 billion in the second quarter ended June 30, down 33% compared with Rs4.2 billion in the same period last year, according to a company notice sent to the Pakistan Stock Exchange (PSX).

The result was above market expectations, a Topline Securities report said on Wednesday. The benchmark KSE-100 Index closed at 39,434, up 287 points or 0.73% Wednesday. FFC share price increased 0.96% to close at Rs114.81.

Earnings per share (EPS) of the company declined to Rs2.2 from an EPS of Rs3.3. The company also declared an interim cash dividend of Rs1.55 per share, taking total dividend in first half of 2016 (1H2016) to Rs3.4 per share.

Revenue in the second quarter of 2016 (2Q2016) plummeted 11% year-on-year (YoY) to Rs17.6 billion owing to Rs90-100 per bag decline in Urea retention prices.

Deteriorating fundamentals of the agriculture business in Pakistan have led to a fall in overall fertiliser demand.

To recall, for the development of agriculture and protection of the interests of farmers, the government reduced feed gas prices by Rs77 per million British thermal units (mmbtu), effective from April 1, 2016.

Additionally, the government also announced Rs70 per bag reduction in urea prices. In spite of this, fertiliser sales failed to pick up due to poor farm economics.

Cost of sales also fell by 7% YoY to Rs11.8 billion in 2Q2016 essentially due to 38% YoY decrease in feed gas prices. Due to a much more amplified reduction in revenues as compared to the cost of sales, gross margins declined by 3 percentage points to 33%.

Finance cost of the company surged by 54% YoY to Rs869 million in 2Q2016 owing to the increase in borrowings made by the company to finance its Gas Infrastructure Development Cess (GIDC) payments and a crunch in the working capital of the company.

The considerable increase in other income, up 211% YoY to Rs1.6 billion, was most likely due to the disbursement of the subsidy on urea of Rs390 per bag in June 2016.

During the 1H2016, revenue of FFC posted a slump of 27% while cost of sales declined by 17% due to a substantial fall in urea retention prices, and 23% YoY fall in urea off-takes.

These factors, in addition to absence of dividend income, and imposition of super tax have led to drag in profitability by 29% a year-on-year to Rs6.2 billion (EPS Rs4.9).

Higher inventory levels, and weak performance of FCC’s subsidiaries in future are potential risks for the company.

Published in The Express Tribune, July 28^th, 2016.

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