Fauji group to extend lead over Engro

Fauji group will extend its current lead if the Fauji Fertiliser Company is successful in its bid for Agritech Ltd.

KARACHI: If the Fauji Fertiliser Company is successful in its bid for Agritech Ltd, the Fauji group will extend its current lead in the fertiliser sector and is likely to extend their lead over their closest competitor, the Engro Corporation.

Analysts estimate that the group – which includes Fauji Fertiliser Company (KSE: FFC) and Fauji Fertiliser Bin Qasim (KSE: FFBL) – would control over 45 per cent of the urea market after the acquisition in addition to retaining its current monopoly over the production of diammonium phosphate (DAP), a high-quality fertiliser. In addition, it would also gain a foothold in the market for single super phosphate (SSP), considered a close substitute for DAP.

Bilal Qamar, an analyst at the investment bank JS Global Capital, says that the acquisition is likely to improve the profitability of FFC.

“Agritech operates one of the newest and the most cost efficient plants in Pakistan which could bring in cost efficiencies for FFC,” said Mr Qamar in a research note issued to clients on Monday.

There has been concern amongst some investors, however, that the transaction, estimated anywhere between Rs6.3 billion and Rs9.4 billion ($74 million and $110 million) would force FFC to cuts its dividend payments in order to finance the acquisition.

Engro Corporation, and its associated firm Dawood Hercules, control a combined 35 per cent of the domestic production of urea, the most commonly used fertiliser in Pakistan. Engro, however, has plans to significantly expand its total production capacity in urea, nearly doubling it by the end of the current calendar year. Engro announced earlier this year that it plans on setting up its own production unit for DAP in North Africa. Although the company has not specified a specific country, it is most likely to be Morocco, since that country has the world’s largest reserves of phosphorus. The Fauji group already has a DAP manufacturing facility in Morocco, named Pakistan Maroc Phosphore.

Competition for the fertiliser market in Pakistan has been intensifying in recent years as income levels amongst farmers have risen over the past decade. Pakistan currently imports approximately one fifth of its total demand for fertiliser.

Engro and Fauji are the two largest players but recently, Fatima Fertilisers has come up as a strong competitor in the sector, with the unique advantage of being the only firm to produce the full array of fertilisers.

While Engro has fallen behind Fauji in recent years in the fertiliser sector, its focus has shifted towards becoming a conglomerate that does more than just fertilisers and petrochemicals, its historic strengths. In 2006, the company launched Engro Foods, its first foray into the packaged foods business.

The Fauji group, for its part, has gone into cement manufacturing, a business that was particularly boosted by the recent construction boom in the Middle East.

There are, however, several differences in the nature of both firms. The Fauji group is part of the Fauji Foundation, a military-owned business endowment ostensibly designed to promote soldiers’ welfare. It is alleged to have access to indirect subsidies beyond those available to private enterprises. Engro Corporation, on the other hand, is Pakistan’s only employee-owned company with aspirations to become its first multinational firm.

Published in The Express Tribune, August 24^th, 2010.