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Fauji Fertilizer             
BY Dilawar Hussain

Fauji Fertilizer :
Never mind the turnover of Rs4.0 billion for the first quarter 2003, which Fauji Fertilizer - the biggest among urea producers in the country - said "were the highest ever achieved by the company during the first quarter in any one year", profits are down 20 per cent.

And while the company admitted that the higher sales had much to do with the acquisition of Pak Saudi Fertilizer Limited (PSFL), the higher financial charges due to mainly leveraged buy-out of PSFL and the lower 'other income' were at least contributory reasons for lower profits.

Chairman Lt. Gen. Syed Muhammad Amjad (retired) wrote in the directors review for the first quarter ended March 31, 2003 that FFC urea sales for the period, though higher by industry standards, were lower than planned targets. 

In consequence net profit after tax for the quarter were negatively impacted due to increase in selling expenses, financial charges and reduction in investment income.

Net profit after tax fell 20 per cent to Rs609 million, from Rs762 million in the first quarter of the previous year.

But for all that the Board approved the first interim dividend at 30 per cent, which required an appropriation of Rs769.5 million from the available divisible profit for the period. 

Fauji Fertilizer has a record of handsome dividend payouts; for all of last year, the company had disbursed cash dividend at 90 per cent, up from 85 per cent the year earlier.


As the company holds a huge 256 million shares outstanding, liquidity is considerable. In the first four months of the current calendar year, nearly 292 million shares were traded at the Karachi Stock Exchange.

The 10-rupee share is currently priced at Rs82.90, which places it on price-to-earnings multiple of 8.7 on the annualized first quarter earnings of Rs2.37 per share. 

For the first quarter 2003 under review, the chairman noted that the company had achieved 55 per cent increase in production and 46 per cent enhancement in revenues with corresponding increase of 17 per cent in the gross profit, over the same period of 2002. 

He noted that the production of company's brand 'Sona' urea stood at 384 thousand tons, which represented an operating efficiency of 116 per cent.

Acquisition Unit (Pak Saudi Fertilizer) produced 169 thousand tons at 118 per cent of designed capacity. Sales of own manufactured urea at 406 thousand tons, including 126 thousand tons produced by the Acquisition Unit, were up by 11 per cent.

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Margins had come under pressure. Gross margin was down to 39 per cent, from 49 per cent in the first quarter last year, while net profit margin to sales had also declined to 24 per cent, from 44 per cent.

Financial charges increase to Rs201 million for the period under review, from Rs41 million in the corresponding period of the previous year, due partly to the acquisition costs which were financed mainly through borrowings.

"Other income" decreased 46 per cent to Rs139 million, from Rs256 million due to lower investments and decline in interest rates. 

Wajahat Ali, research head at Taurus Securities observed that Fauji Fertilizer had lowered its depreciation rate on plant and machinery to 5 per cent with effect from January 1, 2003, following an assessment of extended useful life.

He estimated that the reduction in depreciation rate would lower depreciation charge by about Rs240 million in the current year, and as there would be no change in the tax basis, the amount should effectively flow through to the bottom line.

Though, why the company had decided to lower the depreciation charge remains unexplained. 

Effective March 21, 2003, the feedstock price of gas used in the Expansion Unit had been enhanced almost five times from a fixed rate to a floating rate.

"As a result, margins from urea operations are likely to be constricted by approximately Rs200 per ton", said the chairman.

Analysts observed that the increase in feedgas prices would further lower Fauji's margins. With the end in subsidy, margins were likely to drop further going forward, unless the company raised urea prices.

Feed gas prices would rise by another 7.5 per cent in July, 2003, analysts said.










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