FIRM AND INDUSTRY ANALYSIS

FUNDAMENTAL ANALYSIS OF FAUJI FERTILIZER COMPANY

Presented By:• Bilal Khan•M. Obaid Javed•Sayem•Shahbaz•Usman Mughal

•PRESENTATED TO: Mr.Shehryar Malik

Company Profile

FFC was incorporated in 1978 as a private limited company.

This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark.

The initial share capital of the company was 813.9 Million Rupees.

The present share capital of the company stands above Rs. 8.48 Billion.

Additionally, FFC has more than Rs. 8.3 Billion as long term investments which include stakes in the subsidiaries FFBL, FFCEL and associate FCCL.

DuPont Analysis

ROE= Average assets x asset turnover x operating profit margin x Net income

Average equity N.I + interest

ROE= 75.34%

Q1.How does a company’s recent performance compare to that of its major competitors, taking into account any accounting differences across firms?

Current RatioThere is no change in the current ratio as compare to last year this clearly shows that the proportion with which current assets and current liabilities have increased is same. But the company should increase its current assets in the coming year to be aligned with the industry because it is falling behind from the overall industry.

Quick Ratio: In comparison to the industry the quick ratio is less so the company would either need to invest in quick assets or pay off its huge amount of tax which is the main reason FFC is below the industry.

GP Margin:

Company has increased its Gross profit margin from last year as Sales has improved more than the rise in cost of sales. This ratio is fairly well than the industry too.

Net Profit Margin:

After the taxes were paid off, the company managed to increase its NP margin from last year & performed very well in comparison to the industry.

Fixed Asset turnoverThe investments in fixed assets in 2010 has caused boost in operational efficiency that in return earned it 24% more than last year. This ratio is fairly well even in terms of industry. So, FFC has done well in turning its investment into sales to earn better returns.

Total Asset TurnoverThe same reason is applied here as well that since operational efficiency was attained in this year, it caused high returns on the total assets invested in the business, and this also increased significantly from last year as well. The company is surely competing well as compared to the industry.

Payout Ratio:The payout ratio has decreased due to increase in revenue reserves. However, the company should increase its payout ratio because overall industry is paying more dividends than FFC.

Debt to Equity:

This ratio is worse than last year because it can clearly be seen that company is more inclined towards equity rather than debt, for the reason that company is moving towards equity investments. Although industry is more on borrowing side.

Q2. What are its performance expectations?

Earning per share

2007 2008 2009 20108

10

12

14

16

18 EPS

EPS

FFC’s Earnings per share was Rs. 16.25 increased by 25%. Therefore the company is expected to a lot better in future. FFC has yet again scored an all time highest profit of Rs 11,029 million, translating into an EPS of Rs 16.25, up by Rs 3.25 compared to last year.

Return On Equity

2007 2008 2009 20100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

ROE

ROE

increase in the Company’s net income as a result of good performance. Till the year end, the Company had appropriated Rs 8,651 million of available funds, Rs 2,205 million paid as final dividend for 2009 and Rs 6,446 million appropriated as first, second and third interim cash dividends for 2010.

QUESTION 3 Does the company face major lawsuits?

Contingencies

Guarantees issued by banks on behalf of the Company. Disputed demands for income tax and levy of contribution to Workers’ Welfare Fund related to former PSFL decided in favor of the Company by the Income Tax Appellate Authorities are currently in appeal by the department. The Company is confident that there are reasonable grounds for a favorable decision.

During the year, the Company revised its income tax returns relating to tax years 2007, 2008 and 2009 under the provisions of the Income Tax Ordinance, 2001.

The Company takes into account the current income tax law and decisions taken by the taxation authorities. Instances where the Company’s views differ from the income tax department at the assessment stage and where the Company considers that its view on items of material nature is in accordance with law, the amounts are shown as contingent liabilities.

Claims against the Company and / or potential exposure not acknowledged as debt.

QUESTION 4 Has it made unwise investments?

By looking at the financial statements of FFC, we don’t find any unwise investment made by the company. The following table gives a clear idea about all current healthy investment decisions.

2007 2008 2009 2010

26,848.80

28,577.90

29,570.40

30,983.00

QUESTION 5 Would you recommend a buy/sell/hold on the stock given current stock prices? Why?

We suggest “BUY” as it is showing the highest Net profit margins in the industry consistently, while it works low on long-term borrowing giving assurance for its long term life.

The growth of the company is also comprehensive supported by the healthy dividend income received from its subsidiary FFBL having a stake of 50.8% in its ownership. Along with that FFC’s source for raw material, Mari Gas Plant, provide it with low gas curtailment with very less or no 45-days shut down which gives FFC to manufacture for less and sell for the same market prices as of its Sui network peers.

To add, FFC has been very consistent in paying dividends to it’s share holders.

QUESTION 6

What is the company’s secret?

FFC has a strong governance structure, based on the pillars of honesty, integrity, business ethics and morality, driven by strong sense of responsibility to ourselves, our fellow members and stakeholders.

Being pro-active, FFC mitigates this risk through balancing, production process obsolete or modernization and replacements carried out at all the production cost inefficient.

FFC ensure that our production plants are state of the art and utilize latest technological developments for cost minimization and output optimization.

QUESTION 7

In a growing/declining industry, why is the company declining/growing?

The agriculture sector of Pakistan depicted a growth of 4.7% in 2009 as compared to 1.1% witnessed last year.

Consequentially, fertilizer demand in Pakistan increased substantially as compared to last year; urea in particular witnessed 18% year on year growth during the year ended 2009. 

Also, being major player in urea production, FFC enjoys handsome market share in fertilizer industry.

2010 2009 2010RATIOS FFC INDUSTRY AVG.

Receivable days 8 10 13Inventory days 3 3 19

Company has high receivable turnover which indicate that the company collects its dues from its customers quickly.

2010 2009 2010RATIOS FFC INDUSTRY AVG.

Fixed Asset turnover 282% 258% 213%Total assets turnover 110% 89% 95%Equity Turnover 290% 276% 301%

The above calculated ratios clearly depict the company is growing with tremendous power. The investments in fixed assets in 2010 has caused boost in operational efficiency that in return earned it 24% more than last year. This ratio is fairly well even in terms of industry. So, FFC has done well in turning its investment into sales to earn better returns.

The end