fertilizer sector analysis

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Financial Analysis of Fauji Fertilizer CompanyGroup 5Presented To:Asad Alam

The Fertilizer IndustryAgricultureFFCRatio AnalysisFuture OutlookAgenda

As of Feb 2013, agriculture contributed 20.1 % to overall GDPThe demand for fertilizer is directly related to agriculture growthUrea is the most used Fertilizer, followed by DAPInstalled Capacity: 6.9 Million tonnes

Fertilizer Industry

KPMG Taseer Hadi and CompanyStatement of ComplianceFair EvaluationIAS and Company Ordinance 1984Approval by CEO and CFOHoldings by DirectorSummary of Auditors Report

Incorporated in 1978Head Office located in Plants located in CEO Chairman of the BoardWork Force of Listed on KSE in 1982Share price of Rs. 108.45Earnings per Share of Rs. 16.38 in 2012Financial Year 1st January 31st DecemberFauji Fertilizer Company

Product PortfolioCategoryNitrogenousPhosphatic PotassicProductsUreaCalcium Ammonium NitrateDi-Ammonium PhosphateTriple Super PhosphateSulphate of PotashUsageGrain and Cotton cropsRaw material in production of plastics, adhesives and feedstockTo increase soils pHTo speed ripening of fruitsCommercial firefighting productMetal finisher, yeast nutrient and sugar purifierUsed in strong crops likes tobaccoManufacture of glassProduction ProcessProduced from synthetic ammonia and carbon dioxideProduced from ammonia and phosphoric acidProduced from potassium chloride and sulfuric acidPercentage of use in Pakistan80 %19 %1 %Percentage of FFC Sales93 %6 %1 %

Business Model

FFC Urea Production & Sales

The market share of FFC increased relative to its production in 2012, primarily because of two reasons:The total annual demand for urea decreasedThe quantum of imports increased.Engro and production of other brands decreased.8

Urea Market and Prices

The reasons for the fall in total demand of urea in 2012 were :Destructive rains in 2010, 2011 and 2012.Increase in urea prices in 2012.Distribution and transport network collapsed.

The reason for the fall of urea price in Pakistan in May were:The heavy import of urea by the government as a political gimmick.

International prices of urea hike could not be traced. 9

DuPont Analysis 79.9 %x-++34.21 %42.8 %28.04 %1.22 TimesRs. 60,887 mRs. 26,096 mRs. 20,840 mRs. 74,323 mRs. 60,887 mRs. 34,791 mRs. 26,096 mRs. 74,323 mRs. 53,483 mRs. 30,955 mRs. 29,932 mRs. 26,818 mRs. 7,973 m

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Types of Risk

SWOT

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Accounting PolicyFFCFatimaEngroPPE1. Land and work-in-progress have been stated at cost less impairment losses.2. Depreciation is charged on straight lines bases.3. For newly acquired assets, depreciation is recorded in the month of acquisition but not in the month of disposal.4. The cost of replacement of any part of equipment is made part of the carrying amount of the asset if future economic benefits are expected to flow from it, while the replaced part is derecognized from the carrying amount by expensing it out.1. Land and work-in-progress have been stated at cost less impairment losses.2. Depreciation is charged on straight lines bases.3. For newly acquired assets, depreciation is recorded in the month of acquisition but not in the month of disposal.4. The cost of replacement of any part of equipment is made part of the carrying amount of the asset if future economic benefits are expected to flow from it, while the replaced part is derecognized from the carrying amount by expensing it out.1. Land and work-in-progress have been stated at cost less impairment losses.2. Depreciation is charged on straight lines bases.3. For newly acquired assets, depreciation is recorded in the month of acquisition but not in the month of disposal.4. The cost of replacement of any part of equipment is made part of the carrying amount of the asset if future economic benefits are expected to flow from it, while the replaced part is derecognized from the carrying amount by expensing it out.

ExpensesRecorded when incurredRecorded when incurredRecorded when incurred

Accounting PolicyFFCFatimaEngroInvestments1.Investments in subsidies, associates and jointly controlled entities are initially recognized at cost. 2.Investments available for sale are initially recognized at cost and then subsequently measured at fair value. 3. Investments acquired for selling are classified as held for trading and recognized at fair value with profits and losses recognized directly in P & L.1.Investments in subsidies, associates and jointly controlled entities are initially recognized at cost. 2.Investments available for sale are initially recognized at cost and then subsequently measured at fair value. 3. Investments acquired for selling are classified as held for trading and recognized at fair value with profits and losses recognized directly in P & L.1.Investments in subsidies, associates and jointly controlled entities are initially recognized at cost. 2.Investments available for sale are initially recognized at cost and then subsequently measured at fair value. 3. Investments acquired for selling are classified as held for trading and recognized at fair value with profits and losses recognized directly in P & L.

Inventories (Stock in Trade)Stocks are recognized at lower of cost and net realizable value.Raw Material cost determined at weighted average purchase cost.WIP and Finished Goods at weighted average purchase price and manufacturing expenses.Stocks are recognized at lower of cost and net realizable value.Raw Material cost determined at weighted average purchase cost.WIP and Finished Goods at weighted average purchase price and manufacturing expenses.Stocks are recognized at lower of cost and net realizable value.Raw Material cost determined at weighted average purchase cost.WIP and Finished Goods at weighted average purchase price and manufacturing expenses.

Accounting PolicyFFCFatimaEngroRevenue RecognitionSales revenue is recognized when goods are dispatched and significant risks and rewards are transferred to the customer.Revenue from the sale of goods is measured at the fair value received or receivable net of trade discounts and returns. FOB Shipping.Sales revenue is recognized when goods are dispatched and significant risks and rewards are transferred to the customer.Revenue from the sale of goods is measured at the fair value received or receivable net of trade discounts and returns.FOB ShippingSales revenue is recognized when goods are dispatched and significant risks and rewards are transferred to the customer.Revenue from the sale of goods is measured at the fair value received or receivable net of trade discounts and returns.FOB Shipping.Goodwill & IntangiblesGoodwill is recorded in excess of the purchase consideration over the fair value of assets less liabilities and thereafter tested for impairment on an annual basis.The value in use calculations are based on cash flow projections.Goodwill is recorded in excess of the purchase consideration over the fair value of assets less liabilities and thereafter tested for impairment on an annual basis.The value in use calculations are based on cash flow projections.Goodwill is recorded in excess of the purchase consideration over the fair value of assets less liabilities and thereafter tested for impairment on an annual basis.The value in use calculations are based on cash flow projections.

Liquidity Ratios

Current ratio: FFCs current ratio improving due to decrease in Short term borrowings and dramatic increase in Accounts receivables, attributed to Securitization of Receivables. Fatima Current ratio weakened in 2012 due to additional short term debt. Engro Current ratio got worse because of increasing amounts of long term debt repayments and steady increases in accounts payables. Quick Ratio: FFC ratio remains consistent due to low levels of inventory. FATIMA is effect by increasing inventory levels and fresh debt in 2012. ENGRO is impacted by growth in debt repayment obligations, accounts payabe increase and reduction in loans advances deposits and liquidation of short term investments. Overall: FFC is in a healthy position and is retaining improving CA/QR due to lack of relative debt and obligations as compared to its peers. 16

Efficiency Ratios

Inventory turnover/Days Sales in Inventory: FFC tremendous inventory turnover due to their high quantum of sales and relatively low inventory levels. Fatima has had a low inventory turnover due to their high closing inventory, possibly due to the unfavorable response to CAN. Engro has a consistent inventory, with days sales in Inventory spiking on the back of high UREA prices. The graph shows a marked decrease for FFC in 2011 due to high inventory build up, which was then sold on securitized trade debts (Accounts receivable), resulting in an improved ratio in 2012.

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Activity Ratios

Net Sales Per Day

Total asset turnover: FFC ratio is significantly better than its peers, largely due to efficient use of resources and large market share relative its assets book value. The Asset Turnover ratio of FFC is much better because of the higher sales.Net Sales Per Day: FFC is the largest player by a significant quantum, double the size of its competitors.18

Solvency Ratio

Debt Ratio: Lack of debt in FFC cost structure, reliant more on internal cash generation. The difference between the debt + equity ratio not equal to 1 is because of the deferred liabilities and trade payables. ENGRO and Fatima heavily reliant on debt in their capital structure. 19

Times Interest Earned

Times Interest Earned: FFC had relatively low financing costs due to lack of debt, whereas ENGRO and FATIMA still retain heavy debt components. Engro fert didnt have significant debt repayments till 2011?20

Profitability Ratios

Return on Total Assets: FFC efficiently uses its assets compared to its peers, extracting a healthy profit due to , low debt, prudent costing and continuous supply of gas. The ratio increased in 2011 compared to 2010, because of the increased sales revenue resulting out of greater production and higher prices.21


2011 was an excellent year for UREA producers due to high margins and rising international prices, this trend weakened in 2012 on the back of increased government imports. Gross profit Margin: Relative to its peers, FFC was healthiest, second only to Fatima which was not subject to the government gas price increases and in terms of Net profit, was better due to relatively lower financing costs. However the Net Profit Margin Margin was higher for FFC than Fatima because of lower other Expenses in case of FFC and higher for Fatima because of interest payments.22


The ratio cash flow on total assets basically tells us the operating cash generated by the use of the assets. This figure shows a very gradual decline for FFC because the cash generated from Operations decreases with lower sales in 2012.The Basic earnings per share shows that the earnings per share are constantly increasing for FFC reflecting a positive financial outlook.23

Vertical Analysis (Assets)NON-CURRENT ASSETS201220112010Property Plant and equipment 17,818,755 29% 17,050,951 31% 15,933,588 37%Intangible assets 1,678,639 3% 1,569,234 3% 1,569,234 4%Long term investements 9,511,865 16% 8,659,073 16% 7,870,027 18%Long termloand and advancements 700,786 1% 605,883 1% 455,328 1%Long term deposits and prepeayments 222,313 0% 9,370 0% 9,037 0%Total Non-current assets 29,932,358 49% 27,894,511 50% 25,837,214 60%CURRENTS ASSETSStores, spares and loose tools 3,098,938 5% 2,447,452 4% 2,440,201 6%Stock in trade 442,139 1% 636,923 1% 211,720 0%Trade debts 3,611,476 6% 86,669 0% 357,956 1%Loan and advances 677,977 1% 431,582 1% 336,269 1%Deposits and prepayments 35,670 0% 53,852 0% 50,188 0%Other receivables 588,667 1% 891,673 2% 617,664 1%Short term investments 18,750,996 31% 21,794,480 39% 12,020,581 28%Cash and balances 3,748,632 6% 1,293,774 2% 1,189,063 3%Total Current Assets 30,954,495 51% 27,636,405 50% 17,223,642 40%Total Assets 60,886,853 100% 55,530,916 100% 43,060,856 100%

Vertical Analysis (Assets)201220112010EQUITY AND LIABILITIESEQUITYShare capital 12,722,382 21% 8,481,588 15% 6,785,271 16%Capital Reserves 160,000 0% 160,000 0% 160,000 0%Revenue Reserves 13,213,667 22% 14,428,636 26% 8,502,276 20%Total Equity 26,096,049 43% 23,070,224 42% 15,447,547 36%NON - CURRENT LIABILITIESLong term borrowings 3,870,000 6% 2,703,750 5% 3,819,405 9%Deffered liabilities 4,103,315 7% 3,832,614 7% 3,806,795 9%Total Non-current liabilities 7,973,315 13% 6,536,364 12% 7,626,200 18%CURRENT LIABILITIESTrade and other payables 15,836,879 26% 11,730,961 21% 9,023,052 21%Interest and markup accrued 24,921 0% 79,826 0% 137,968 0%Short term borrowings 4,990,000 8% 8,735,650 16% 5,640,420 13%Current portion of long term borrowings 1,433,750 2% 1,615,655 3% 1,759,405 4%Taxation 4,531,939 7% 3,762,236 7% 3,426,264 8%Total current liabilities 26,817,489 44% 25,924,328 47% 19,987,109 46%CONTINGENCIES AND COMMITMENTS 60,886,853 100% 55,530,916 100% 43,060,856 100%

Vertical Analysis (Income Statement)

Cost of sales increase in 2012 because of rising fertilizer industry gas prices26

Current Outlook

Relative to its peers, FFC retains a larger portion of Current assets due to heavy short term cash and cash equivalents. 27

Horizontal Analysis (Balance Sheet)

Accounts Receivables

The sharp increase in FFC Accounts receivable in 2012 is because of the large increase in trade payable given on secure credit terms backed by banks. This was done to reduce the inventory levels.29

Horizontal Analysis (Balance Sheet)

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2011 was an exceptional year for FFC with high profits being earned as international urea prices increased substantially. Government intervention through urea import subsidies resulting in a buildup of inventories and hence subsequent price cuts in order to increase demand. 31

Chart186.67944017614.885479920312.308765126832.76967388523.901980553310.7112273568119.5465992821022.5757797415

FFCFatimaEngroInventory Turnover

Sheet1Column1FFCFatimaEngro201286.684.8912.31201132.773.9010.712010119.550.0022.58Category 44.52.8586.6832.77119.554.893.900.0012.3110.7122.58

Chart14.210917828574.711186200129.653665192211.138347036393.54223964345.79702034653.0532027025032.3355387215

FFCFatimaEngroDays Sales in Inventory

Sheet1Column1FFCFatimaEngro20124.2174.7129.6536651922201111.1493.5445.797020346520103.0532.3355387215Category 44.52.85

Chart11.22066765380.0804043866-0.03009587150.99442206210.05392434050.04548396831.04211488500.0380363447

FFCFatimaEngroTotal Asset Turnover

Sheet1Column1FFCFatimaEngro20121.220.08-0.030095871520110.990.050.045483968320101.040.000.0380363447Category 44.52.85

Chart10.16906359080.44470045020.69140744570.23509525760.49104652730.68818125170.26054358980.54368483150.7526754507

FFCFatimaEngroDebt Ratio

Sheet1Column1FFCFatimaEngro20120.16906359080.44470045020.691407445720110.23509525760.49104652730.688181251720100.26054358980.54368483150.75267545070.16906359080.23509525760.26054358980.44470045020.49104652730.54368483150.69140744570.68818125170.7526754507

Chart10.4285990770.38090167360.16201848350.41544828830.36746399820.18455206940.35873757360.34926309410.139103598

FFCFatimaEngroEquity Ratio

Sheet1Column1FFCFatimaEngro20120.430.380.162018483520110.420.370.184552069420100.360.350.139103598Category 44.52.85

Chart131.0375764041.5727084369-0.369214535542.20539305831.98741713750.899641339315.0080368736010.0867059079

FFCFatimaEngro

Sheet1Column1FFCFatimaEngro201231.041.57-0.3692145355201142.211.990.8996413393201015.0110.0867059079

Chart10.34226966860.0804043866-0.03009587150.40503659260.05392434050.04548396830.256122381800.0380363447

FFCFatimaEngroReturn on Total Assets

Sheet1Column1FFCFatimaEngro20120.340.08-0.030095871520110.410.050.045483968320100.260.000.0380363447

Chart10.79857770810.2110896122-0.18575579090.97493864820.14674727540.2464560190.71395471400.2734389709

FFCFatimaEngroReturn on common shareholders equity


Chart10.28039546030.2070258833-0.09581810140.40730853430.27754869550.14634336620.245771733500.1961138126

FFCFatimaEngroNet Profit Margin

Sheet1Column1FFCFatimaEngro20120.280.21-0.095818101420110.410.280.146343366220100.250.1961138126Category 44.52.85

Chart10.48435126310.58492552310.32196759540.62203336590.680384860.53369444850.435971753900.4684992376

FFCFatimaEngroGross Profit Margin

Sheet1Column1FFCFatimaEngro20120.480.580.321967595420110.620.680.533694448520100.440.4684992376Category 44.52.85

Chart116.382.86-2.7417.381.854.2818.3818.383.48

FFCFatimaEngroCashflow on Total Assets


Chart10.52160504990.09132972350.06533361110.59645490090.09778480820.0919871780.4733100986-0.00549054510.0444609203

FFCFatimaEngroBasic Earnings per Share

Sheet1Column1FFCFatimaEngro20120.520.090.065333611120110.600.100.09198717820100.47-0.010.0444609203Category 44.52.85

Chart1383243615560687999457268523642678521018100020839723208717594372151785825265488166295011067400022492053253104063944473108674113760003153110528100011028849

Cost of salesDistribution CostFinance CostOther expensesOther incomeProvision for taxationNet Profit after taxation

Sheet1Column1Cost of salesDistribution CostFinance CostOther expensesOther incomeProvision for taxationNet Profit after taxation201238,324,3615,560,687999,4572,685,2364,267,85210,181,00020,839,723201120,871,7594,372,151785,8252,654,8816,629,50110,674,00022,492,053201025,310,4063,944,4731,086,7411,376,0003,153,1105,281,00011,028,849Category 44.52.85

Chart10.49160625860.50839374140.89041466540.10958533460.85247768480.1475223152

Total Non-Current AssetsTotal Current AssetsAssets

Sheet1Column1Total Non-Current AssetsTotal Current AssetsSeries 3FFC49%51%2Fatima89%11%2Engro85%15%3Category 44.52.85

Chart10.13095298260.44044794040.4285990770.45763706810.16146125830.38090167360.56876850370.26921301280.1620184835

Total Non Current LiabilitiesTotal Current LiabilitiesTotal Share Capital and ReservesLiabilities and Equity

Sheet1Column1Total Non Current LiabilitiesTotal Current LiabilitiesTotal Share Capital and ReservesFFC13%44%43%Fatima46%16%38%Engro57%27%16%Category 44.52.85

Chart100000.070126264100.10025963060.33065174990.0450299810.0697187290.0984853690.1566358521

Property Plant and equipmentIntangible assetsLong term investementsLong termloand and advancementsNon-Current Assets

Sheet1Column1Property Plant and equipmentIntangible assetsLong term investementsLong termloand and advancements20100%0%0%0%20117%0%10%33%20125%7%10%16%Category 44.52.85

Chart100000000.00297147652.00832703570.283442720.07300549930.44362145110.81309705410.08806177640.2661894901-0.30582032680.5709112058-0.3376290574-0.3398173994-0.13964471741.8974395837

Stores, spares and loose toolsStock in tradeLoan and advancesDeposits and prepaymentsOther receivablesShort term investmentsCash and balancesCurrent Assets

Sheet1Column1Stores, spares and loose toolsStock in tradeLoan and advancesDeposits and prepaymentsOther receivablesShort term investmentsCash and balances20100%0%0%0%0%0%0%20110%201%28%7%44%81%9%201227%-31%57%-34%-34%-14%190%Category 44.52.85

Chart101-0.7578780632-0.236634080240.6697550451-0.2928921569

FFCFatima

Sheet1Column1FFCFatimaSeries 320100%100%22011-76%-24%220124067%-29%3Category 44.52.85

Chart1000.24999988950.69703218290.5-0.0842053954

Share capitalRevenue ReservesEquity

Sheet1Column1Share capitalRevenue Reserves20100%0%201125%70%201250%-8%

Chart1000-0.29210178030.0067823458-0.14290682120.43134535370.07063090620.219839501

Long term borrowingsDeffered liabilitiesTotal Non-current liabilitiesNon-Current Liabilities

Sheet1Column1Long term borrowingsDeffered liabilitiesTotal Non-current liabilities20100%0%0%2011-29%1%-14%201243%7%22%Category 44.52.85

Chart1000000.3001100958-0.42141656040.5487587804-0.08170375780.09805782630.3500069602-0.6878084835-0.4287774808-0.11258901190.204586581

Trade and other payablesInterest and markup accruedShort term borrowingsCurrent portion of long term borrowingsTaxationCurrent Liabilities

Sheet1Column1Trade and other payablesInterest and markup accruedShort term borrowingsCurrent portion of long term borrowingsTaxation20100%0%0%0%0%201130%-42%55%-8%10%201235%-69%-43%-11%20%Category 44.52.85

fertilizer sector analysis

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