Project Presentation

• References: Corporate Affairs

• Senior Manager Corporate Affairs/Company Secretary

• Brig. Sher Shah (Retired). Email ID: secretary@ffc.com.pk

• Location: Head Office, 156-The Mall Rawalpindi

Group Members

• Muhammad Tauseef Ahmad (6319)

• Muhammad Waqas Khan (6371)

• Fawad Ur Rahman (6317)

• Ikhtisham khan (6318)

• Dawood Khan (6324)

COMPANY PROFILE

• Vision – To be a leading national enterprise with global

aspirations, effectively pursuing multiple growth opportunities, maximizing returns to the stakeholders, remaining socially and ethically responsible

• Mission – To provide our customers with premium quality

products in a safe, reliable, efficient and environmentally sound manner, deliver exceptional services and customer support, maximizing returns to the shareholders through core business and diversification, providing a dynamic and challenging environment for our employees.

Corporate Strategy

• Maintaining our competitive position in the core business, we employ our brand name, unique organizational culture, professional excellence and financial strength diversifying in local and multinational environments through acquisitions and new projects thus achieving synergy towards value creation for our stakeholders.

Company Ownership: • Public company incorporated in Pakistan under the companies Ordinance,

1984,

• Established in 1978 as a joint venture of Fauji Foundation and Haldor Topsoe.

• The first urea complex was commissioned in 1982.

• Plant-1 was improved in 1992, and a second plant was built in 1993.

• In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo, District Ghotki from National Fertilizer Corporation (NFC).

• Fauji Fertilizer Bin Qasim Limited, Karachi, Pakistan (FFBL) is another company where FFC has controlling shares.

• FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation and Haldor Topsoe A/S.

• 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.

Products & Services

Products

• Urea (Nitrogen) Fertilizer Percentage of use in Pakistan: 80%

Percentage of FFC Sales: 93%

• DAP(Phosphate) Fertilizer Percentage of use in Pakistan: 19%

Percentage of FFC Sales: 6%

• SOP (Potash) Fertilizer: Percentage of use in Pakistan: 1%, Percentage of FFC Sales: 1%

• SONA BORON

Fauji Fertilizer Company Limited Fluctuation for the Years 1996-2013

Year Date High Date Low

1998 14-APR-98 89.00 21-OCT-98 31.55

1999 15-MAR-99 57.30 08-FEB-99 39.30

2000 21-JAN-00 67.50 19-OCT-00 36.50

2001 02-FEB-01 50.00 24-SEP-01 28.40

2002 26-DEC-02 73.95 22-May-02 38.85

2003 29-AUG-03 105.95 28-FEB-03 69.15

2004 29-DEC-04 143.90 01-JAN-04 95.75

2005 16-MAR-05 180.00 27-JUN-05 118

2006 31-JAN-06 144.90 29-DEC-06 105.50

2007 13-JUL-07 131.90 05-JAN-07 103.00

2008 02-APR-08 149.85 31-DEC-08 54.30

2009 14-DEC-09 109.90 01-JAN-09 58.90

2010 30-DEC-10 128.50 15-JUN-10 101.10

2011 18-OCT-11 198.35 25-FEB-11 109.82

2013 23-DEC-13 116 27-DEC-13 113

Production and Sale at a Glance Urea Production (Met/Year) Sale (Met/Year)

Years Goth Machi M.Mathelo Total Urea Domestic Urea Export Urea Imported Phos*/ Potassic Total

Plant-I Plant-II Plant-III Sona FFC

1987

632,079 - -

632,079

587,891 - -

2,907 -

590,798

1988

637,737 - -

637,737

642,857 - -

22,542 -

665,399

1989

632,972 - -

632,972

678,430 - -

2,605

162,113/14,086

857,234

1990

652,665 - -

652,665

645,188 - -

134,366

169,943/24,229

973,726

1991

629,266 - -

629,266

643,608 - -

206,244

148,753/18,945

1,017,550

1992

648,178 - -

648,178

647,460 - -

187,058

153,025/16,040

1,003,583

1993

657,376

477,339 -

1,134,715

1,176,611 - -

129,006

207,038/7,147

1,519,802

1994

678,114

659,526 -

1,337,640

1,288,811 - -

33,387

192,002/8,210

1,522,410

1995

680,062

700,031 -

1,380,093

1,422,666 - -

60,604

122,640/9,527

1,615,437

1996

710,862

695,749 -

1,406,611

1,413,907 - -

238,130

144,969/1,446

1,798,452

1997

773,048

734,275 -

1,507,323

1,482,948 - -

146,813

81,181/0

1,710,942

1998

742,599

682,969 -

1,425,568

1,449,201 - -

169,610

187,392/0

1,806,203

1999

726,723

734,689 -

1,461,412

1,581,655 - -

26,277

291,499/0

1,899,431

2000

729,864

695,938 -

1,425,802

1,793,554 -

63,350 0

321,977/9,269

2,188,150

2001

737,607

756,417

- 1,494,024

1,883,849

- - 34,035

340,301/9,377

2,267,562

2002

801,825

713,889

368,575**

1,884,289

2,033,883

328,147

57,000

- 285,776/7,718

2,712,524

2003

784,826

738,327

626,716

2,149,869

2,065,459

598,792

18,500

- 475,491/10,947

3,169,189

2004

741,831

716,621

715,577

2,174,029

2,708,544

148,832

13,500

105,693

515,993/11,451

3,504,013

2005

820,454

772,825

709,526

2,302,805

2,891,882

- - 314,701

572,990/45,293

3,824,866

2006

809,373

760,442

725,839

2,295,654

2,888,668

- - 321,601

824,361/20,426

4,055,056

2007

829,250

810,673

680,442

2,320,365

2,771,861

- - 96,976

562,276/17,305

3,448,418

2008

841,117

797,108

683,986

2,322,211

3,027,245

- - 58,370

348,275/19,364

3,453,254

2009

807,221

846,613

810,323

2,464,157

3,088,382

- - - 708,886/41,128

3,838,396

2010

867,346

806,589

810,706

2,484,641

3,006,074

- - - 722,766

3,728,840

2011

841,755

782,752

711,195

2,395,702

2,839,162

662,387/9,588

3,511,353

2012

799,432

772,307

834,054

2,405,784

2,677,668

677,917/6,489

3,362,286

2013

749,000

784,000

787,000

2,320,000

Capital Budgeting Cash Flow Estimation

Key Definitions

• Capital Budgeting:

• Cost of Capital:

• Net Present Value:

• Internal Rate of Return:

• Payback Period:

• Profitability Index:

Capital Budgeting: Cash Flow Estimation

• We purchase the existing unit at a cost of two million and we dont charge the depreciation on it

• Because we have sale out the unit immedietly

Initial Investment

Installed Cost Of New Asset

Cost of New Asset

2809000

Installation Cost

6500

Total Installed Cost

2815500

After tax sales proceeds from old asset

Net sales proceeds from old asset

1305000

Tax

243250

Total After Tax Sales Proceeds

1548250

Net working capital

Initial Investment

1267250

Operating cash flows • CASH INFLOWS OF NEW MACHINERY YEARS 1 2 3 4 5 6

Revenues

30000000

33000000

50000000

50050000

65000000

72000000

Expenses

1200000

1200000

1350000

1000000

987000

967000

Income before

depreciation and tax

28800000

31800000

48650000

49050000

64013000

71033000

Depreciation

561800

898880

533710

337080

337080

140450

Income before tax

28238200

30901120

48116290

48712920

63675920

70892550

Tax

9883370

10815392

16840701.5

17049522

22286572

24812393

Net Income

18354830

20085728

31275588.5

31663398

41389348

46080158

Add Depreciation

expense

561800

898880

533710

337080

337080

140450

Cash Flows 18916630 20984608 31809298.5 32000478 41726428 46220608

Operating cash flows • CASH INFLOWS OF OLD MACHINERY

YEARS 1 2 3 4 5 6

Revenues 20700000 23700000 26300000 29400000 25900000 23900000

Expenses 800000 800000 900000 750000 987000 967000

Income before

depreciation and tax

19900000 22900000 25400000 28650000 24913000 22933000

Depreciation 400000 640000 380000 240000 240000 100000

Income before tax 19500000 22260000 25020000 28410000 24673000 22833000

Tax 6825000 7791000 8757000 9943500 8635550 7991550

Net Income 12675000 14469000 16263000 18466500 16037450 14841450

Add Depreciation

expense

400000 640000 380000 240000 240000 100000

Cash Flows 13075000 15109000 16643000 18706500 16277450 14941450

INCREMENTAL CASH INFLOWS YEARS NEW OLD INCREMENTAL CASH INFLOWS

1

18916630

13075000

5841630

2

20984608

15109000

5875608

3

31809298.5

16643000

15166299

4

32000478

18706500

13293978

5

41726428

16277450

25448978

6

46220607.5

14941450

31279158

RISK AND REFINEMENTS IN

CAPITAL BUDGETING

RISK AND CASH FLOWS

• NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

• NPV is an indicator of how much value an investment or project adds to the firm. With a particular project,

RISK AND CASH FLOWS If Means Then

NPV > 0 The investment

would add value to

the firm.

The project may be accepted.

NPV < 0 The investment

would subtract value

from the firm.

The project should be rejected.

NPV = 0 The investment

would neither gains

nor loss value for the

firm.

We should be indifferent in the decision whether to accept or

reject the project. This project adds no monetary value.

Decision should be based on other criteria, e.g. strategic

positioning or other factors not explicitly included in the

calculation.

ILLUSTRATION

Fauji Fertilizing company an urea retailer with a 9% cost of capital, is considering investing in either of two mutually exclusive projects, X and Z. Each requires a $1500000 initial investment, and both are expected to provide equal annual cash inflows over their 10-years lives. For either to be acceptable according to the net present value technique, its NPV must be greater than zero. If we let CF equal the annual cash inflow and let CF0 equal the initial investment , the following condition must be met for projects with annuity cash inflows , such as X and Z, to be acceptable.

NPV= [CF (PVIFA k, n)]-CFO

K=9% n=10years CFO=150000,

we can find the breakeven cash inflow necessary

for Fauji projects to be acceptable.

NPV= [CF (PVIFA 9%, 10)-$1500000

NPV=CF (6.418)-$1500000

CF=$1500000/6.418

CF=$233717.66

I n this example we didn’t say that project x is less risky than project z in this example clearly identifies risk as it is related to the chance that a project is acceptable, but it doesn’t address the issue of cash flow variability because both project has equal net present value so the project x has greater chance of loss than project z or vise versa or it might result in higher potential NPVs

SENSITIVITY AND SCENARIO ANALYSIS

Sensitivity analysis of Fauji fertilize of project X and Z.

Note: The Present Values are calculated keeping the discount

rate of 8% for project X and 10% for Project Z and 9 years of

Project life for both Projects.

Project X Project Z

Initial Investment 500000 500000

Outcome:-

Pessimistic 800000 700000

Most likely 450000 450000

Optimistic 900000 850000

Range 100000 150000

Outcome:-

Pessimistic 4497600 3531300

Most likely 2311150 2091550

Optimistic 5122300 4395150

Annual Cash inflows

Net Present Values

APPLYING THE RISK ADJUSTED DISCOUNT RATE • Risk-adjusted discount rate = Risk free rate + Risk premium

• Risk premium = (Market rate of return - Risk free rate) x beta of the project

Plus points of adjusted rate

• It is quite simple and easy to understand.

• Risk adjusted rate has a good deal of intuitive appeal in the eyes of risk averse business person.

• It integrates an attitude towards uncertainty.

Risk adjusted discount rate for the projects by using the CAPM

• Project A: Project E:

• Risk free rate 9.32% Risk free rate 9.32 %

• Market rate 20% Market rate 10%

• Beta 1. Beta 0.90

• CAPM 20% CAPM 10%

• Project B: Project F:

• Risk free rate 9.32% Risk free rate 9.32%

• Market rate 17% Market rate 07%

• Beta 1.10. Beta 0.50

• CAPM 18% CAPM 08%

• Project C: Project G:

• Risk free rate 9.32% Risk free rate 9.32%

• Market rate 15% Market rate 05%

• Beta 1.05. Beta 0.75

• CAPM 15% CAPM 06%

NPV at the Risk Adjusted Discount Rate:

Project

CFO

RADR

PVIFA

Cash Flow

PV

NPV

A

750000

20%

2.990

300000

897000

147000

B

660000

18%

3.127

350000

1094450

434450

C

450000

15%

3.352

400000

1340800

890800

E

550000

10%

3.790

550000

2084500

1534500

F

325000

8%

3.992

700000

2794400

2469400

G

200000

6%

4.212

450000

1895400

1695400

LEVERAGE AND CAPITAL STRUCTURE

TECHNIQUES

• Operating Leverage: DOL= Percentage change in EBIT/Percentage change in Sales

• Financial Leverage: DFL= Percentage change is EPS/Percentage change in EBIT

• Break Even Analysis of FFC: Breakeven Point = Fixed Costs/ (Unit Selling Price - Variable Costs)

• Total Leverage: DTL=DOL * DFL

Operating Leverage

• Referring to the data used in the previous illustration, here we show EBIT for various levels of sales, and what are the effects of each level:

• We used the sales of 60000 in units as a reference point. It is evident how operating leverage works in both directions, either in increasing or decreasing the sales level:

Case 2 Base Case 1

Sales in

Units

40,000

60,000

80,000

Sales

Revenue

68,000,000

102,000,000

136,000,000

Less: V.C

20,000,000

30,000,000

40,000,000

Less: F.C

48,000,000

48,000,000

48,000,000

EBIT

-

24,000,000

48,000,000

Operating Leverage

• Case 1: a 33 percent increase in sales level (from 60,000 to 80,000) results in a in a 100 percent increase in EBIT.

• Case 2: a 33 percent decrease in sales level (from 60,000 to 40,000) results in a 100 percent decrease in EBIT.

Taking in consideration the previous illustration at FFC, we get the following results:

• Case 1: +100% / +33% = 3.

• Case 2: -100% / -33% = 3

Financial Leverage Case 2 Base Case 1

EBIT 14,400,000 24,000,000 33,600,000

Less: Interest 4,000,000 4,000,000 4,000,000

Net Profit Before Tax 10,400,000 20,000,000 29,600,000

Less: Tax 3,640,000 7,000,000 10,360,000

Net Profit 6,760,000 13,000,000 19,240,000

Less: Pref. Dividend 3,000,000 3,000,000 3,000,000

Earnings Available for C.S 3,760,000 10,000,000 16,240,000

No of CS outstanding 10,000,000 10,000,000 10,000,000

Earnings Per Share 0.376 1 1.624

We used the EBIT of 24,000,000 in units as a reference point.

The interest payable on Bonds equals to Rs.4000, 000. The

annual dividends on preferred stock are Rs.3, 000,000. The tax

rate applies is 35%. The previous table shows EPS for various

EBIT levels. Two Scenarios are shown:

Financial Leverage

• Case 1: a 40% increase in EBIT (from 24,000,000 to 33,600,000) resulting in a 62% increase in EPS (from 1 to 1.624).

• Case 2: a 40% decrease in EBIT (from 24,000,000 to 14,400,000) resulting in a 62% decrease in EPS (from 1 to 0.376).

Refereeing to the data illustrated in the table above; we can calculate the degree of financial leverage at FFC:

• Case 1: +62%/+40% = 1.55.

• Case 2: -62%/-40% = 1.55.

Total Leverage

To calculate the degree of total leverage, we use the following formula:

• DTL=DOL * DFL

If we take cases 1 of each leverage consideration, we will end up with a DOL of 3 and a DFL of 1.55

Hence:

• DTL = 3 X 1.55 = 4.65

THANK YOU