July 29, 2003	Tuesday	Jumadi-ul-Awwal 28, 1424

KARACHI, July 28: Fauji Fertilizer and Engro Chemical Company — two stalwarts among the listed fertilizer companies — are due to release their financial figures for the second-quarter (April-June 2003) on Wednesday. Analyst are, meanwhile, feverishly trying to figure out possible earnings and dividends.

Owing to their high yield and good liquidity, both companies are closely followed by research analysts at most brokerage houses. InvestCap predicts the after tax profit at Fauji for the 2Q2003 to fall in the range of Rs750 to Rs800 million, which would represent slight decline in 1H2003 profit to Rs1.36-Rs1.41 billion, from Rs1.49 billion in the similar period of the previous year. Lower urea sales coupled with end of feed subsidy on 1993 expansion could be accountable for the slight slip in profitability.

Taurus Securities’ estimates of taxed profit at Fauji for the 1H2003 was about the same at Rs1.31 billion. Fauji’s feed gas costs had increased with the end of the subsidy on its expansion unit in March 2003, but urea prices were not raised to pass on this higher costs, reported Taurus, adding that the company had a poor start to the year with 1Q03 profit after tax down to Rs608 million, from Rs762 million, despite higher sales. Gross margins in 1Q2003 slipped to 39 per cent, from 49 per cent in the same time of 2002.

Capital One Research projected after tax profit for second- quarter ended June 30, to range between Rs700 to Rs750 million. “Furthermore an announcement of 20-25 per cent cash dividend cannot be ruled out,” stated Capital One Research. Taurus said that dividend at 20 per cent was expected in addition to 30 per cent already paid out during the year, with the full year dividend outlook at 90 per cent. But InvestCap observed: “A rumour has been circulating in the market that Fauji may not pay out a second interim dividend along with 2Q2003 results,” but the analyst, Khalid Iqbal Siddiqui, added that he believed that Fauji does possess ability to pay out around 20-25 per cent as second interim dividend.

As regards Engro, InvestCap expects the company to announce profit after taxation at Rs250 to Rs270 million for 2Q2003, which would elevate the half term earnings to Rs484 to Rs509 million, up from Rs414 million earned in the corresponding period of last year. The brokerage expects the company to maintain its four year practice of distributing cash dividend at 20 per cent with the half-term results. Higher urea sales with decent margins was seen to contribute to better performance for Engro as its feed gas subsidy on 1993 expansion was available till September 2003.

Analyst at Taurus, gave the same reason for better profitability at Engro, and opined that Engro’s margins would come under pressure not before the fourth quarter. Taurus forecasts profit after tax at Engro to be Rs526 million, up 19 per cent over the taxed earnings in the similar term of the previous year. Wajahat Ali, the analyst at Taurus said that an interim dividend at 20 per cent was expected, but that the dividend outlook for the full year was only 60 per cent as compared to 68 per cent in FY02 (adjusted for 10 per cent bonus shares announced after FY02).

Giving an industry overview, InvestCap noted that after experiencing a 20-per cent decline in urea offtake during 1Q2003, the fertilizer sector was able to sell around 1.1 million tons during 2Q2003, which was up by 10 per cent, and which lifted the overall offtake for the half year (Jan-June) to 1.8 million tons, a marginal 5 per cent drop from 1H2002.

“Fertilizer manufacturers, who had increased their prices by Rs10 per bag following the 7.5 per cent increase in feed gas prices on July 1, have now rescinded that increase under government pressure,” said the analyst. Taurus Securities observed that urea sales had dropped by 5.5 per cent in the half term under review, compared to the same time last year, mostly as a result of pre-stocking in December 2002, which led to depressed sales volume at the start of the year. “While dealers pre-stocked urea in June ‘03 as well ahead of a widely anticipated price increase in July, the year-on-year impact of this was negated as pre-stocking was also seen in June 2002,” said the analyst, adding that overall sales volume in 2Q03 were up 8 per cent versus 2Q02.

Average urea prices were also slightly higher by 1.5 per cent in HY03, compared to the corresponding period of the previous year.

Industry observers said that for three years 1999-2001, urea consumption in Pakistan had remained about stagnant at 4.0 to 4.1 million tons, but it rose to 4.3 million tons, following the record offtake of 0.8 million tons in December 2002.

In an earlier report, analyst at KASB and Co stated that the immediate concern for fertilizer was that installed capacity was not increasing in step with growth in demand. The trend was said to result in growing demand supply gap especially in urea. “This will have to be met through imports, which is likely to result in not only possible delays but also slowly erode Pakistan’s self- sufficiency in this all important agriculture ingredient,” said Tasneem Shabbir, analyst at KASB.

She observed that the local production capacity of urea was being used almost to the hilt. Fauji Fertilizer that controls 65-70 per cent of the urea sales in the country following its acquisition of Pak Saudi Fertilizer in 2002, was operating both plants at full capacity, while the remaining two large fertilizer units: Engro Chemical Pakistan (with 20 per cent market share) and Dawood Hercules Chemical were also approaching full capacity utilization.