KARACHI, Nov 13: Fauji Fertilizer Company Limited — the biggest among urea producers in the country — is scheduled to announce third-quarter FY03 results on Friday. Never mind the turnover forecast of Rs12.1 billion for the three-quarters of the current year, which is likely to spell around 25 per cent in top line growth, the company’s earnings are expected to slump by 15 to 20 per cent.

There are reasons for the dismal performance this year, one of it being the end of special feed gas subsidy on its expansion unit from March this year.

The market is looking at a figure of around Rs2 billion in profit that the company is likely to make for the nine months period, which would be 15-20 per cent lower than Rs2.12 billion earned in the corresponding period of the previous year.

Fauji Fertilizer has a record of good 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. For the current year, the company has disbursed interim cash dividends totalling 52.5 per cent. The board is not expected to announce an interim payout in its meeting on Friday, but the market expects the last interim to materialize in December.

As the company holds a huge 256 million shares outstanding, liquidity is considerable. From January to October of the current year, nearly 587 million shares were traded at the Karachi Stock Exchange. The 10-rupee share in the company is currently priced at Rs86. Given the lower earnings this year, the board may opt to slice a part of dividend but another 32.5 would carry the total cash distribution to 8.5 per cent. On the ruling price, that would mean dividend yield of 10 per cent. Higher financial charges due to mainly leveraged buy-out of Pak Saudi Fertilizer (PSFL) and the lower ‘other income’ were at least contributory reasons for lower profits.

But for all that, Fauji Fertilizer’s earnings until the first half of the year had stood at Rs1.167 billion, representing 22 per cent decrease from Rs1.490 billion in the corresponding period of the previous year. Market is expecting gross margins to remain at around 38 per cent, down from 46 per cent, due to the removal of expansion unit feed gas subsidy. In July this year, feed gas prices were further raised by 7.5 per cent, which would also go to trim margins.

For the first quarter of 2003, the chairman had 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 the company’s brand ‘Sona’ urea stood at 384,000 tons, which represented an operating efficiency of 116 per cent. Acquisition Unit (Pak Saudi Fertilizer) produced 169,000 tons at 118 per cent of designed capacity. Sales of own manufactured urea at 406,000 tons, including 126,000 tons produced by the Acquisition Unit, were up by 11 per cent.

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. As for the third-quarter, the market was generally expecting industry offtake to improve by around 10 per cent due to the spillover effect of reduction in product prices by fertilizer producers, during May and June. The province of Punjab accounts for more than 60 per cent of all urea consumed in the country. Sales in Punjab was understood to have increased by 19 per cent during the third-quarter, while in Sindh the urea offtake had dropped by 12 per cent.

Fauji Fertilizer had lowered its depreciation rate on plant and machinery to five per cent with effect from January 1, 2003, following an assessment of extended useful life. The depreciable life of its fixed assets had been changed to 20 years from 10 years. The reduction in depreciation rate would lower depreciation charge and as there would be no change in the tax basis, the amount should effectively flow through to the bottom line. On nine months basis, the benefit could be of around Rs335 million. Though, why the company had decided to lower the depreciation charge remains unexplained.