KARACHI, Oct 30: The market was taken by surprise on Wednesday, when Fauji Fertilizer Company Limited (FFCL) - the largest urea producer in the country - announced a hefty rise of 59 per cent in after tax earnings for nine-months to end-September 2004 compared to the corresponding period of the previous year.

The icing on the cake was a surprise Rs4 interim cash dividend, which much of the market was not even expecting. Cumulative cash payout for the FY04 now amounts to Rs12 per share. Net earnings for the three-quarters under review stood at Rs3,094 million, which produced earning per share (eps) of Rs10.49. The price of the share in Fauji is at around Rs115.50, so that the stock is trading at current year's price-to-earnings (p/e) ratio of 8.5x and offers a decent dividend yield of 12.5pc.

The profitability of the "Sona" urea producer for the three-quarters under review soared because of 11pc increase in sales to Rs13,875m. The analysts attributed that to higher urea industry off-take. "Overall urea demand during the period Jan-Sept 2004 soared by 10.7pc to 3.25m tons compared to 2.94m tons during the corresponding period of the previous year", says Faraz Farooq, sector analyst at Jahangir Siddiqui Capital Markets Ltd. The demand was said to have risen on the back of a combined effect of improved farmer cash flow, enhanced availability of credit and higher profitability from Kharif crops.

Most analysts in our sample of brokerage houses thought that a reason for a surge in profit during the three quarters was the sum of Rs475.23m that the company received as its share of first ever cash dividend at Rs1 per share declared by Fauji Fertilizer Bin Qasim (FFBL); Fauji Fertilizer holds 475m shares in FFBL, which runs up to 51pc equity of that company.

Wajahat Ali, head of research at Taurus Securities commented that top line growth of 11pc was in line with expectations but the company also managed to raise gross margin from 38 to 41pc, in spite of higher gas costs.

Elixir Securities Pakistan stated that the major reasons for higher-than-expected net profit were a higher 'other income' (up 128pc to Rs795m, from Rs349m) owing to the aforesaid Rs475m in cash dividend from FFBL, which analysts thought would be booked in the fourth, instead of the third quarter and improving operating margins due to rationalization of operating costs.

Mohsin Ahsan, analyst at Global Securities, stated that 14pc year-on-year growth in urea off-take and 9pc higher urea prices helped company post 33pc growth in gross profit during the third quarter. The 3Q04 gross profit stood at Rs2,288m, up from Rs1.721m in the same quarter last year.

Bilal Khan, analyst at BMA Capital Management looked up at the huge jump of 97pc in after tax profit to Rs1.53bn, from Rs779m in the similar three-months of last year. The analyst observed that sales for FFC had increased 23pc and stood at Rs5.8 billion for 3Q04, having been spurred on by increase in production capacity after the acquisitions of Pak Saudi Fertilizer Company.

Shagufta Irshad, analyst at KASB Securities listed the reasons for the 23pc growth in FFCL's third quarter sales over same time last year. Those included increase in company's market share; speculative buying by dealers for Rabi season to avail price advantage and a 9pc increase in urea prices during he period. Looking ahead, Mohsin Ahsan at Global Securities thought that urea volumes for full year could slip slightly during 4Q04 compared to same time last year, due to water shortage and pre-stocking by dealers.

On medium to long term basis, most analysts were positive on the fertilizer sector. The recent (Oct 26) increase in urea prices by Rs6 per bag had raised price per bag to Rs445, from Rs439. Khalid Iqbal Siddiqui, analyst at InvestCap, while giving an overview of the fertilizer sector said that mounting shortage of urea in the country was likely to continue for at least the next couple of years forcing urea prices to increase gradually in spite of government pressure. No new plant was coming up in the next couple of years. Overall economic recovery and improving financial health of farmers could contribute to a combined increase in profitability of the three main fertilizer companies (FFC; Engro and Bin Qasim) by 35pc in 2004; 20pc in 2005 and 5pc in 2006.