Depressed primary margins on di-ammonium phosphate because of higher phosacid prices and incomplete pass through of the gas infrastructure development cess on urea to customers led to an overall decline in Fauji Fertiliser Bin Qasim’s third quarter earnings.

For the first nine months of the year (9MCY14), FFBL’s profitability dropped by 46pc to Rs1.77bn, against Rs3.3bn during the same period last year. Its earnings-per-share worked out at Rs1.90, down from last year’s Rs3.53.

The company announced an interim cash dividend of Rs0.75 per share, taking its total payout for 9MCY14 to Rs1.75 per share, against Rs2.75 during 9MCY13.

Lower di-ammonium phosphate (DAP) and urea production owing to higher gas curtailment resulted in a volumetric decline in sales. The company, however, experienced an improvement in ‘other income’ because of profitable operations of the parent group’s other ventures like Askari Bank Limited, Pakistan Maroc Phosphore (PMP) and Fauji Cement Company Limited (FCCL).

Local DAP prices up: In contrast to the direction of international DAP prices, domestic DAP prices rose by Rs132 per bag to Rs3,532 per bag in October. That compares with a 10pc reduction in DAP Tampa to $446 per MT since September.

The downward price trend in local DAP can be attributed to soft demand from South American and main Asian markets. Traditionally, domestic DAP prices mimic international prices trend with a time lag of 1-2 months.

Dairy segment venture: According to a notice sent to the stock exchange, FFBL is considering acquiring Noon Pakistan Limited (NOPK) either as a subsidiary or through an associate investment. However, the deal is subject to due diligence and other corporate and regulatory approvals.

NOPK currently produces and sells dairy, processed dairy and fruit products under the brand name ‘Nurpur’. Its profitability came under pressure after 2012 because of high input cost which was not passed on to consumers due to intense competition in the dairy segment. Any potential acquisition of NOPK is expected to be brought under the Fauji Food Limited (FFL), a newly formed subsidiary of FFBL.

Moreover, the company recently acquired Rs10bn in a long-term loan. Out of this, Rs5.5bn was used to retire short-term borrowings.

GIDC: The Economic Coordination Committee (ECC) of the Cabinet has reportedly allowed distribution companies to increase the gas tariff by 5pc for all categories of consumers except for domestic ones. Since August, fertiliser manufacturers were not billed the cess because of a stay order against the GIDC.

These companies, however, accounted for the cess in their financial accounts because of the ambiguity on the issue. If the cess is removed in the future, FFBL is likely to be a key beneficiary in the fertiliser sector.

Imran Ahmed Patel, Global Securities

Published in Dawn, Economic & Business, November 24th, 2014