FAUJI Fertiliser Company Limited with paid-up capital of Rs12.7bn is 44pc owned by the Fauji Foundation. On the last Thursday’s closing price of the FFC stock at Rs110.90, the outstanding shares at 1,272m, produces the company’s market capitalisation at Rs141bn.

The total assets of the company, according to the last released figures for Sept 30, 2015, stood at Rs80bn.

Major competitors in the fertiliser industry include Engro Fertiliser; Fatima Fertiliser; Fauji Fertiliser Bin Qasim and National Fertiliser Marketing Ltd (NFML) The. FFC has retained its position among the hundreds of listed companies represented by the fact that the company clinched an award among the ‘KSE top-25 companies’ consecutively for 20 years since 1994. It has earned well and paid generous dividends to the shareholders.

‘Gas price hike and fall in farmers’ income have put a dent in margins of fertiliser companies across the spectrum’

Yet, like the rest of the industry, in the recent times the company has been plagued by problems. Gas price hike together with the decline in farmers’ income have put a dent in margins of fertiliser companies across the spectrum. Analyst Tahir Abbas at brokerage Arif Habib Limited said in last week’s report that as per the latest fertiliser offtake numbers urea sales in Dec stood at 778,000 tonnes which took the industry cumulative off-take for CY15 to 5,557 thousand tonnes, reflecting decrease of 1pc YoY.

Things do not appear to improve in the short term. Analyst Danish Ali Kazmi who follows the fertiliser sector for brokerage Alfalah Securities says: “The situation for urea players still looks bleak as urea prices are likely to remain on the lower side given lower demand in upcoming quarters owing to seasonality and decline in international urea prices which has limited the industry’s pricing power.

For the latest three-quarters ended Sept 30, 2015, FFC posted after tax profit amounting to Rs11.946bn, down from Rs12.961bn in the corresponding period of the previous year. Chairman retired Lt.Gen.Khalid Nawaz Khan stated in the directors’ report that the urea production from the three plants of the company stood at 1,818 thousand tonnes which was higher by 3pc YoY, due to improved operating efficiency.

However, substantial increase in feed/fuel gas prices with effect from Sep 1, 2015 led to escalation in urea selling prices. “However, the government announced its intention of reducing the feed gas price to lower the selling prices of urea, through the Prime Minister’s ‘Kissan Package’.

Non implementation of this decision resulted in uncertainty in the market, negatively impacting urea off-take. The chairman, however, affirmed that the board of directors remained focused towards sustained profitability and shareholders’ return through cost economisation and improved efficiencies to increase productivity, besides augmenting company earnings through its diversification initiatives.

And what are those diversifications? Sector watchers say that FFC has partnered with Tanzania Petroleum Development Corporation (TPDC); Ferrostaal Industrial Projects (of Germany) and Haldor Topsoe (of Denmark) to set up a 1.3m tonne fertiliser plant in Tanzania. The FFC board gave its nod to the project in the autumn last year.

In addition, FFC’s wholly owned subsidiary, Fauji Fresh-n-Fresh’s individually quick freeze project (QFP) is like to commence operations in the 1HCY16. In order to remain competitive, the company is also planning to install a coal fired boiler at Goth Machhi which will enhance urea production and lower the fuel stock price.

Analyst Muhammad Awais Ashraf at Foundation Securities in his research note issued last week showed concern that despite the strong brand name, weak agronomics made it difficult for FFC to pass on gas tariff hike. “Another probable gas price hike will make the situation worse for the company as we do not see any improvement in farmer’s cash position”.

Is there a threat of further hike in gas price? Market watchers remind that the Oil and Gas Regulatory Authority (OGRA) had raised revenue requirements of gas distribution companies by 27pc, which was a prerequisite for determination of consumer tariff, making a strong case for gas price hike as the government was committed to reduce subsidies. However, the fertiliser companies could breathe easy after the Prime Minister delayed the hike till June 2016.

The directors of FFC in their report stated that for nine months to Sept 30, 2015, sales revenue was recorded at Rs54.3bn, marginally down by 1pc YoY owing to lower urea off-take during the third quarter whereas the financing costs increased by Rs357m, mainly because of higher borrowings for payment of withheld GIDC besides increased working capital financing caused by the decline in cash generation owing to uncertain market conditions. Incremental levies including 3pc super tax and 2.50pc higher dividend taxation, further pressurised company margins.

Sector analysts believe that until the situation in core business of urea takes a turn for the better, the company will have to augment earnings from investments. On Sept 30, 2015, the company carried sizeable amount of Rs28bn representing ‘long term investments’.

The FFC investment portfolio consists mainly of 43.15pc shareholding in Askari Bank; 49.88pc stake in Fauji Fertiliser Bin Qasim and 6.79pc holding in Fauji Cement. All of them together yielded hefty dividend of Rs2.9bn in CY14. Moreover, the company’s subsidiary, FFC Energy Limited (FFCEL) received its commercial operation date (COD) tariff on July 31, 2015 which will subsequently pave way for further increase in dividend income.

Published in Dawn, Business & Finance weekly, January 25th, 2016