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Financial Risk Analysis of Fauji


Fertilizer Co. Ltd.
Acknowledgement

The compilation of this report could not have been realized without the blessings of Almighty
Allah. We are highly indebted to quite a few people who have been there from the beginning till
the completion of our research. Their undue support has been the source of inspiration for us to
complete it efficiently within time.

We would deeply like to thank our teacher for his guidance during the project. His excessive
support has been the source of motivation to perform our best, regarding the report.

We would also like to thank Mr. Mian Amin Rasool, Leasing Officer, Saudi Pak Leasing
Company and Mr. Adnan Ali Fateh, Senior Accountant, FFBL who provided us the supporting
material and all kinds of information required for the research.
Contents
Acknowledgement...................................................................................................... b
Contents..................................................................................................................... 3
Introduction................................................................................................................ 1
Fertilizer Sector in Pakistan.....................................................................................1
Urea Industry in Pakistan: an Overview...................................................................2
Fauji Fertilizer Company Ltd....................................................................................2
Vision................................................................................................................... 2
Engro Chemicals Ltd................................................................................................4
Vision................................................................................................................... 4
Internal Analysis of Financial Ratios...........................................................................5
Short Term Liquidity Ratios and their Risk Analysis................................................6
Operating Cycle and their Risk Analysis..................................................................7
Long Term Solvency Ratios and their Risk Analysis.................................................7
Performance Ratios and their Risk Analysis.............................................................8
The Efficiency of Leverage and their Risk Analysis..................................................8
External Analysis of Financial Ratios........................................................................10
Short Term Liquidity Ratios and their Risk Analysis..............................................11
Operating Cycle and their Risk Analysis................................................................12
Long Term Solvency Ratios and their Risk Analysis...............................................15
Performance Ratios and their Risk Analysis...........................................................16
The Efficiency of Leverage and their Risk Analysis................................................17
Conclusion................................................................................................................ 23
Recommendation..................................................................................................... 24
References................................................................................................................25
Appendix.................................................................................................................. 26
Balance Sheet of Fauji Fertilizers...........................................................................26
Income Statement of Fauji Fertilizers....................................................................27
Balance Sheet of Engro.........................................................................................28
Income Statement of Engro Fertilizers..................................................................29
Introduction

Fertilizer Sector in Pakistan

Pakistan’s economy is agro-based; however our cultivable land is deficient in nutrient


contents. This deficiency can only be overcome through the balanced use of fertilizer.
Presently, there are ten manufacturing units in Pakistan. Out of these, four units are
located in the public sector and six are operating in the private sector. The province wise
distribution of units confirms that five units are located in Punjab, three in Sindh and two
in the province of NWFP. The four major listed players in fertilizer sector in the country
are Fauji Fertilizer Company Ltd., Engro Chemical Pakistan Ltd., Fuji Fertilizer Bin
Qasim Ltd., and Dawood Hercules Ltd.

Fertilizer production is concentrated in nitrogenous fertilizers, which comprises 85% of


all fertilizers produced in the country. Although other types of fertilizers are also
produced in Pakistan, the bulk of which is imported. The main reason for this
concentration on nitrogenous fertilizers is that its main raw material i.e. natural gas is
available at lower cost in the country. The raw material for other fertilizers such as
potassium and phosphate has to be imported.

Financial Risk Analysis of Fauji Fertilizer Page 1


Urea Industry in Pakistan: an Overview

Manufacture Urea Capacity Capacity Share in Local


r Utilization* Production
Tons/year
FFC 1,904,000 118% 45%
Engro 850,000 107% 20%
FFBL 551,100 105% 13%
Dawood 445,500 91% 11%
Hercules
Pak 350,000 100% 8%
American
Pak Arab 92,400 124% 2%
Total 4,193,000 110% 100%

Fauji Fertilizer Company Ltd.


Vision
“Harmonizing the Company with fresh challenges and encompasses diversification and
embarking on ventures within and beyond the territorial limits of the Country in
collaboration with leading business partners.”

FFC was incorporated in 1978 as a private limited company. This was a joint venture
between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of
Denmark.

The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC
has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly
FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea
in 1982 with annual capacity of 570,000 metric tons.

Through De-Bottle Necking (DBN) program, the production capacity of the existing plant
increased to 695,000 metric tons per year.

Production capacity was enhanced by establishing a second plant in 1993 with annual
capacity of 635,000 metric tons of urea.

FFC participated as major shareholders in a new DAP/Urea manufacturing complex with


participation of major international/national institutions. The new company Fauji Fertilizer
Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced
commercial production with effect from January 01, 2000. The facility is designed to
produce 551,000 metric tons of urea and 445,500 metric tons of DAP.

In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated
at Mirpur Mathelo. This acquisition at Rs. 8,151 million represents one of the largest
industrial sector transactions in Pakistan

The overall financial position of the company is stable, over the year which is one of the
reason of high efficiency and profitability of FFC. All the profitability ratios are also
showing increasing trend on the back of increasing Sales as well as Gross profit which is
because of good investments by the company in high yielding projects. Leverage and
Liquidity ratios related to FFC are also improving from past to present. If the company would
be able to continue its current stability and investments in profitable projects then the
company would be able to increase its market share as well as Profitability.

Engro Chemicals Ltd.


Vision

"To be the premier Pakistani enterprise with a global reach, passionately pursuing value
creation for all stakeholders.”

The Company’s current manufacturing base includes urea name plate capacity of 975,000
tons per annum and blended fertilizer (NPK) capacity of 160,000 tons per year. A premier
brand and nationwide presence ensure sellout production. Additionally, the company imports
and sells phosphatic fertilizers for balanced fertility and improved farm yields. Engro’s share
of Pakistan’s phosphates market mirrors or exceeds its urea market share.

Expansion plans include a new urea plant of 1.3 million tons annual capacity, also at
Daharki. The US$ 1 billion project is well underway and on track for commercial production
in mid 2010. This addition will increase Engro’s urea market share to 35% from 19% at
present.

Internal Analysis of Financial Ratios


2007 2008
Short Term Liquidity Ratios
Current Ratio (Times) Current Assets/Current 0.942 0.821
Liabilities
Quick Ratio (Times) Current Assets- 0.886 0.799
Inventory/Current
Liability

Operating Cycle
Receivable Turnover (Times) Sales/Average Accounts 21.789 27.579
Receivable
Receivable Turnover in Days 365/Receivable Turnover 16.752 13.235
Inventory Turnover (Times) COGS/Average 22.950 40.480
Inventory
Inventory Turnover in Days 365/Inventory Turnover 15.904 9.017
Operating Cycle RTD + ITD 32.655 22.251

Long Term Solvency Ratios


Total Debt to Total Assets (Times) Total Debt/Total Assets 0.565 0.615
Debt to Equity Ratio (Times) Total Debt/Total Equity 0.21 0.44
Interest Coverage Ratio (Times) EBIT/Interest Expense 10.942 13.934

Performance Ratios
Return on Assets(Times) Net Income/Total Assets 0.183 0.204
Return on Equity(Times) Net Income/Total Equity 0.421 0.531

The Efficiency of Leverage


Degree of Operating Sales-VC/Sales-VC-FC 1.62 1.76
Leverage(Times)
Degree of Financial Sales-VC-FC/Sales-VC- 1.10 1.08
Leverage(Times) FC-Finance Cost
Degree of Combined DOL*DFL 1.782 1.901
Leverage(Times)
Break Even in Rs. FC/CM Ratio 1246541 14430166
0
Beta 0.68
Ke 14.07% 18.58%
Kd 7.82% 8.32%
Ki 11.40% 12.80%
Effective Tax Rate 31.40% 35.02%
WACC-% 13.80% 16.97%
Stock Prices Rs. at year end 118.75 58.73

Short Term Liquidity Ratios and their Risk Analysis


2007 2008

Current Ratio (Times) Current Assets/Current 0.942 0.821


Liabilities

2007 2008

Quick Ratio (Times) Current Assets- 0.886 0.799


Inventory/Current Liability
Operating Cycle and their Risk Analysis
2007 2008

Receivable Turnover (Times) Sales/Average Accounts 21.789 27.579


Receivable

2007 2008

Receivable Turnover in Days 365/Receivable Turnover 16.752 13.235

2007 2008

Inventory Turnover (Times) COGS/Average Inventory 22.950 40.480

2007 2008

Inventory Turnover in Days 365/Inventory Turnover 15.904 9.017

2007 2008

Operating Cycle RTD + ITD 32.655 22.251

Long Term Solvency Ratios and their Risk Analysis

2007 2008

Total Debt to Total Assets (Times) Total Debt/Total Assets 0.565 0.615

2007 2008

Debt to Equity Ratio (Times) Total Debt/Total Equity 0.21 0.44


2007 2008

Interest Coverage Ratio (Times) EBIT/Interest Expense 10.942 13.934

Performance Ratios and their Risk Analysis


2007 2008
Return on Assets(Times) Net Income/Total Assets 0.183 0.204

2007 2008

Return on Equity(Times) Net Income/Total Equity 0.421 0.531

The Efficiency of Leverage and their Risk Analysis


2007 2008

Degree of Operating Leverage(Times) Sales-VC/Sales-VC-FC 1.62 1.76

2007 2008
Degree of Financial Leverage(Times) Sales-VC-FC/Sales-VC-FC- 1.10 1.08
Finance Cost

2007 2008

Degree of Combined Leverage(Times) DOL*DFL 1.782 1.901

2007 2008

Break Even in Rs. FC/CM Ratio 12465410 14430166

2007 2008

Beta 0.68 0.68

2007 2008

Ke 14.07% 18.58%

2007 2008

Kd 7.82% 8.32%

2007 2008

Ki 11.40% 12.80%

2007 2008

Effective Tax Rate 31.40% 35.02%

2007 2008

WACC-% 13.80% 16.97%

2007 2008

Stock Prices Rs. at year end 118.75 58.73


External Analysis of Financial Ratios

Fauji Fertilizer Engro


2007 2008 2007 2008
Short Term Liquidity Ratios
Current Ratio(Times) 0.942 0.821 2.979 2.554
Quick Ratio(Times) 0.886 0.799 2.468 1.774

Operating Cycle
Receivable Turnover(Times) 21.789 27.579 22.816 27.918
Receivable Turnover in Days 16.752 13.235 15.998 13.074
Inventory Turnover(Times) 22.950 40.480 10.108 4.645
Inventory Turnover in Days 15.904 9.017 36.111 78.573
Operating Cycle 32.655 22.251 52.109 91.647

Long Term Solvency Ratios


Total Debt to Total Assets 0.565 0.615 0.590 0.617
Debt to Equity Ratio 0.21 0.44 0.98 1.25
Interest Coverage Ratio 10.942 13.934 6.128 3.008

Performance Ratios
Return on Assets(Times) 0.183 0.204 0.082 0.070
Return on Equity(Times) 0.421 0.531 0.200 0.184

The Efficiency of Leverage


Degree of Operating 1.910 1.77 1.76 1.77
Leverage(Times)
Degree of Financial 1.120 1.086 1.50 1.20
Leverage(Times)
Degree of Combined 2.139 1.923 2.64 2.12
Leverage(Times)
Break Even in Rs. 12465410 1443016 12207691 14495032
6
Beta 0.68 1.036
Ke 14.07% 18.58% 16.22% 20.72%
Kd 7.82% 8.32% 6.29% 7.97%
Ki 11.40% 12.80% 8.45% 9.78%
Effective Tax Rate 31.40% 35.02% 25.52% 18.52%
WACC -% 13.80 % 16.97 % 13.93 % 13.12 %
Stock Prices in Rs. at the 118.75 58.73 265.75 96.46
year end

Short Term Liquidity Ratios and their Risk Analysis


Fauji Fertilizer Engro
2007 2008 2007 2008
Current Ratio(Times) 0.942 0.821 2.979 2.554
Fauji Fertilizer Engro
2007 2008 2007 2008
Quick Ratio(Times) 0.886 0.799 2.468 1.774

Operating Cycle and their Risk Analysis

Fauji Fertilizer Engro


2007 2008 2007 2008
Receivable Turnover(Times) 21.789 27.579 22.816 27.918
Fauji Fertilizer Engro
2007 2008 2007 2008
Receivable Turnover in Days 16.752 13.235 15.998 13.074

Fauji Fertilizer Engro


2007 2008 2007 2008
Inventory Turnover(Times) 22.950 40.480 10.108 4.645
Fauji Fertilizer Engro
2007 2008 2007 2008
Inventory Turnover in Days 15.904 9.017 36.111 78.573

Fauji Fertilizer Engro


2007 2008 2007 2008
Operating Cycle 32.655 22.251 52.109 91.647
Long Term Solvency Ratios and their Risk Analysis

Fauji Fertilizer Engro


2007 2008 2007 2008
Total Debt to Total Assets 0.565 0.615 0.590 0.617

Fauji Fertilizer Engro


2007 2008 2007 2008
Debt to Equity Ratio 0.21 0.44 0.98 1.25
Fauji Fertilizer Engro
2007 2008 2007 2008
Interest Coverage Ratio 10.942 13.934 6.128 3.008

Performance Ratios and their Risk Analysis

Fauji Fertilizer Engro


2007 2008 2007 2008
Return on Assets(Times) 0.183 0.204 0.082 0.070
Fauji Fertilizer Engro
2007 2008 2007 2008
Return on Equity(Times) 0.421 0.531 0.200 0.184

The Efficiency of Leverage and their Risk Analysis

Fauji Fertilizer Engro


2007 2008 2007 2008
Degree of Operating 1.910 1.77 1.76 1.77
Leverage(Times)
Fauji Fertilizer Engro
2007 2008 2007 2008
Degree of Financial 1.120 1.086 1.50 1.20
Leverage(Times)

Fauji Fertilizer Engro


2007 2008 2007 2008
Degree of Combined 2.139 1.923 2.64 2.12
Leverage(Times)
Fauji Fertilizer Engro
2007 2008 2007 2008
Break Even in Rs. 12465410 14430166 12207691 14495032

Fauji Fertilizer Engro


2007 2008 2007 2008
Beta 0.68 1.036

Fauji Fertilizer Engro


2007 2008 2007 2008
Ke 14.07% 18.58% 16.22% 20.72%
Fauji Fertilizer Engro
2007 2008 2007 2008
Kd 7.82% 8.32% 6.29% 7.97%

Fauji Fertilizer Engro


2007 2008 2007 2008
Ki 11.40% 12.80% 8.45% 9.78%
Fauji Fertilizer Engro
2007 2008 2007 2008
Effective Tax Rate 31.40% 35.02% 25.52% 18.52%

Fauji Fertilizer Engro


2007 2008 2007 2008
WACC -% 13.80 % 16.97 % 13.93 % 13.12 %
Fauji Fertilizer Engro
2007 2008 2007 2008
Stock Prices in Rs. at the year 118.75 58.73 265.75 96.46
end
Conclusion
Recommendation
References

• http://www.ffc.com.pk/contents/annualrep.htm

• http://www.engro.com/

• http://www.igisecurities.com.pk/pdf/Pakistan_Fertilizer_Sector_Review.pdf

• http://www.kse.com.pk

• Principles of Corporate Finance, 8th edition by Brealey & Myers.


Appendix
Balance Sheet of Fauji Fertilizers
Balance Sheet as at December 31, 2008
2008 2007
(Rupees '000) (Rupees '000)
SHARE CAPITAL AND RESERVES
Share capital 4,934,742 4,934,742
Capital reserve 160,000 160,000
Revenue reserves 7,190,471 7,635,303
12,285,213 12,730,045
NON CURRENT LIABILITIES 5,378,214 2,671,250
DEFERRED TAXATION 2,431,895 2,363,526
CURRENT LIABILITIES
Trade and other payables 5,993,674 5,815,276
Interest and mark - up accrued 194,570 184,430
Short term borrowings 3,114,000 3,141,081
Current portion of long term financing 743,036 1,022,500
Taxation 1,778,361 1,313,106
11,823,641 11,476,393
Total Liabilities and Shareholder's Equity 31,918,963 29,241,214

Balance Sheet as at December 31, 2008


2008 2007
(Rupees (Rupees
'000) '000)
PROPERTY, PLANT AND EQUIPMENT 12,730,81 10,390,490
3
GOODWILL 1,569,234 1,569,234
LONG TERM INVESTMENTS 7,744,779 6,325,129
LONG TERM LOANS AND ADVANCES 163,102 142,782
LONG TERM DEPOSITS AND PREPAYMENTS 1,524 2,144
CURRENT ASSETS
Stores, spares and loose tools 3,034,268 2,407,988
Stock in trade 258,094 642,836
Trade debts 495,929 1,722,602
Loans and advances 136,944 83,917
Deposits and prepayments 107,369 33,665
Other receivables 1,233,479 1,542,763
Short term investments 3,511,563 3,027,664
Cash and bank balances 931,865 1,350,000
9,709,511 10,811,435
Total Assets 31,918,96 29,241,214
3

Income Statement of Fauji Fertilizers

Income Statement for the year ended December 31, 2008

2008 2007
(Rupees (Rupees
'000) '000)
Sales 30,592,806 28,429,005
Cost of sales 18,234,692 18,311,525
GROSS PROFIT 12,358,114 10,117,480
Distribution cost 2,668,571 2,418,793
9,689,543 7,698,687
Finance cost 695,371 703,612
Other expenses 895,647 845,327
8,098,525 6,149,748
Other income 1,942,558 1,665,205
NET PROFIT BEFORE TAXATION 10,041,083 7,814,953
Provision for taxation 3,516,000 2,454,000
NET PROFIT AFTER TAXATION 6,525,083 5,360,953
Earnings per share - basic and diluted 13.22 10.86
Balance Sheet of Engro
Balance Sheet as at December 31, 2008
2008 2007
(Rupees (Rupees
'000) '000)
SHARE CAPITAL AND RESERVES
Share capital 4,934,742 4,934,742
Capital reserve 160,000 160,000
Revenue reserves 7,190,471 7,635,303
12,285,213 12,730,045
NON CURRENT LIABILITIES 5,378,214 2,671,250
DEFERRED TAXATION 2,431,895 2,363,526
CURRENT LIABILITIES
Trade and other payables 5,993,674 5,815,276
Interest and mark - up accrued 194,570 184,430
Short term borrowings 3,114,000 3,141,081
Current portion of long term financing 743,036 1,022,500
Taxation 1,778,361 1,313,106
11,823,641 11,476,393
Total Liabilities and Shareholder Equity 31,918,963 29,241,214

Balance Sheet as at December 31, 2008


2008 2007
(Rupees (Rupees
'000) '000)
PROPERTY, PLANT AND EQUIPMENT 12,730,813 10,390,490
GOODWILL 1,569,234 1,569,234
LONG TERM INVESTMENTS 7,744,779 6,325,129
LONG TERM LOANS AND ADVANCES 163,102 142,782
LONG TERM DEPOSITS AND PREPAYMENTS 1,524 2,144
CURRENT ASSETS
Stores, spares and loose tools 3,034,268 2,407,988
Stock in trade 258,094 642,836
Trade debts 495,929 1,722,602
Loans and advances 136,944 83,917
Deposits and prepayments 107,369 33,665
Other receivables 1,233,479 1,542,763
Short term investments 3,511,563 3,027,664
Cash and bank balances 931,865 1,350,000
9,709,511 10,811,435
Total Assets 31,918,963 29,241,214
Income Statement of Engro Fertilizers

Income Statement for the year ended December 31, 2008


2008 2007
(Rupees (Rupees
'000) '000)
Sales 30,592,806 28,429,005
Cost of sales 18,234,692 18,311,525
GROSS PROFIT 12,358,114 10,117,480
Distribution cost 2,668,571 2,418,793
9,689,543 7,698,687
Finance cost 695,371 703,612
Other expenses 895,647 845,327
8,098,525 6,149,748
Other income 1,942,558 1,665,205
NET PROFIT BEFORE TAXATION 10,041,083 7,814,953
Provision for taxation 3,516,000 2,454,000
NET PROFIT AFTER TAXATION 6,525,083 5,360,953
Earnings per share - basic and diluted 13.22 10.86

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