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Fauji Fertilizer Company
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Introduction to Business Finance
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Contents
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December 15, 2014

Muhammad Rafay 13659

Muhammad Zain Abbas 15700

Acknowledgement

Executive Summary

Introduction

Product Portfolio

Financial Ratios

10

Analysis of Ratios

11

Sources and uses of Funds Statement

Analysis of Funds Statement (Matching Principle)
Issues

21
22
24

Recommendations

26

Balance Sheet

28

P & L Account

30

Cash flow Statement

31

Acknowledgement
We praise ALMIGHTY ALLAH, provider of hope, guidance and knowledge
without ALLAHs constant remembrance we would not have overcome our
anguishes.
We are heartily thankful to our Instructor, Sir Kamran Rabbani, whose
encouragement, guidance and support from the initial to the final level
enabled us to develop an understanding of the subject.
Our graceful thanks also go to our parents and siblings who supported us all
along. We also owe our deepest gratitude to our friends who were a true help
for us. We offer our regards and blessings to all of those who supported us in
any respect during the completion of the project.

Executive Summary
This report provides a case study of the financial issues of FFC and how it
affected their profitability.
Since Pakistan is an agriculture based economy so the use of fertilizer is
important. The key players in the industry are: Dawood Hercules Company
ltd, Fauji Fertilizer Company ltd, Fauji Fertilizers Bin Qasim Company ltd
and Engro Chemicals Pakistan ltd.
As stated in their vision statement, FFC aims to provide a premium quality
fertilizer with excellent customer support. However will they be able to
achieve their mission?
Their product portfolio includes urea, DAP and SOP. The ratio analysis reveal
that there were excessive stocks, increased expenses and high risks. This had
affected their profitability. An analysis of the cash flows highlights that FFC
had high cash outflows owing to debt repayment and high fixed costs along
with operating expenses.
There were many issues that lead to a decrease in the financial health of the
company.
These were: gas shortage, underutilized production capacity, fluctuating
prices of urea (high-2011, low-2012), black marketing, excessive inventories
and the global financial crisis.
So the main question is: What should FFC do in order to remain profitable for
2013 and beyond?
Our recommendations include: importing, exploring new gas reserves,
discovering alternatives (such as coal, oil, wind, hydel) , tapping international
markets, using the piled up stocks in other ways, adopting JIT, selling off
redundant assets, augmenting fertilizers to justify the high price,
diversification into emerging markets and finally developing payment
agreements with suppliers. These solutions will speed up FFCs cash inflows,
decrease costs and spread their risks so that their profitability and financial
strength increases simultaneously.
The ultimate aim is to pull FFC out of these problems, while maintaining their
market share and being financially stable in order to exploit other
opportunities and handling their threats.

Introduction
Fauji Fertilizer Company (FFC) one of the companies largely unaffected by the gas
supply issue announced a profit of Rs20.839 billion for 2012, down 7% compared
to previous years profit of Rs22.492 billion. (The Tribune Express, 2013)
However, major gas crises in 2011 (from Jan-Nov) affected FFCs sales and declined
5% sales of urea. The manufacturers of FFC planned to drop the level of urea
production from 281k ton to 250k ton. Similarly, another fertilizer, Di-Ammonia
Phosphate (DAP) sales also declined by 18% to 1.01 million tons on a yearly basis
against 1.24 million tons in the same period last year.
Expectations are that the dark days for FFC are going to continue as the
government in a new gas load management plan has agreed to cut-off gas supply to
the four plants on the basis of Sui Northern Gas Pipeline (SNGPL). The four plants
include Engro Corporations Enven, Pak-Arab Fertilizer, Agritech Fertilizer and
Dawood Hercules Fertilizer.

Fertilizer Industry of Pakistan

Pakistans economy is agriculture based, however our cultivable land is deficient in
nutrient contents. This deficient can only be overcome through the balanced use of
fertilizer. Presently, there are 10 manufacturing units in Pakistan. Out of these, 4
units are located in the public sector and six are operating in the private sector. The
province wise distribution of units confirms that 5 units are located in Punjab, 3 in
Sindh and 2 in the KPK.
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 those demands are imported. The main reason for
this concentration on nitrogenous fertilizers is that its main raw material i.e. natural
gas is cheaply available in the country. The raw material for other fertilizers such as
potassium and phosphate has to be imported. The local fertilizer companies meet
almost 80% of Pakistans fertilizer requirement. The total installed capacity is over
5124 million tons per annum. It mainly comprises of 4180 million tons for urea and
remained For NP, DAP CAN, SSP.

Fertilizer industry is fast growing industry, being aided by government of Pakistan,

as it is associated with agriculture. Pakistan, being an agriculture country will have
to support all industries which are directly related to agriculture to ensure maximum
benefits as well as maximum production. Current the sector is growing at 35% rate.

Threats and Risks

Supplier (Raw material)
Consumer (less purchasing power)
Inflation rate
Interest rate
Environmental problems and political instability
Financial Indicators
Overall profitability of fertilizer sector increased by 45%.
Increased in fertilizer demand by 20%.
Fertilizer sector is the 2nd largest consumer of gas.
Market players

Dawood Hercules Company ltd

Fauji Fertilizer Company ltd
Fauji Fertilizers Bin Qasim Company ltd
Engro Chemicals Pakistan ltd.

FAUJI FERTILIZER COMPANY

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 share capital of the company was 813.9 Million Rupees. The present
share capital of the company stands above Rs. 8.48 Billion. Additionally, FFC has
more than Rs. 8.3 Billion as long term investments which include stakes in the
subsidiaries FFBL, FFCEL and associate FCCL.
FFC commenced commercial production of urea in 1982 with annual capacity of
570,000 metric tons. (Fauji Fertilizer Company Limited)

Vision Statement
In a nation of increasing population, we believe there is substantial opportunity of
growth for FFC in the years to come. FFCs vision is to play a leading role in the
industrial and agricultural advancement of the Country pursuing new growth
opportunities offering the convenience of multiple products, brands and channels
within and beyond the territorial limits of Pakistan, to the benefit of our customers
and our shareholders, elevating our image as a socially responsible and ethical
company that is watched and emulated as a model of success.

Mission Statement

FFC is a market-focused, process centered organization delivering successful

performance through a strong focus on quality. Our mission is to stand above the
competition and provide our customers with premium quality fertilizer products in a
safe, reliable, efficient and environmentally sound manner, deliver exceptional
services and unparalleled customer support, produce predictable earnings for our
shareholders, and provide a dynamic and challenging environment for our
employees.

Companys Background

1978 Incorporation of the Company.

1982 Commissioning of Plant I, Goth Machhi with annual capacity of 570
thousand tons.
1991 Listed with Karachi and Lahore Stock Exchanges.
1992 Through the De-Bottle Necking (DBN) program, the production capacity
of Plant I was increased to 695 thousand tons per year.
1992 Listed with Islamabad Stock Exchange.
1993 Commissioning of Plant II, Goth Machhi with annual capacity of 635
thousand tons of Urea.
1993 Initial investment in Fauji Fertilizer Bin Qasim Limited, a DAP and Urea
manufacturing concern which currently stands at Rs 4.75 billion representing
50.88% equity share.
1997 With achievement of Quality Management System certification in Goth
Machhi, FFC became the first fertilizer plant in Pakistan to achieve this
distinction.
2002 FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated
in Mirpur Mathelo (Plant III) with annual capacity of 574 thousand tons of urea
which was the largest industrial sector transaction in Pakistan at that time.
2003 FFC obtained certification of Occupational Health & Safety Assessment
Series, OHSAS-18001:1999.
2004 With investment in Pakistan Maroc Phosphore, Morocco S.A. of Rs 706
million, FFC has equity participation of 12.5% in PMP.
2008 Investment of Rs 1.5 billion in Fauji Cement Company Limited, currently
representing 6.79% equity participation.
2008 DBN of Plant III was executed and commissioned successfully for
enhancement of capacity to 125% of the design i.e. 718 thousand tons
annually.
2010 Investment in FFC Energy Limited, Pakistans first wind power electricity
generation project.
2011 SAP - ERP implemented in the Company, improving business processes
by reducing time lags and duplication of work.
2012 Inauguration of new state of the art HQ Building in Rawalpindi.

2012 Inauguration of FFC Energy Limited. (Fauji Fertilizer Company Limited

Corporate Report)

10

Financial Ratios

FFC
2011

2010

2009

Indust
ry
Avera
ge

2013

2012

0.77
0.66

1.14
1.01

1.04
0.93

0.86
0.73

0.84
0.66

1.34
1.28

0.51
15:85

0.40
13:87

0.58
10:90

0.73
20:80

0.95
26:74

0.75
16:65

39.91
times

32.08
times

43.20
times

16.00
times

14.82
times

19.7
times

248.1
8
1

145.9
3
3

96.06

100

40.20

162.4
3
2
0.99

282.7
9
1
1.04

235.8
0
2
0.94

180.25

2
1.10

9
151.6
8
2
1.23

27.03
%
68.41
%
80.05
%

28.07
%
70.38
7
80.96
%

40.73
%
88.60
%
99.17
%

24.58
%
57.25
%
71.40
%

24.40
%
49.96
%
67.44
%

10.97%

Liquidity Ratios:
Current Ratio
Quick Ratio

Leverage Ratios:
Total Debt to Total Asset
Total Debt to Total Equity

Coverage Ratios:
Interest Coverage

Activity Ratios:
Receivable Turnover
Receivable Turnover
days
Inventory Turnover
Inventory Turnover in days
Total Asset Turnover

Profitability Ratios:
Net Profit Margin
Return on
Investment
Return on Equity

34.55
11
188

Analysis of ratios
Operating performance / Liquidity

11

20
0.46

17.06%
26.90%

The hefty decrease in the current ratio is pointing towards the increase in trade
payables ( Accounts Payable), creditors have increased in addition to it advances
from customers also swelled. Contrary to it the current assets to be specific the
stock in trade and trade debts suffered a noteworthy depletion. Industry average is
quite above not a good sign for FFC. Current ratio depicted a decline of 0.13

times below 2012 due to increase in trade creditors (Accounts Payable).

This also shows less liquidity.

12

Their quick ratio is not depicting a good picture. The major reason behind it the
decrease in trade debts plus a drastic decrease cash and bank balances owing to
strict trade receivables policy.

Leverage Ratio

13

The leverage ratios show the level of risk the company takes. If we have a look at
last five years current position is much better now as compared to the past and
industry average. Whereas last year it was 0.40 now it is 0.51 but still they are
going good as compared to the industry. The major reason of this outcome is
increase in long term debt plus the increase in long term investment in addition to
that increase in property, plant and equipment is also evident. Their current
situation here is better than their past years record. FFCs situation is better than the
industry average.

14

Debt to equity although a slight difference from last year but overall it is going
good as compared to Industry Average too but generally speaking from investors
view point this is not a good sign high gearing/leverage doesnt makes investors
happy as the finance cost lessens their EPS. FFC opted place less reliance on debt
financing the graph depicts the same picture. The current standing is indicative of
increase in the debt which resulted in increase of long term investment plus the
fixed assets. Energy shortage, law and order situation and a host of other
sociopolitical impediments continued to challenge Pakistans economy in 2013,
holding back investment and growth in the Country.

Coverage Ratios

15

Cumulative regularization of Company profitability post exceptional performance

during 2011 lead to change in capital market sentiment, which resulted in reduction
in market price of FFCs shares by 4% as of December 31, 2013 compared to 2012.
Companys interest cover ratio improved to a significant 40 times as compared
to 15 times in 2008, because of efficient treasury management.
The interest coverage ratio of FFC has fallen from 2011 to 2013 i.e. from 43
times to 39 times. This concludes that low earnings before interest and taxes maybe
a problem for the FFC and the company is now only able to cover 39 times interest
charges as compared with 2011 of 43 times. But still compared with last year it
seems to be okay and in comparison to the industry average they are going quite
good. This is a good sign which will help them secure the loans and credits easily
hence from lenders view it seems to be okay.

16

Activity Ratio

The receivable turnover indicates the problems being faced by FFC. Most of the
sales are either against cash or advance, providing adequate cover against this risk.
For credit sales, credit limits have been assigned to customers, backed by bank
guarantees. Risk of default by banks has been mitigated by diversification of
placements among A ranked banks and financial institutions.

17

In 2011 it took a day to collect the receivables and convert them into the cash,
whereas, in 2013 it took them 11 days to convert the receivables into cash. This is
also not a good sign as now debtors are taking more time to pay receivables. In
addition as they have in place now a more strict system that is guaranty from bank.
On the basis of that may they are allowing them time to pay off their liability.

18

Inventory turning into cash also is not depicting a pleasant picture. But still the
improvement is there as compared to last year. Strict policies regarding trade
receivables play a vital role in this case on the other hand decreased sales on
account of inflation plus strict trade debt policy.

Inventory turnover in days is more or less unchanged if looked unto over the period
of 5 years where as it is to be noted that their current status is in line with the
industry.

19

The Total asset turnover has increased from 0.94 to 1.10 over the last five years
although lesser than the last years turnover because of increase in the short term
plus long term in addition the increase in fixed assets and intangible assets also are
among the determinants the investments of course wont help them sale more
that is why the trend is declining as evident from the graph.

Profitability Ratios

Net profit margin saw many ups and downs during the five year period the highest
was in 2011 and declining since, now in 2013 it is 27%. Mainly on account of higher
cost of sales plus distribution cost. It is a problem for the company. It indicates that
the firms profitability after taking account of all expenses and income taxes is
decreasing. The current decrease is because of increase in costs i.e. Cost of goods
sold, fixed costs, distribution costs, salaries expense and transportation costs are
high, lowering the net income. Rising raw material and fuel costs in addition to
general inflation were the primary factors for increased cost of production and
resultantly, the Company recorded gross profit of Rs. 34.53 billion, 4% below last
year. Increase in transportation rates and warehouse security costs resulted in
distribution cost escalation to Rs. 6.17 billion, 11% higher than 2012. But still
they are going good as compared to the industry average.

Gross profit and net profit margins for 2013 depicted decline of 2% and 1%
as compared to 2012 mainly on account of higher cost of sales.
20

Distribution cost however was fairly in line with historic averages. Gross
profit margin demonstrated an aggregate improvement of 6% over the last
six years with a corresponding increase of 6% in the net profit margin of the
Company.

Return on investment has decreased over the last 3 years. This decrease is also due
to increase in expense like the major input being natural gas, price hikes in the price
of natural gas is one of the key determinants in addition to it worsening law and
order situation of the country didnt allowed for foreign investment opportunities
hence resulting in an increase in the finance cost in form of more interest which is
to be paid on the debt. As a result lowering the net profit and a less EPS. As
compared to the industry their standing is good.

21

Return on equity is also decreasing although they had an amazing 99% in 2011 but
now it has decreased over the years .This is because of increase in assets and
decrease in net profit due increase in expenses such as the distribution costs
which has registered a noteworthy increase in addition to it finance costs have also
increased in result of increased debt and dividends. It indicates the profitability to
the shareholders of the firm (after all expenses and taxes) is decreasing. All the
profitability ratios are quite high above than the industry averages which is a good
sign for investors.

22

FFC Analysis of Fund flow statement (Rupees 000)

Long Term
Sources

Uses

Funds provided by operations:

Net Income
Rs. 20,134,548

Dividends
20,677,553

Depreciation
266,630

Additions to Fixed Assets

358,803

- Long Term Deposits and Prepayments

2,457
+ Long Term Borrowings
410,000
+ Deferred Liabilities
163,110
TOTAL LONG TERM SOURCES
20,976,745

+ Long Term Investments

11,150,667
+ Long Term Loans & Advances
39,622

TOTAL
32,226,645

Rs.

LONGTERM USES

Short Term
Sources

Uses

- Stock in trade (Inventory)

Rs. 140,182
- Trade debts (A/c Receivable)
2,910,935
- Cash & Bank Balance
1,807,830
+ Trade payable (A/c Payable)
5,728,536
+ Short Term Borrowings
2,010,000
+ Current position of Long term Borrowings
26,250

+ Stores, Spares and loose tools

145,707
+ loans in advances
243,483
+ Deposits & prepayments
11,314
+ Other receivables
201,496
+ Short Term Investments
209,299
- Interest & markup accrued
2,823
- Taxation
559,711
TOTAL SHORT TERM USES
1,373,833

TOTAL SHORT TERM SOURCES

12,623,733
TOTAL SOURCES

Rs.

TOTAL USES
23

Rs.

Rs.

33,600,478

33,600,478

FFC FUND FLOW STATEMENTS ANALYSIS (MATCHING

PRINCIPLE):
From the above mentioned Fund flow statement we can analyze long-term uses is
32B for which only 21B from long-term sources is being covered and utilized and
that the principal uses of funds for 2013 were Dividends, additions to fixed assets,
increases in inventories and long-term investment, and a sizeable decrease in tax
payable. These were financed primarily by funds provided by operations, a decrease
in Accounts receivable and short term borrowings. Also of note is the fact that the
firm has decreased its cash balance by 1.8B approx. In sources and uses of funds
analysis through matching principle It is useful to place cash dividends opposite net
profits and additions to fixed assets opposite depreciation. Doing this allows the
analyst to easily evaluate both the amount of the dividend payout and the net
increase (decrease) in fixed assets.
In FFC, having source of dividend payment being net profit as well as increase in
debt means it is covering cash dividend from net profit as well debts which is not a
healthy sign since cash dividends are higher than net profit. Reason is Payment of
higher dividends during the year resulted in depletion of the Company reserves
(Retained Earnings) and lower net assets at the close of 2013 and higher cash
dividends during the year attributed to increased outflows from financing activities
means its more cash is being used in long-term financing and financing activities.
However, having more of the firms assets being replaced through additions than
depreciation (worn away) is a good sign with a good addition in fixed assets which
could not be a problem if allowed to continue and grow.
Increase in long term investments is primarily represented by acquisition of 43.15%
equity stake in AKBL and 100% acquisition of AHFL.
Efficient credit management and debt collections enabled reduction in trade debts
by Rs. 2.9 billion. Improved fertilizer demand enabled marketing of most of our
fertilizer inventory, with a carrying stock of Rs 301.9 million only at the close of the
year.
The major flaw FFC is doing is it is covering and financing Long term USES from
Short Term SOURCES i.e. financing investments not only from long term sources but
from short term sources (result in low cash) as well which is not good because in
this way it can increase potential risks to its short of liquidity and it is evident from
the matching principle as well that it is already short of cash and cash equivalents
24

I.e. decrease in Cash & Cash balance. And The major reason for decrease in liquidity
is the financing of over Rs.11.05 billion for AKBL(Acquisition of 43.15% equity stake
in AKBL) and AHFLs 100 % acquisition from internal Company sources. Current
ratio depicted a decline of 0.13 times below 2012 due to increase in trade creditors
(Accounts Payable). This also shows less liquidity.
So, FFC should finance long-term USES from Long term SOURCES and SHORT TERM
USES FROM SHORT TERM SOURCES to manage its sources and uses effectively and
efficiently without being less liquid or over liquid. The FFC is considering only longterm uses and neglecting short term uses and day to day operations which is also
not effective in this way it can become less liquid because a company can perform
without profits for years but not without liquidity. The Company has also
established a diversified investment portfolio comprising FFBL, FCCL, FFCEL, PMP
and lately in 2013 in AKBL and AHFL to maintain growth in liquidity for the
Company. Credit risks attributable to any short term investments are minimized
through diversified investments among top ranking financial institutions by way of
internal policies.
Targets for the year were projected on the basis of estimated impact of
various factors which included elements outside the Companys control and other
variables which could either be monitored or the impact of which could be mitigated
to the extent possible. General inflation, currency parity, Government taxes / levies
& regulations, raw material prices, gas curtailment and supply / demand, are factors
that affect the Companys cost of production and distribution and are generally
considered to be outside the Companys control, in addition to environmental
factors which cannot be predicted including weather, floods etc. As a result of
careful planning and control, in addition to improvement in efficiencies, the
Company was able to achieve its operating targets with sustained production and
sales during the year despite gas curtailment. The continuation of GIDC and
increase in cost of gas affected the cost pass through ability of the Company. The
selling price on average therefore remained depressed throughout the year at levels
equivalent to last year, resulting in increased costs and lower profitability by 4%
compared to last year. Inflation and fuel costs which were slightly above the
projections further escalated the operating costs Savings in financing costs and
increase in income on deposits despite planned acquisition of Askari Bank
Limited and Al-Hamd Foods Limited were the result of efficient credit and
treasury management. First ever dividend receipt from Fauji Cement positively
impacted profitability and the Company expects a continuation in the incremental
income. The net earnings of Rs. 20.14 billion were therefore an overachievement
against targets. Considering the restricted pass through ability of the Company,
targets for 2014 have been prepared considering the effects of likely changes in
cost of production and distribution, market conditions and Government taxes &
levies that are likely to force a downward slide on profitability. Efforts shall however

25

be made to ensure sustenance of existing profitability.

ISSUES
Gas Crises
Due to major Sui Northern Gas Pipeline Limited (SNGPL) crises in 2011 (from JanNov), FFC had to face 5% decline in the sales of urea, whereas, it was the most
widely used and purchased fertilizer amongst all. Due to the continuous gas
shortage FFC had to decrease its productions level as well. The manufacturers of
FFC planned to drop the level of urea production from 281k ton to 250k ton.
Similarly, another fertilizer, Di-Ammonia Phosphate (DAP) sales also declined by
18% to 1.01 million tons on a yearly basis against 1.24 million tons in the same
period last year.
Its been predicted that the dark days for FFC are going to continue as the
government in a new gas load management plan has agreed to cut-off gas supply to
the four plants on the SNGPL-based pipeline. The four plants include Engro
Corporations Enven, Pak-Arab Fertilizer, Agritech Fertilizer and Dawood Hercules
Fertilizer.

Production Capacity Underutilized

Depletion in natural gas reserves has left the installed production capacity highly
underutilized. Stocks are being piled up. Therefore, the demand and supply
imbalances thus had to be met through imports, causing excessive burden on the
National Exchequer in addition to reduction of foreign exchange reserves.
Yet, the outstanding flexibility of the business model of FFC, it continues its path of
profitable returns. However, unfortunately the growth pattern established over the
last few years could not be sustained due to depleting returns on investments.

26

Excessive Prices of Urea (2010-2011)

Due to the immense increased in prices the Competition Commission of Pakistan
[CCP] had decided to impose the maximum penalty of 10% of the turnover on FFC
for unreasonable, unjustified and unfair increase in prices of urea in 2010. Rs5.5
billion penalty had been imposed on Fauji Fertilizer then. The price of urea was
raised from Rs850 per 50 kilogram bag to Rs1580 in 201. An 86% increase without
proper justification.
Whereas, FFC argued that it had increased prices to match the impact of gas
restrictions on their input prices.
However, CCPs findings show that Faujis plant was only slightly affected by gas
limitations, with impact in the range of 7-9%. Due to the price increase, Fauji
Fertilizers gross profit margins increased from 43.6% or Rs19.6 billion in 2010, to
62.2% or Rs34.4 billion in 2011. Profits before interest and taxes, meanwhile,
increased by surprising 95%; from approximately Rs17.4 billion in 2010, to Rs33.95
billion in 2011. As per Fauji Fertilizers accounts, its rate of return on equity after tax
comes out to 97% in 2011, up from 71.4% in 2010.

Black Marketing
Unavailability and higher prices of FFC is due to black marketing can be attributed
to the severe low sales.

Price Cuts in 2012-2013

FFC has reduced urea and DAP-(Di ammonia phosphate) prices by Rs10/bag and
Rs100/bag given increase in the inventory levels.
Reasons:
1) Fresh arrival of 0.3k tons of urea with more import plans under consideration.
2) Slower than expected urea off take due to rains.
3) With the price cuts, the impact of recent 9% cut in fuel gas prices gets reduced.

Piled up Stocks
The company management, Fauji Fertilizer has reduced urea prices by PRs10/bag
(to PRs1640) at the warehouse level and DAP prices by PRs100/bag (to Rs3550).
The management has not provided any timeline regarding upward revision in prices
which will eventually be driven by market supply/demand dynamics. The objective
behind the price cuts remain clearing of piled up of stock of urea with FFC (170kt)
and DAP with FFBL (250kt).

Global Financial issues

27

Euro zone crisis impacted negatively on foreign direct investments in the Country.
However, Pakistan managed to keep the exports steady and recorded an increase in
foreign payments, in addition to recording a moderate growth in domestic sector.
According to Summit Banks Research
According to their research FFC profit declined by 7% in 2012. The negative impact
on their earning was on the basis of following factors:
1) Massively higher cost of sales
2) Substantial increase in distribution cost
3) Huge upsurge in financial cost and
4) Hefty drop in other income.

(Summit Bank (pvt) ltd, 2013)

How did FFC manage to be profitable

FFC overcame its problems by increasing the price of the Urea by 17%. This led 35%
increase in the revenue. Moreover, FFC also sold the imported Di Ammonia
Phosphate (DAP) at higher prices and approximately sold 65000 tons of DAPs in
2012 against nil in 2011. Furthermore, cost of sales increased 1.84 times in
comparison to 1.35 times growth in sales. However, limited operating margins
coupled with 27% higher distribution expenses, owing to higher transportation costs
and salaries, resulted in operating profits to grow by a mere 2% to Rs30.4 billion.
Financial charges were up 27% with the absence of dividend income were touching
a billion due to higher leverage as the fertilizer producer borrowed to finance
pending inventories piling up because of lower urea off-take. Other income declined
36% to Rs4.268 million, the drop is attributed to absence of dividend income from
its subsidiary Fauji Fertilizer Bin Qasim Limited. (The Tribune Express, 2013)

Recommendations

28

Because of the global crunch which has affected every business all over the world,
the companies should remain calm and confident and wait for the tides to turn. We
recommend the following for FFC to adopt:
1. Owing to the shortage of gas, FFC can import Liquefied Natural Gas (LNG)
from countries such as Nigeria, Malaysia, Qatar, UAE, Norway and Indonesia.
This will help them increase their production of fertilizer at full capacity.
However, the cost of importing along with the devaluation of the Pakistan
rupee will harm their cash flows. Moreover, building gas pipelines from
Turkmenistan and Iran will be expensive and will require a long duration.
2. FFC can build offshore reserves for imports. However, it will require
infrastructure, creating a burden on the cash flows.
3. According to ,the Oil & Gas Journal, Pakistans total gas reserves were 31.3
trillion in 2009 and is ranked 25th in the world. Since 71 % gas comes from
Sindh, therefore, FFC can build their gas reserves in Sindh.
4. Unlike gas, Pakistan tends to be rich in having the largest reserves of coal.
Punjab and Balochistan are rich in coal reserves. FFC can use coal in their
production plants. Although coal is the cheapest fuels but it requires the
construction of power plants and new technologies in order to make it a clean
source of power generation. These will add to FFCs cost.
5. According to Shahab Alam, technical director of Pakistan Petroleum
Concessions. There are 40 trillion tight gas reserves. FFC should use these to
their advantage. However, this will again crush the cash flows.
6. In Balochistan and Sindh there are untouched oil and gas reserves. FFC
should utilize them.
7. FFC should try to tap international markets where there is no gas shortage.
Countries such as Nigeria, Algeria, Tanzania and Mozambique are rich in gas
reserves. This will require a lot of investment but by having a joint venture
from other companies, they can use this to their own advantage. Moreover,
these countries tend to offer cheap rates and good terms, benefiting FFC.
8. FFC should work with the government and policy makers to devise ways to
counter the gas shortage. For example, OGDC (Oil and Gas Production) can
invest in the exploration of oil, gas and coal reserves.
9. Other alternatives such as hydel energy can be used to generate power. The
rivers of the country namely Indus, can be used. Moreover, FFCs likely
acquisition of Agritech can help in expansion of wind energy
10.The establishment of a natural gas compressor at GM plant Mirpur Mathelo
(future plan of FFC to establish this plant) will enable FFC to combat the gas
crisis. This will save the company more than Rs. 250 million in foreign
exchange.
11.The piled up stocks can be reduced by lowering the prices. But there are
other ways too. FFC can use research and development and find alternative
ways to use that inventory efficiently. They can diversify and spread risks by
creating new products from the same inventory.

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12.Moreover, they can improve their production scheduling by reducing cycle

times, improving production predictability and adopting a JIT (just in time)
approach. This will enable them to reduce inventory, free up more cash and
increase profitability. The cost of handling the inventory and the carrying cost
will decrease.
13.In order to combat high costs, FFC can lower their asset investment. This is
done by selling off redundant and unprofitable assets. This can bring in some
cash inflow while increasing the ROI (return on investment) ratio. By freeing
up their cash which is tied up in the maintenance of those assets, FFC can
use it to finance their other operations.
14.The high prices of urea can be justified by offering something more to
customers. This can be done by augmenting the product. Consumers will only
pay the high price if they find value in getting something else in return. For
example, after sales service, free advice etc.
15.The global financial crisis has impacted the fertilizer industry negatively as
local investors are unwilling to invest. FFC should diversify into more products
in new unexplored markets to spread their risks.
16.FFC can also develop payment agreements with their creditors. This will
result in a minimal collection cost and the money owed will be collected in a
timely manner.

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