FFC Negative Growth On Low Volumes And Higher Costs

WE Financial Services Limited.

In our today’s morning briefing we would discuss the performance of Fauji fertilizer Company Limited (FFC) in 9MCY15.

Cumulative PAT dips 8% YoY

The bottom-line of Fauji Fertilizer Company Limited (FFC) witnessed negative growth in 9MCY15 due to decline in volumetric sales along with higher finance cost due to surge in borrowings. The profit after taxation (PAT) of the company totaled Rs 11,946 million (EPS: Rs 9.39) versus a PAT of Rs 12,962 million (EPS: Rs 10.19) in 9MCY14. In addition to the above mentioned factors, the bottom-line was also affected by higher effective taxation and slight rise in cost. However rise in other income on back of increased dividend income had a positive impact on the bottom-line.

Strong recovery QoQ

On QoQ basis however the bottom-line posted a growth of 56% in 3QCY15 as its PAT totaled Rs 3,680 million (EPS: Rs 2.89) as against a PAT of Rs 2,359 million (EPS: Rs 1.85) in 2QCY15. This heavy growth was made possible due to massive rise in other income and lower effective taxation. The corporate results were accompanied with a third interim cash dividend of Rs 2.75/share in addition to the already paid cash dividend of Rs 5.69/share during 1HCY15.

Revenue drops on lower volumes

Due to decline in sales volumes, the net revenue of the company reduced by 1% YoY in 9MCY15 to Rs 54,294 million as against net revenue of Rs 55,039 million in the identical period in CY14. The urea sales volumes fell by 4% YoY in 9MCY15 to 1,696 million due to uncertainty related to implementation of Prime Minister’s ‘Kissan Package’. The cost of sales of the company increased by 1% YoY during the period under review to Rs 33,660 million versus Rs 33,258 million in 9MCY14. Cost surged as the government increased the feed and fuel gas prices from September 1, 2015. Therefore gross profit dropped 5% YoY in 9MCY15 to Rs 20,634 million as against Rs 21,781 million in 9MCY14. The gross margins therefore decreased to 38% in 9MCY15 versus 39.6% in 9MCY14.

Recommendation

Due to uncertainty regarding increase in urea prices and allowing huge discount to dealer for decreasing inventory, we have a neutral stance on stock which is trading at Rs121.60/share offering an upside potential of 18% to our June’16 target price of Rs 144/share.