October 18, 2021 (MLN): Covid-19 has proved to be a blessing in disguise for country’s sole DAP producer Fauji Fertilizer Bin Qasim Limited (FFBL), providing much needed improvement in company’s core business profitability and enabling it to enjoy better primary margins this year.
Over the past few years, FFBL’s earnings remained subdued where higher input costs and financial charges kept profitability muted. However, recently earnings have witnessed impressive turnaround in CY20 where improved DAP margins coupled with reduced interest rates lifted unconsolidated profit of Rs2.2 bn, a 5-Yr high. The company surpassed that number in 1HCY21 (PAT of Rs3.9bn), and in the light of recent development, the company is expected to continue to show strong business performance for the rest of the year.
A report by JS Global projected that the company will post a 5ppt YoY increase in gross margins in the upcoming 3QCY21 result, which is scheduled to be announced on October 25, 2021.
The increase in gross margins will primarily be attributed to higher retention prices, leading to unconsolidated earnings of Rs5.86bn (EPS of Rs4.54, up by 77% YoY).
According to the report, with the arrival of Rabi season, demand for DAP has risen and most countries are facing serious shortage of the product. On top of that, China which is a major DAP exporter, has reportedly decided to enforce customs inspections on phosphate fertilizer cargoes from Friday where this move is expected to magnify the issue and further impact DAP shipments.
On the regional front, Indian government has increased subsidies on DAP by 2.4x to INR1,200/bag from INR500/bag announced previously, in light of the rising global prices.
The GoP on the other hand hasn't been able to finalize a mechanism of the subsidy on DAP announced last year while DAP retail prices in the local market have reached around Rs7,000/bag.
DAP off-takes in the upcoming Rabi season may be impacted to some extent if any announcement on subsidy is not made by the government in the coming days, the report said.
According to latest data, International DAP suppliers are offering the product at US$750/ton CFR (landed cost: nearly Rs6,925/bag) to Pakistan.
The rally in DAP prices since May-20 does not seem to be ending anytime soon. Supply chain disruptions started by Covid-19 led stringent lockdowns in Hubei province (Accounts for 25% of China’s DAP production) in China during 1HCY20 coincided with series of other factors which have contributed in this price frenzy.
“With DAP prices at all-time high levels, the sole manufacturer of the product in Pakistan, FFBL, will benefit the most from the said development as it will be selling majority of its production at higher rates in the coming quarter,” report underlined.
The report further stated that the company has been able to enjoy better primary margins recently and has shown strong core business performance. At the moment, despite higher phos prices and rupee devaluation, company has healthy primary margins of around $215/ton.
With regards to subsidiary, Fauji Foods Limited (FFL) has a positive EBITDA now and has been showing gross profit for the last four quarters, thanks to the new management.
Currently, FFBL is focusing on improving the group level performance and get rid of loss-making businesses, the proceeds from sale of Foundation Wind Energy I and II will also provide a breather to the company’s cash position.
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