Why is FFC a winning bet for investors?

Fauji Fertilizer Company (FFC) has had an impressive quarter, posting its highest-ever unconsolidated quarterly profit of PKR 15.5 billion, with earnings per share (EPS) of PKR 12.22. 

This remarkable 191% year-on-year (YoY) growth didn’t just happen by chance; it was the result of a perfect storm of favorable conditions and strategic decisions. 

Riding the EFERT Shutdown Surge

One of the major contributors to FFC’s stellar performance was the planned shutdown of Engro Fertilizer Limited (EFERT). With EFERT’s production temporarily offline, the demand for urea shifted significantly towards FFC. 

This unexpected windfall led to a 61% YoY increase in net sales, reaching PKR 57 billion. FFC was in the right place at the right time, capitalizing on the market vacuum left by EFERT’s absence. 

Urea and Gas Dynamics

FFC also benefited from favourable pricing conditions.

While the gas prices for feed and fuel remained unchanged at Rs580/mmbtu and Rs1,580/mmbtu, respectively, the company strategically increased urea prices by PKR 633 per bag, bringing them up to PKR 4,400 per bag. 

This price hike, coupled with a 55% YoY jump in DAP offtake to 41,000 tons, significantly boosted the company’s revenue. With gross margins hitting a robust 54.5%, up from 46.8% in 2Q2023, FFC’s bottom line improved.

FFC sources its gas from Mari Petroleum Company Limited (MARI), while EFERT buys from Sui Northern Gas Pipelines Limited (SNGPL). Recently, the government hiked gas prices, but Mari Petroleum’s prices stayed the same as it is not governed by the petroleum policy, unlike SNGP.

Because EFERT is supplied by SNGP, the gas costs have risen significantly, hitting its fertilizer production costs drastically. Having two different prices for homogenous commodities is difficult to justify.

FFC has been reaping the rewards by cutting out the middleman, which is a big reason for its strong performance. With gas prices expected to rise further, FFC stands to benefit even more with thicker profit margins. 

EFERT has sought relief from the government, but instead of addressing the issue of subsidies, the government merely assured that FFC would align its prices with those of EFERT.

Ali Rathore, Chief Financial Officer of EFERT, stated during a media workshop

Complete removal of subsidies and unification of gas prices for the entire industry can help the government earn an additional Rs80 to Rs100bn, which can then be used for targeted initiatives that uplift the farmers.

Other Income and Dividends

But that’s not all. FFC’s other income doubled YoY to PKR 5.5 billion, thanks to higher interest income and dividends from its subsidiaries and associates.

The company also declared its highest-ever quarterly cash dividend of PKR 10 per share, surpassing industry expectations and pledging greater returns for investors.

With EFERT’s plant now resuming operations, the market dynamics may shift once again, potentially impacting FFC’s momentum. The question now is: Can FFC sustain this impressive performance in the face of renewed competition? Due to favorable pricing, it is certainly possible.