IBF Final Report FFC

8/9/2019 IBF Final Report FFC

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Fauji Fertilizer Company

Introduction to Business FinanceDecember 15, 2014

Muhammad Rafay 13659Muhammad Zain Abbas 15700

Contents

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(c$noled"ement )

*%ecuti&e +ummary 4

Introduction 5

roduct ort!olio -

Financial .atios 10

(nalysis o! .atios 11

+ources and uses o! Funds +tatement 21

(nalysis o! Funds +tatement /atc#in" rinciple 22

Issues 24

.ecommendations 2

Balance +#eet 23

(ccount )0

Cas# 6o +tatement )1

2


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Acknowledement

7e praise (I89:; ((9, pro&ider o! #ope, "uidance and $noled"e

it#out ((9


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!"ecuti#e $umma%y

:#is report pro&ides a case study o! t#e ?nancial issues o! FFC and #o itaAected t#eir pro?tability=

+ince a$istan is an a"riculture based economy so t#e use o! !ertilizer isimportant= :#e $ey players in t#e industry are Daood 9ercules Companyltd, &au'i &e%tili(e% Com)any ltd* Fauji Fertilizers Bin Qasim Company ltdand *n"ro C#emicals a$istan ltd=

(s stated in t#eir &ision statement, FFC aims to pro&ide a premium 'uality!ertilizer it# e%cellent customer support= 9oe&er ill t#ey be able toac#ie&e t#eir mission

:#eir product port!olio includes urea, D( and +@= :#e ratio analysis re&ealt#at t#ere ere e%cessi&e stoc$s, increased e%penses and #i"# ris$s= :#is #adaAected t#eir pro?tability= (n analysis o! t#e cas# 6os #i"#li"#ts t#at FFC#ad #i"# cas# out6os oin" to debt repayment and #i"# ?%ed costs alon"it# operatin" e%penses=

:#ere ere many issues t#at lead to a decrease in t#e ?nancial #ealt# o! t#ecompany=

:#ese ere "as s#orta"e, underutilized production capacity, 6uctuatin"prices o! urea /#i"#2011, lo2012, blac$ mar$etin", e%cessi&e in&entoriesand t#e "lobal ?nancial crisis=+o t#e main 'uestion is 7#at s#ould FFC do in order to remain pro?table !or201) and beyond@ur recommendations include importin", e%plorin" ne "as reser&es,disco&erin" alternati&es /suc# as coal, oil, ind, #ydel , tappin" internationalmar$ets, usin" t#e piled up stoc$s in ot#er ays, adoptin" EI:, sellin" oAredundant assets, au"mentin" !ertilizers to justi!y t#e #i"# price,di&ersi?cation into emer"in" mar$ets and ?nally de&elopin" paymenta"reements it# suppliers= :#ese solutions ill speed up FFC


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+nt%oduction

Fauji Fertilizer Company /FFC G one o! t#e companies lar"ely unaAected by t#e "as

supply issue G announced a pro?t o! .s20=3)- billion !or 2012, don H compared

to pre&ious year


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Fertilizer industry is !ast "roin" industry, bein" aided by "o&ernment o! a$istan,

as it is associated it# a"riculture= a$istan, bein" an a"riculture country ill #a&e

to support all industries #ic# are directly related to a"riculture to ensure ma%imum

bene?ts as ell as ma%imum production= Current t#e sector is "roin" at )5 rate=

-h%eats and Risks

+upplier /.a material

Consumer /less purc#asin" poer

In6ation rate

Interest rate

*n&ironmental problems and political instability

&inancial +ndicato%s

@&erall pro?tability o! !ertilizer sector increased by 45=

Increased in !ertilizer demand by 20=

Fertilizer sector is t#e 2ndlar"est consumer o! "as=

Ma%ket )laye%s

Daood 9ercules Company ltd

&au'i &e%tili(e% Com)any ltd

Fauji Fertilizers Bin Qasim Company ltd

*n"ro C#emicals a$istan ltd=


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&A./+ &!R-++Z!R CM,A2

FFC as incorporated in 1-H3 as a pri&ate limited company= :#is as a joint &enturebeteen Fauji Foundation /a leadin" c#aritable trust in a$istan and 9aldor :opsoe

(L+ o! Denmar$=

:#e initial s#are capital o! t#e company as 31)=- illion .upees= :#e present

s#are capital o! t#e company stands abo&e .s= 3=43 Billion= (dditionally, FFC #as

more t#an .s= 3=) Billion as lon" term in&estments #ic# include sta$es in t#e

subsidiaries FFB, FFC* and associate FCC=

FFC commenced commercial production o! urea in 1-32 it# annual capacity o!

5H0,000 metric tons= /Fauji Fertilizer Company imited

4ision $tatementIn a nation o! increasin" population, e belie&e t#ere is substantial opportunity o!

"rot# !or FFC in t#e years to come= FFC


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FFC is a mar$et!ocused, process centered or"anization deli&erin" success!ul

per!ormance t#rou"# a stron" !ocus on 'uality= @ur mission is to stand abo&e t#e

competition and pro&ide our customers it# premium 'uality !ertilizer products in a

sa!e, reliable, eMcient and en&ironmentally sound manner, deli&er e%ceptional

ser&ices and unparalleled customer support, produce predictable earnin"s !or our

s#are#olders, and pro&ide a dynamic and c#allen"in" en&ironment !or ouremployees=J

Com)anys ack%ound

1-H3 Incorporation o! t#e Company=

1-32 Commissionin" o! lant I, 8ot# ac##i it# annual capacity o! 5H0

t#ousand tons=

1--1 isted it# >arac#i and a#ore +toc$ *%c#an"es=

1--2 :#rou"# t#e DeBottle Kec$in" /DBK pro"ram, t#e production capacity

o! lant I as increased to -5 t#ousand tons per year=

1--2 isted it# Islamabad +toc$ *%c#an"e=

1--) Commissionin" o! lant II, 8ot# ac##i it# annual capacity o! )5

t#ousand tons o! Nrea=

1--) Initial in&estment in Fauji Fertilizer Bin Qasim imited, a D( and Nrea

manu!acturin" concern #ic# currently stands at .s 4=H5 billion representin"

50=33 e'uity s#are=

1--H 7it# ac#ie&ement o! Quality ana"ement +ystem certi?cation in 8ot#

ac##i, FFC became t#e ?rst !ertilizer plant in a$istan to ac#ie&e t#is

distinction=

2002 FFC ac'uired e% a$ +audi Fertilizers imited /+F Nrea lant situatedin irpur at#elo /lant III it# annual capacity o! 5H4 t#ousand tons o! urea

#ic# as t#e lar"est industrial sector transaction in a$istan at t#at time=

200) FFC obtained certi?cation o! @ccupational 9ealt# +a!ety (ssessment

+eries, @9+(+130011---=

2004 7it# in&estment in a$istan aroc #osp#ore, orocco +=(= o! .s H0

million, FFC #as e'uity participation o! 12=5 in =

2003 In&estment o! .s 1=5 billion in Fauji Cement Company imited, currently

representin" =H- e'uity participation=

2003 DBK o! lant III as e%ecuted and commissioned success!ully !or

en#ancement o! capacity to 125 o! t#e desi"n i=e= H13 t#ousand tons

annually=

2010 In&estment in FFC *ner"y imited, a$istan


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2012 Inau"uration o! FFC *ner"y imited=/Fauji Fertilizer Company imited

Corporate .eport

-


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&inancial Ratios

Analysis of %atios

)e%atin )e%fo%mance i8uidity

11

&&C

013 01

011 010 009 +ndust%y

A#e%ae

Liquidity Ratios: Current .atio 0=HH 1=14 1=04 0=3 0=34 1=)4

Quic$ .atio 0= 1=01 0=-) 0=H) 0= 1=23

Leverage Ratios: :otal Debt to :otal (sset 0=51 0=40 0=53 0=H) 0=-5 0=H5

:otal Debt to :otal *'uity 1535 1)3H 10-0 2030 2H4 15

Coverage Ratios:

Interest Co&era"e)-=-1times

)2=03times

4)=20times

1=00times

14=32times

1-=Htimes

Activity Ratios:

.ecei&able :urno&er)4=55

40=20243=1

3145=-

)-=0 100

.ecei&able :urno&er

days

11

-

1 ) 4

In&entory :urno&er133

151=3

12=4)

232=H-

2)5=30

130=25

In&entory :urno&er in days 2 2 2 1 2 20

:otal (sset :urno&er 1=10 1=2) 0=-- 1=04 0=-4 0=4

Profitability Ratios:

Ket ro?t ar"in2H=0)

23=0H

40=H)

24=53

24=40

10=-H

.eturn onIn&estment

3=41

H0=)3H

33=0

5H=25

4-=-

1H=0

.eturn on *'uity30=05

30=-

--=1H

H1=40

H=44

2=-0


12/34

:#e #e!ty decrease in t#e cu%%ent %atiois pointin" toards t#e increase in trade

payables / (ccounts ayable, creditors #a&e increased in addition to it ad&ances

!rom customers also selled= Contrary to it t#e current assets to be speci?c t#e

stoc$ in trade and trade debts suAered a noteort#y depletion= Industry a&era"e is

'uite abo&e not a "ood si"n !or FFC= Current ratio depicted a decline o! 0=1)

times belo 2012 due to increase in trade creditors :Accounts ,ayable=

:#is also s#os less li'uidity=

12


13/34

:#eir 8uick %atiois not depictin" a "ood picture= :#e major reason be#ind it t#e

decrease in trade debts plus a drastic decrease cas# and ban$ balances oin" to

strict trade recei&ables policy=

e#e%ae Ratio

1)


14/34

-he le#e%ae %atioss#o t#e le&el o! ris$ t#e company ta$es= I! e #a&e a loo$ at

last ?&e years current position is muc# better no as compared to t#e past and

industry a&era"e= 7#ereas last year it as 0=40 no it is 0=51 but still t#ey are

"oin" "ood as compared to t#e industry= :#e major reason o! t#is outcome is

increase in lon" term debt plus t#e increase in lon" term in&estment in addition to

t#at increase in property, plant and e'uipment is also e&ident= :#eir current

situation #ere is better t#an t#eir past years record= FFCs situation is better t#an t#e

industry a&era"e=

14


15/34

;ebt to e8uityalt#ou"# a sli"#t diAerence !rom last year but o&erall it is "oin"

"ood as compared to Industry (&era"e too but "enerally spea$in" !rom in&estor


16/34

Cumulati&e re"ularization o! Company pro?tability post e%ceptional per!ormance

durin" 2011 lead to c#an"e in capital mar$et sentiment, #ic# resulted in reduction

in mar$et price o! FFC


17/34

Acti#ity Ratio

-he %ecei#able tu%no#e%indicates t#e problems bein" !aced by FFC= ost o! t#e

sales are eit#er a"ainst cas# or ad&ance, pro&idin" ade'uate co&er a"ainst t#is ris$=

For credit sales, credit limits #a&e been assi"ned to customers, bac$ed by ban$

"uarantees= .is$ o! de!ault by ban$s #as been miti"ated by di&ersi?cation o!

placements amon" O(< ran$ed ban$s and ?nancial institutions=

1H


18/34

In 2011 it too$ a dayto collect t#e recei&ables and con&ert t#em into t#e cas#,

#ereas, in 201) it too$ t#em 11 days to con&ert t#e recei&ables into cas#= :#is is

also not a "ood si"n as no debtors are ta$in" more time to pay recei&ables= In

addition as t#ey #a&e in place no a more strict system t#at is "uaranty !rom ban$=

@n t#e basis o! t#at may t#ey are alloin" t#em time to pay oA t#eir liability=

13


19/34

In&entory turnin" into cas# also is not depictin" a pleasant picture= But still t#e

impro&ement is t#ere as compared to last year= +trict policies re"ardin" trade

recei&ables play a &ital role in t#is case on t#e ot#er #and decreased sales on

account o! in6ation plus strict trade debt policy=

In&entory turno&er in days is more or less unc#an"ed i! loo$ed unto o&er t#e period

o! 5 years #ere as it is to be noted t#at t#eir current status is in line it# t#e

industry=

1-


20/34

:#e :otal asset turno&er #as increased !rom 0=-4 to 1=10 o&er t#e last ?&e years

alt#ou"# lesser t#an t#e last year


21/34

Distribution cost #oe&er as !airly in line it# #istoric a&era"es= 8ross

pro?t mar"in demonstrated an a""re"ate impro&ement o! o&er t#e last

si% years it# a correspondin" increase o! in t#e net pro?t mar"in o! t#e

Company=

.eturn on in&estment #as decreased o&er t#e last ) years= :#is decrease is also due

to increase in e%pense li$e t#e major input bein" natural "as, price #i$es in t#e price

o! natural "as is one o! t#e $ey determinants in addition to it orsenin" la andorder situation o! t#e country didn


22/34

.eturn on e'uity is also decreasin" alt#ou"# t#ey #ad an amazin" -- in 2011 but

no it #as decreased o&er t#e years =:#is is because o! increase in assets and

decrease in net pro?t due increase in e%penses suc# as the dist%ibution costs

#ic# #as re"istered a noteort#y increase in addition to it ?nance costs #a&e also

increased in result o! increased debt and di&idends= It indicates t#e pro?tability to

t#e s#are#olders o! t#e ?rm /a!ter all e%penses and ta%es is decreasin"= (ll t#e

pro?tability ratios are 'uite #i"# abo&e t#an t#e industry a&era"es #ic# is a "ood

si"n !or in&estors=

22


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&&C Analysis of &und >ow statement :Ru)ees ?000@on -e%m

$ou%ces .ses

&unds )%o#ided by o)e%ations

Ket Income

.s= 20,1)4,543

Depreciation

2,)0

Di&idends .s=

20,HH,55)

(dditions to Fi%ed (ssets

)53,30)

on" :erm Deposits and repayments

2,45H

P on" :erm In&estments

11,150,HP on" :erm Borroin"s

410,000

P on" :erm oans (d&ances

)-,22

P De!erred iabilities

1),110

--A 2B -!RM $.RC!$

0*976*75

--A 2B-!RM .$!$

3*6*65

$ho%t -e%m

$ou%ces .ses

+toc$ in trade /In&entory

.s= 140,132

P +tores, +pares and loose tools .s=

145,H0H

:rade debts /(Lc .ecei&able

2,-10,-)5

P loans in ad&ances

24),43)

Cas# Ban$ Balance

1,30H,3)0

P Deposits prepayments

11,)14

P :rade payable /(Lc ayable

5,H23,5)

P @t#er recei&ables

201,4-

P +#ort :erm Borroin"s

2,010,000

P +#ort :erm In&estments

20-,2--

P Current position o! on" term Borroin"s2,250

Interest mar$up accrued2,32)

:a%ation

55-,H11

--A $DR- -!RM $.RC!$

1*63*733

--A $DR- -!RM .$!$

1*373*E33

--A $.RC!$ Rs= --A .$!$ Rs=

2)


24/34

33*600*7E 33*600*7E

&&C &.2; &F $-A-!M!2-$ A2A$+$ :MA-CD+2B

,R+2C+,!@

From t#e abo&e mentioned Fund 6o statement e can analyze lon"term uses is

)2B !or #ic# only 21B !rom lon"term sources is bein" co&ered and utilized and

t#at t#e principal uses o! !unds !or 201) ere Di&idends, additions to ?%ed assets,

increases in in&entories and lon"term in&estment, and a sizeable decrease in ta%

payable= :#ese ere ?nanced primarily by !unds pro&ided by operations, a decrease

in (ccounts recei&able and s#ort term borroin"s= (lso o! note is t#e !act t#at t#e

?rm #as decreased its cas# balance by 1=3B appro%= In sources and uses o! !unds

analysis t#rou"# matc#in" principle It is use!ul to place cas# di&idends opposite netpro?ts and additions to ?%ed assets opposite depreciation= Doin" t#is allos t#e

analyst to easily e&aluate bot# t#e amount o! t#e di&idend payout and t#e net

increase /decrease in ?%ed assets=

In FFC, #a&in" source o! di&idend payment bein" net pro?t as ell as increase in

debt means it is co&erin" cas# di&idend !rom net pro?t as ell debts #ic# is not a

#ealt#y si"n since cas# di&idends are #i"#er t#an net pro?t= .eason is ayment o!

#i"#er di&idends durin" t#e year resulted in depletion o! t#e Company reser&es

/.etained *arnin"s and loer net assets at t#e close o! 201) and #i"#er cas#

di&idends durin" t#e year attributed to increased out6os !rom ?nancin" acti&ities

means its more cashis bein" used in lon"term ?nancin" and ?nancin" acti&ities=

9oe&er, #a&in" more o! t#e ?rm


25/34

I=e= decrease in Cas# Cas# balance= (nd :#e major reason !or decrease in li'uidity

is t#e ?nancin" o! o&er .s=11=05 billion !or (>B/(c'uisition o! 4)=15 e'uity sta$e

in (>B and (9F


26/34

be made to ensure sustenance o! e%istin" pro?tability=

+$$.!$

Bas C%ises

Due to major +ui Kort#ern 8as ipeline imited /+K8 crises in 2011 /!rom Ean

Ko&, FFC #ad to !ace 5 decline in t#e sales o! urea, #ereas, it as t#e most

idely used and purc#ased !ertilizer amon"st all= Due to t#e continuous "as

s#orta"e FFC #ad to decrease its productions le&el as ell= :#e manu!acturers o!

FFC planned to drop t#e le&el o! urea production !rom 231$ ton to 250$ ton=

+imilarly, anot#er !ertilizer, Di(mmonia #osp#ate /D( sales also declined by

13 to 1=01 million tons on a yearly basis a"ainst 1=24 million tons in t#e same

period last year=

It


27/34

!"cessi#e ,%ices of .%ea :010G011@

Due to t#e immense increased in prices t#e Competition Commission o! a$istan

CCR #ad decided to impose t#e ma%imum penalty o! 10 o! t#e turno&er on FFC

!or unreasonable, unjusti?ed and un!air increase in prices o! urea in 2010= .s5=5

billion penalty #ad been imposed on Fauji Fertilizer t#en= :#e price o! urea as

raised !rom .s350 per 50 $ilo"ram ba" to .s1530 in 201= (n 3 increase it#outproper justi?cation=

7#ereas, FFC ar"ued t#at it #ad increased prices to matc# t#e impact o! "as

restrictions on t#eir input prices=

9oe&er, CC


28/34

*uro zone crisis impacted ne"ati&ely on !orei"n direct in&estments in t#e Country=

9oe&er, a$istan mana"ed to $eep t#e e%ports steady and recorded an increase in

!orei"n payments, in addition to recordin" a moderate "rot# in domestic sector=

According to Summit Banks Research

(ccordin" to t#eir researc# FFC pro?t declined by H in 2012= :#e ne"ati&e impacton t#eir earnin" as on t#e basis o! !olloin" !actors

1 assi&ely #i"#er cost o! sales

2 +ubstantial increase in distribution cost

) 9u"e upsur"e in ?nancial cost and

4 9e!ty drop in ot#er income= /+ummit Ban$ /p&t ltd, 201)

Dow did &&C manae to be )%o


29/34

Because o! t#e "lobal crunc# #ic# #as aAected e&ery business all o&er t#e orld,

t#e companies s#ould remain calm and con?dent and ait !or t#e tides to turn= 7e

recommend t#e !olloin" !or FFC to adopt

1= @in" to t#e s#orta"e o! "as, FFC can import i'ue?ed Katural 8as /K8

!rom countries suc# as Ki"eria, alaysia, Qatar, N(*, Koray and Indonesia=:#is ill #elp t#em increase t#eir production o! !ertilizer at !ull capacity=

9oe&er, t#e cost o! importin" alon" it# t#e de&aluation o! t#e a$istan

rupee ill #arm t#eir cas# 6os= oreo&er, buildin" "as pipelines !rom

:ur$menistan and Iran ill be e%pensi&e and ill re'uire a lon" duration=2= FFC can build oAs#ore reser&es !or imports= 9oe&er, it ill re'uire

in!rastructure, creatin" a burden on t#e cas# 6os=)= (ccordin" to ,t#e @il 8as Eournal, a$istan


30/34

12=oreo&er, t#ey can impro&e t#eir production sc#edulin" by reducin" cycle

times, impro&in" production predictability and adoptin" a EI: /just in time

approac#= :#is ill enable t#em to reduce in&entory, !ree up more cas# and

increase pro?tability= :#e cost o! #andlin" t#e in&entory and t#e carryin" cost

ill decrease=

1)=In order to combat #i"# costs, FFC can loer t#eir asset in&estment= :#is isdone by sellin" oA redundant and unpro?table assets= :#is can brin" in some

cas# in6o #ile increasin" t#e .@I /return on in&estment ratio= By !reein"

up t#eir cas# #ic# is tied up in t#e maintenance o! t#ose assets, FFC can

use it to ?nance t#eir ot#er operations=14=:#e #i"# prices o! urea can be justi?ed by oAerin" somet#in" more to

customers= :#is can be done by au"mentin" t#e product= Consumers ill only

pay t#e #i"# price i! t#ey ?nd &alue in "ettin" somet#in" else in return= For

e%ample, a!ter sales ser&ice, !ree ad&ice etc=15=:#e "lobal ?nancial crisis #as impacted t#e !ertilizer industry ne"ati&ely as

local in&estors are unillin" to in&est= FFC s#ould di&ersi!y into more products

in ne une%plored mar$ets to spread t#eir ris$s=1=FFC can also de&elop payment a"reements it# t#eir creditors= :#is ill

result in a minimal collection cost and t#e money oed ill be collected in a

timely manner=

)0


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)1


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)2


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))


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