Problem Statement

The normalization phase witnessed by fertilizer industry in the previous couple of years could
not be sustained during 2019, owing to further deterioration in economic conditions, ever-
increasing cost of production, weakening of local currency and rising inflation. The
normalization phase witnessed by fertilizer industry in the previous couple of years could not be
sustained during 2019, owing to further deterioration in economic conditions, ever-increasing
cost of production, weakening of local currency and rising inflation.

Global fertilizer consumption is contracting at the backdrop of unfavorable climate changes, low
international crop prices and tighter financial conditions. However, with the expected
agricultural growth in new and emerging markets and world’s focus on sustainable development,
the demand is expected to rebound in the coming years. Cost of raw material, distribution and
financing cost increased significantly while considerable pricing pressure from the Government
also continued during the year. Persistent Governmental intervention in pricing, with rapid
changes in cost of gas, unfavorable legislative changes, unsettled Government receivables etc,
shall continue to negatively affect the fertilizer industry with consequential implications for
farming community and food security in the Country.

Purpose

The purpose of this report is to highlight the several issues faced by Fauji Fertilizer Company
Ltd and provide the solutions to them. The vision of the company is “To be leading national
enterprise with global aspirations, effectively pursuing multiple growth opportunities,
maximizing returns on the stakeholders, remaining socially and ethically responsible”. To
achieve this type of vision companies need a lot of effort and consistency. This type of vision can
only be attained if all the hurdles/issues faced by the companies is highlighted and resolved.
Therefore, we are going to highlight those issues in this report and will provide solutions to
them.

Aim

Maintaining our competitive position in the core business, we employ our brand name, unique
organizational culture, professional excellence and financial strength diversifying in local and
multinational environments through acquisitions and new projects thus achieving synergy
towards value creation for our stakeholders.

Threats

The major threats are:

 Poor economic conditions

 Increasing cost of production
 Weak local currency
  Increasing inflation
 Unfavorable climate changes
 Low international crop prices
 Tighter financial conditions
 Rapid changes in cost of gas

Objectives

To provide our customers with premium quality products in a safe, reliable, efficient and
environmentally sound manner, deliver exceptional services and customer support, maximizing
returns to the shareholders through core business and diversification, providing a dynamic and
challenging environment for our employees. The major objectives are:

 Good economic conditions

 Low cost of production
 Strong local currency
 Decreased inflation
 Favorable climate changes
 High international crop prices
 Smooth financial conditions
 Consistent changes in cost of gas

INTRODUCTION

FERTILIZER INDUSTRY

As Pakistan’s economy is agriculture based therefore the fertilizer sector assumes a central role
in the development of the country. A good quality fertilizer increases yield therefore increasing
production of crops and earning foreign exchange for Pakistan through exports. Not only does
the quantity of production increase but the quality also increases. This increases the exports of
our country which in turn helps us correct our adverse balance of trade with other countries.
Therefore it is necessary to have a vibrant fertilizer industry in Pakistan. The good news is that
future outlook for the fertilizer industry looks bright because of supportive government policies
and favourable climatic conditions. The government almost always comprises of feudal lords and
they always try to implement encouraging agricultural policies because their aim is also to
maximize yield. Thus the fertilizer sector gets a boost in terms of subsidized gas rates and lesser
hours of load shedding.

FAUJI FOUNDATION

Fauji Foundation is one of the largest conglomerates in Pakistan.Its interests include energy,
cement, and power generation, food, fertilizer, education, security and employment services. It
was setup as a charity in 1954 and its main purpose was the welfare of ex-army personnel and
their dependents. It is run by retired army officers.Its headquarters is in Rawalpindi Cantonment.
Some of the organizations owned by this group are as follows:

1. Fauji Fertilizer Company

2. Fauji Cereals
3. Foundation Gas
4. Foundation University
5. Fauji Cement Company
6. Foundation Security
7. Fauji Kabirwala Power Company
8. Fauji Sugar Mills
9. Fauji Security Services
10. 10.Fauji Fertilizer Bin Qasim

FAUJI FERTILIZER COMPANY LIMITED

HISTORY

Fauji Fertilizer Company was incorporated in 1978 as a joint venture between Fuji
Foundation and Haldor Topsoe A/S of Denmark. Its head office is located on Mall Road in
Rawalpindi Cantonment. FFC has two plants. One is located at Goth Machhi in Rahimyar
Khan while the other one is situated at Mirpur Mathelo in Ghotki.The initial share capital of
the company was Rs. 813.9 million. 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.FFC participated as major shareholders in a new
DAP/Urea manufacturing complex with participation of major international/national
institutions. The new company Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan
Fertilizer Company Limited) commenced commercial production with effect from January
01, 2000. The facility is designed with an annual capacity of 551,000 metric tons of urea and
445,500 metric tons of DAP, revamped to 670,000 metric tons of DAP.
1.2: Audience:
Reader:
First of all most respected Sir Dr Salman Masood will be the reader who can guide me for the
preparation of business report and then all respected stakeholders of Fauji Fertilizers Company
Ltd.

Readers Preference:
Under the light of fundamentals of corporate finance the writer did highlight all major and minor
problems which can be crucial for the stability and growth of the any firm. It’s the writer
academic professional writing activity in which writer can used his full potential to highlight the
problems. The entire objectives described earlier can creates problems for future prospects of any
public ltd firm.

 This report is to be written for firm management to observe and take corrective actions
for all the highlighted problems in future for betterment. All the determinants show poor
performance in each level.
 This report is to be written for the all the stakeholders related to firm growth,
productivity, and easily analyze the value of the company, because everything has
explained easily.
 For investors, this report is to be very crucial to read before the investment in Fauji
Fertilizers Company Ltd.

Reader’s Needs:
After the identifications of problems, the writer is also interested in problem solving. The
solutions of the problems can impress the reader, because the writer did cover all major aspects
in problem identification. First reader Dr. Salman Masood will be impressed by the writers’
contribution and also writer had almost completed the work of stakeholders, if anyone of them
can review this report. The writer can also give some necessary recommendations for the
betterment of Fauji Fertilizers Company Ltd. The main uncertainties highlighted by them are;

 Poor economic conditions

The outgoing year 2019 witnessed deteriorating economic conditions, rising inflation, significant
currency devaluation and high interest rates resulting in sizeable increase in cost of doing
business. Borrowing requirements and the resultant finance costs have significant impact on the
Company’s profitability. Although margins on loans are negotiated by the management, the
interest rate / KIBOR fluctuations, being subject to market and economic conditions, are beyond
 the Company’s control. The Company recognises life time ECL for trade debts and other
receivables, using the simplified approach. The expected credit losses on these financial assets
are estimated using a provision matrix based on the Company’s historical credit loss experience,
adjusted for factors that are specific to the debtors and other receivables, general economic
conditions and an assessment of both the current as well as the forecast direction of conditions
at the reporting date, including time value of money where appropriate. The Group recognises
life time ECL for trade debts and other receivables, using the simplified approach. The expected
credit losses on these financial assets are estimated using a provision matrix based on the
Group’s historical credit loss experience, adjusted for factors that are specific to the debtors and
other receivables, general economic conditions and an assessment of both the current as well as
the forecast direction of conditions at the reporting date, including time value of money where
appropriate.
 Increasing cost of production
Unfortunately, the Company faced severe challenges in terms of rising inflation, increasing
production cost, escalating fuel and financing cost etc. The Company also continued to face
pricing pressure from the Government. The GIDC levy was significantly increased by the
Government effective January 2014, which could only partially be passed under the prevalent
market conditions, resulting in decline in Gross profitability. The fertilizer industry witnessed
depressed market conditions in subsequent years owing to pricing intervention by the
Government alongwith factors beyond the Company’s control until the second half of year 2017
when the market returned to normalization. FFC successfully sailed through these difficult times
and financial results were back on the trajectory. However, ever increasing cost of urea
manufacturing, consistent pricing pressures, rising inflation and inconsistent Governmental
policies are major challenges being faced by the Company adversely impacting its financial
performance.
 Weak local currency
The outgoing year 2019 witnessed deteriorating economic conditions, rising inflation, significant
currency devaluation and high interest rates resulting in sizeable increase in cost of doing
business. Sona urea cost of sales were recorded at Rs 60.67 billion with an increase of 18% from
last year mainly due to rising inflation, substantial currency devaluation besides significant
increase in gas cost by around Rs 340 per bag since September 2018. Contraction in global
fertilizer consumption has been witnessed owing, primarily to low international prices for most
crops; unfavorable weather in important agricultural and fertilizer-consuming areas and
currency depreciation in some fertilizer-importing countries, besides increasing emphasis on the
more efficient use of fertilizers in developed countries.
 Increasing inflation
Operating revenue remained in line with last year after a continuous upward trend despite a
decline in 2016 when Government pricing pressures had limited revenue growth. Gross profit
margin stood at 29.06% despite rising inflation, substantial currency devaluation and significant
increase in gas prices whereas the Company was able to continue with the improving trend in
net profit margin to 16.17% on account of effective treasury management and efficient cost
 controls. Global economic outlook during 2019 remained precarious on account of rising trade
and geopolitical tensions increasing uncertainty about the future of the global trading system
and international cooperation affecting business confidence, investment decisions and global
trade. A notable shift towards increased monetary policy management has cushioned the
impact of these tensions on financial market sentiments and activity. Pakistan’s economic
growth slowed due to the stabilization measures undertaken by the government. The IMF
program, depreciation of exchange rate, increase in energy and policy rate revision, which
remained unchanged in 2019, were the main factors in increased inflation and decreased
domestic demand.
 Unfavorable climate changes
Global fertilizer consumption is contracting at the backdrop of unfavorable climate changes, low
international crop prices and tighter financial conditions. However, with the expected
agricultural growth in new and emerging markets and world’s focus on sustainable
development, the demand is expected to rebound in the coming years. Support to small and
medium scale farmers over latest technologies, market economy, value chain and climate
change. In collaboration with Ministry of Climate Change Government of Pakistan, United
Nations Development Program, Planning Commission and Corporate Social Responsibility Centre
Pakistan (CSRCP), FFC organized conversation on Sustainable Development Goals to discuss
Climate Change SDG 13 and SDGs relevant to chemical sector. Taking into account the severity
of the issue of climate change and resulting impacts, companies are taking concentrated actions
to address the issue through a number of initiatives including energy efficiency and reducing
environmental footprint of the products. The climate change is resulting in severe weather
patterns, floods and droughts, affecting production patterns and land productivity resulting in
impacts not only relevant to the chemical sector but also society at large. FFC is working
together with supply chain partners to build resilience and adaptive capacity in response to the
impact of climate change.
 Low international crop prices
Global fertilizer consumption is contracting at the backdrop of unfavorable climate changes, low
international crop prices and tighter financial conditions. However, with the expected
agricultural growth in new and emerging markets and world’s focus on sustainable
development, the demand is expected to rebound in the coming years.
 Tighter financial conditions
Ascertaining that the internal control systems including financial and operational controls,
accounting systems for timely and appropriate recording of purchases and sales, receipts and
payments, assets and liabilities and the reporting structure are adequate and effective.
 Rapid changes in cost of gas
Persistent Governmental intervention in pricing, with rapid changes in cost of gas, unfavorable
legislative changes, unsettled Government receivables etc, shall continue to negatively affect the
fertilizer industry with consequential implications for farming community and food security in
the Country.
Findings:
 Conclusions:

Current Liabilities

 Trade and other payables as a percentage of current liabilities reduced substantially in

2015 and 2016, as the Company ceased to withhold GIDC.However, subsequent to
court’s ruling the Company resumed withholding GIDC amount which resulted in
continuous increase in trade and other payables as a percentage of current assets during
2017, 2018 and 2019.
 Non-current Assets
At 40%, property, plant and equipment as a percentage of non-current assets, remained
broadly in line with six years’ average of 41% as the Company continued to invest in
natural gas compressors under sustainability plan besides regular capital expenditure.
Long term investments as a percentage of non-current assets also remained steady at a six
years’ average of 55% as the Company continued to diversify in the power and food
sector.
 Current Assets
Stock in trade as a percentage of current assets increased in 2015, 2016 and 2018, when
the Company carried abnormal fertilizer inventory at the yearend due to adverse market
conditions. In order to promote sales under depressed market conditions, higher quantum
of credit sales were made during the last quarter of the year. As a result, trade debts
increased to 14% as a percentage of current assets at the close of 2019 against previous
six years’ average of 8%.

Recommendations:

 Poor economic conditions:

 Lower interest rates – reduce the cost of borrowing and increase consumer spending and
investment.
 Increased real wages – if nominal wages grow above inflation then consumers have more
disposable to spend.
 Higher global growth – leading to increased export spending.
 Devaluation, making exports cheaper and imports more expensive, increasing domestic
demand.
 Rising wealth, e.g. rising house prices cause consumers to spend more (they feel more
confident and can remortgage their house.
 Growth in productivity:

 Development of new technology, e.g. steam power and telegrams helped productivity in
the nineteenth century. Internet, AI and computers are helping to increase productivity in
the twenty-first century.
 Introduction of new management techniques, e.g. Better industrial relations helps
workers become more productive.
 Improved skills and qualification.
 More flexible working practices – working from home, self-employment.
 Increased net migration – especially encouraging workers with the skills that are in short
supply (e.g. builders, fruit pickers)
 Raise retirement age and therefore increasing the supply of labour.
 Public sector investment – e.g. improved infrastructure, increased spending on education
and
 Expansionary fiscal policy – cutting taxes to increase disposable income and encourage
spending. However, lower taxes will increase the budget deficit and will lead to higher
borrowing. The expansionary fiscal policy is most appropriate in a recession when there
is a fall in consumer spending.
  Expansionary monetary policy (now usually set by independent Central Bank) – cutting
interest rates can boost domestic demand.
 Stability. A key function of the government is to provide economic and political stability
which enables the usual economic activity to take place. Uncertainty and political tension
can discourage investment and economic growth.
Increasing cost of production

In an uncertain economy when every penny counts, even the smallest increase in revenue or
reduction in expenses can have an impact on company profitability. The good news is a
large-scale company overhaul isn't necessary. It's often simple, common sense steps that
improve the bottom line, especially for a small business.

 Reduce supply expenses.

Save money on office supplies by contacting vendors to let them know you’re price
shopping. Look outside your pool of traditional vendors. Large discount suppliers like
BJ's, Amazon or Wal-Mart can often beat traditional office supply vendor prices.

Cut production costs.

As a business owner, you're always looking for ways to cut material costs, and optimize your
resources. Here are a few suggestions:

 Try selling leftover cardboard, paper and metal instead of sending it to the recycling center.
Also, consider ways to use your waste to create another product.
 Make sure you're getting the most out of your production real estate. Centralize or
consolidate the space necessary for production. Lease unused space to another business or
individual—it can be as small as an office or as big as a warehouse space.
 Track and measure the operational efficiency of your business, in order to adjust and
optimize the use of available resources. Set performance parameters that reflect your
efficiency goals and offer incentives when those goals are met.

Lower financial expenditures.

 Look at your insurance policies and financial accounts for places to save money.
 Save money on insurance by comparing providers for the most competitive rate; then ask
your current lender or insurance provider to match that rate.
 Consolidate insurance policies or bank accounts if possible.
 Evaluate insurance policies to make sure you're not over-insured or duplicating coverage.
 Don’t take on unnecessary debt. Do a thorough cost-benefit analysis and future forecasting
when considering business expansion. Consider the opportunity costs and the effect of debt
payments on cash flow. Excess debt affects company rating, interest rates and the ability to
borrow in the future.

Use efficient time strategies.

 Optimizing productivity effectively lowers your cost of doing business.
Remember, wasted time equals wasted dollars.
 Minimize distractions and limit access to time wasters. Use apps like Focus
Booster or Rescue Time to help employees focus and concentrate to stay on task.
 Utilize software such as Paymo and Toggl to track employee time usage, time spent on
different types of work activities or projects and billable hours.
 Set expectations for a reasonable amount of time to complete certain types of activities or
tasks. Offer incentives for meeting or exceeding those expectations.
 Schedule business activities and encourage employees to adhere to the daily or weekly
schedule.
 Schedule a predetermined block of time for meetings. Make it clear that you expect
participants to be on time, to stick closely to the agenda and to wrap up at the appointed time.

Increase inflation:
 Governments can use wage and price controls to fight inflation, but that can cause
recession and job losses.
 Governments can also employ a contractionary monetary policy to fight inflation by
reducing the money supply within an economy via decreased bond prices and increased
interest rates.
 There are three main tools to carry out a contractionary policy. The first is to
increase interest rates through the central bank. In the case of the U.S., that's the Federal
Reserve. The Fed Funds Rate is the rate at which banks borrow money from the
government, but in order to make money, they must lend it at higher rates