Professional Documents
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Report - BF I
Report - BF I
Report
Sarah Khurshid (25695)
Mahnoor Siddiqui (25697)
Mahad Khan (25702)
Muhammad Ahmad (25705)
Business Finance – Mr. Najamul Hassan Sheheryar Malik (25671)
5/1/23 Taha Sohail (25755)
Table of Contents
COMPANY OVERVIEW ............................................................................................................................ 2
HISTORICAL STOCK PERFORMANCE .................................................................................................. 2
OVERVIEW OF THE FERTILIZER SECTOR ........................................................................................... 3
FATIMA FERTILIZER – CURRENT POSITION ...................................................................................... 4
RATIO ANALYSIS...................................................................................................................................... 5
LIQUIDITY .............................................................................................................................................. 5
EFFICIENCY ........................................................................................................................................... 6
PROFITABILITY ..................................................................................................................................... 6
SOLVENCY ............................................................................................................................................. 8
WORKING CAPITAL MANAGEMENT POLICY .................................................................................... 9
EARNING POTENTIAL............................................................................................................................ 10
DUPONT ANALYSIS................................................................................................................................ 10
DIVIDEND TREND ................................................................................................................................... 11
MARKET VALUATION ........................................................................................................................... 12
BETA .......................................................................................................................................................... 12
WEIGHTED AVERAGE COST OF CAPITAL - WACC ......................................................................... 13
FREE CASH FLOW ................................................................................................................................... 14
INTRINSIC VALUE AND RECOMMENDATION ................................................................................. 15
INVESTMENT RISKS ............................................................................................................................... 16
REFERENCES: .......................................................................................................................................... 17
APPENDIX ................................................................................................................................................. 18
Fatima Fertilizer Company was incorporated on 24 December 2003 as a joint venture between Fatima
Group and Arif Habib Corporation. The company deals with importing, buying, selling, manufacturing,
and exporting chemical fertilizers. Its intermediate products are Ammonia and Nitric Acid, and four final
products are Calcium Ammonium Nitrate (CAN), Nitro Phosphate (NP) and Nitrogen Phosphorous
Potassium (NPK).
The company has three production plants strategically located in Sheikhupura, Sadiqabad and Multan, the
agricultural belt of the country.
Sadiqabad Plant – This facility produces CAN, NP, and Urea along with intermediary products. The
complex has a 56 MW captive power plant and is allocated 110MMCFD of gas from Mari Gas Fields.
Sheikhupura Plant – This plant is based on RLNG and has a Urea manufacturing capacity of 445,000 MT
annually as of Dec’22
Pak-Arab Plant – This plant has a capacity of producing 854,500 MT. This plant has had a history of
remaining nonoperational and non-availability of gas, nevertheless it was acquired by Fatima in 2010.
The management has a Gas Supply Agreement Signed with Mari for gas supply till the next 7 years.
Currently Fatima Fertilizer is one of the biggest players in the Fertilizer industry.
As of Dec’22, Fatima Fertilizer was trading at a P/E of 5.03 with a closing share price at Rs 33.8 and
market capitalization of Rs 70.98 Billion. Out of 21 billion shares, 15% of the shares are on free float
(i.e.) 315,000 shares and has an earnings per share of Rs 6.73. This contrasts with its peers, like Engro
Fertilizer, that has a market capitalization value of Rs 102.67 billion with a P/E of 6.66 and Fauji
Fertilizer that has the highest market capitalization of Rs 125.58 billion with a P/E of 6.26
The agricultural sector is one of the largest sectors in Pakistan with fertilizers being an essential
contributor towards this sector in terms of food security. Pakistan fulfills around 84% of its fertilizer
requirement through indigenous production while the remainder is fulfilled through imports. In the year
2022, the sector has suffered a myriad of issues such as hyperinflation, higher current account deficit,
rising interest rates and finally catastrophic floods due to climate change which has had a devastating
impact on the agricultural value chain.
The fertilizer sector is oligopolistic in nature and dominated by six major players owning 95% of the total
market share. Four of these players are listed on the Pakistan Stock Exchange. The country’s total
fertilizer production stands at approximately ~ 7.1 million MT of Urea and CAN and ~1.7 million MT of
DAP, NP and NPK.
The year 2022 closed with a total fertilizer offtake of 9.5 million MT a decrease of 5.9% from 10.1
million MT last year due to decline in DAP offtake which declined from 1.87 million MT to 1.2 million
MT in 2022 on the back of higher input costs and significant rupee devaluation.
Urea is the most widely used fertilizer type in the agricultural sector which accounts for around 70% of
the country’s overall offtake. Average fertilizer inventory levels for the past 4 years from FY19 to FY22
stood at ~1.2 million MT. Urea is used equally in both crop seasons of the country i.e., Rabi (Oct – Mar)
and Kharif (Apr – Sept). During the Rabi season there was a shortfall in urea supply and the ECC
(Economic coordination committee) approved providing RLNG at subsidized rate till the month of
Dec’22 to both Fatima Fertilizer and Agritech. However, by Mar’23 for the upcoming Kharif season, urea
fertilizer demand was projected to be 3.2 million MT whereas local production was estimated to be 2.9
million MT. To bridge the demand- supply the ECC decided to start supply of indigenous gas to Fatima
Fatima Fertilizer, although being a small player in the non-cyclical fertilizer industry, is also one of the
fastest growing ones. The cumulative fertilizer production of the manufacturing division was recorded at
2.831 million MT which is 5.6% higher than 2021 and is highest ever recorded in the company’s history.
This was attributed to plant efficiencies and higher production from its Sheikhupura plant with better
availability of gas. The fertilizer industry uses gas both as fuel and feed stock. Under the Fertilizer policy
2001, Engro and Fatima Fertilizer were granted concessionary rates for feed stock for 20 years that ended
in July 2021. Following the expiry, the gas rates for Engro and Fatima were revised to Rs 302/mmbtu.
Now in 2023, the ECC has raised gas tariffs for fertilizer feed from Rs 302/mmbtu to Rs 510/mmbtu and
for fuel stock it has been revised from Rs 1,023/mmbtu to Rs Rs 1,500/mmbtu marking an end to the
subsidies and relief offered by Government. However, Fatima Fertilizer has a well-diversified product
portfolio which enables it to sustain its earnings despite the market volatility.
For the analysis, consolidated financial statements have been used. Engro Fertilizer was chosen as the
peer company for comparison.
LIQUIDITY.
The current ratio has been increasing more or less except for the previous year. A ratio under 1.0 mainly
indicates that the current debts and liabilities (those due within a year) are greater than its assets and the
company may not be able to pay them off. However, a ratio of 1.28 means that the company can cover its
current liabilities 1.28 times which is a good position from a lender’s position. Compared to its peer
Fatima has a better liquidity position.
However, the quick ratio trend for Fatima Fertilizer from 2018 to 2022 is a matter of concern. The ratio
has remained range bound between 2018 to 2020 and less than 1.0 indicating liquidity issues in meeting
short term obligations. However, this ratio improved to 0.77 in 2021 and finally now is at 0.69. Also, in
comparison to EFERT, Fatima has a better liquidity position compared to its peer.
EFFICIENCY
Initially Fatima Fertilizer faced challenges with maintaining a healthy turnover with both Fixed assets and
Total Asset turnover being below 0.50x. However, from 2021 onwards, the company has made significant
strides in improving its operational efficiency which is reflected by its improved asset turnover ratios.
On the contrary, Engro has been maintaining a healthy turnover with efficient asset utilization. Fatima’s
inventory turnover has remained between 3 to 5 which is lower than Engro’s.
PROFITABILITY
Fatima had saw the highest revenue increase in 2019 (Please refer the appendix) by 46% whereas
fertilizer sales increased by 17% indicating price increase as the main driver for revenue. Urea prices had
shot up by 20% due to gas price increase however CAN manufacturing had been shut down due to has
supply issues. With the cost of production rising due to high input costs and depreciation of the rupee, the
net profit margin was squeezed to its lowest 16%.
Due to the inelastic yet strong demand for fertilizer products, the topline and bottom-line growth of
Fatima have been on an upward trend except for 2020 when sales went down by 5% YoY due to COVID-
related lockdown, even then Fatima endured and posted a higher net profit margin of 18.6% compared to
16.1% last year owing to its efficient operations and dedicated gas supply from Mari fields. However, in
Compared to Engro, Fatima has always had the upper hand in terms of profitability margin but has a ROE
and ROA ratio attributed to difference in the capital structures of both companies. Engro employs greater
financial leverage compared to Fatima that prefers a higher equity base.
SOLVENCY
Fatima’s debt to equity and debt to asset ratio has reduced from 69.9% and 27% to 45.5% and 14.1%
respectively. This reflects a moderate capital structure with strong coverage. Financial leverage has
remained range bound within x1 compared to Engro that has higher financial leverage.
Over the period of 2018 to 2022, the total liabilities to equity ratio has remained steady in 2022 however
debt financing was slightly increased bringing the ratio to 1.08. A major portion of the debt financing
comprises of short-term financing for the general business operations.
Historically both Fatima and Engro have had negative cash conversion cycles with heavy reliance on
short term financing against import merchandise and for working capital requirements. These credit
facilities are usually secured by pledge of raw materials and finished goods.
Fatima’s cash conversion cycle indicates that the company is generating more cash flow from its sales
than what it spends on purchasing new inventory and paying its creditors. The company’s days payable
has been fluctuating over 2018 to 2022, increasing and decreasing over the years. But overall, the DPO
for 2022 is higher than that of Engro indicating that Fatima may have better bargaining power over its
suppliers. However, Engro has a significantly lower DSO and DIO implying that the inventory is being
cycled through faster than Fatima and they have a more stringent policy when it comes to collecting cash
from customers. When the cash conversion cycle is compared with the return on equity, a declining trend
is evident alluding to a working capital policy that is moderate in nature. The current assets are in sync
with the short-term liabilities balancing risk and growth potential. Moreover, this strategy ensures long
term sources of finance are used for investment in fixed assets and short-term funding options are used for
current asset financing.
The last five years earning summary and growth rate has remained volatile due to economic challenges
and disruption to gas supply. In 2020, the pandemic has resulted in reduced offtake however despite price
uncertainties, sales volumes remain steady. Coupled with a lower cost of production due to subsidy
released by the government for SNGPL against gas supplied to its Sheikhupura plant at subsidized rate
resulted in earnings remaining robust. In 2021, the Fatima had recorded sales with production reaching a
new milestone despite inflationary pressures. In 2022, both Engro and Fatima saw its earnings venture
into the negative territory due to regressive taxation measures (imposition of super tax), persistent
unprecedented inflation and surge in finance costs due to surge in interest rates.
Despite the precarious economic situation, the fundamentals for Fatima remain strong and the company is
generating reasonable earnings compared to its price, albeit it is lower than Engro.
DUPONT ANALYSIS
Fatima’s dividend payments have been increasing over the past five years. However, the dividend
coverage ratio has been in a declining trend which is a cause of concern as to whether the company will
be able to adequately cover dividends paid out with its earnings.
Dividend yield was at its highest in 2021 however it has fallen back to 2020 levels in 2022, indicating that
there is room for future growth in dividend payments.
Overall, the valuation of Fatima Fertilizer reflects stable and sustainable earnings despite operating in an
environment with deteriorating macros. P/B ratio has consistently below 1.0 from 2019 indicating that the
stock may be undervalued.
A cause of concern is its decreasing operating cashflow which plummeted from 12.5 in 2021 to 4.2 in
2022 indicating it might be facing some trouble in covering its operating expenses and capital
expenditures. Price to Sales ratio has remain more or less consistent with reaching its highest in 2022
supported by strong sales.
BETA
The beta for Fatima Fertilizer was calculated regressing daily returns of the stock against the KSE-100 for
the last 36 months (2020-2022). The risk of the stock is lower compared to the stock market due to the
non-cyclical nature of the industry it operates.
15.3% of the variation in stock returns is explained by fluctuations in the stock market and the returns are
moderately correlated.
The capital structure of Fatima Fertilizer is composed of moderate leverage and higher equity base.
Cost of equity was computed using the CAPM model. Market returns were calculated using the earnings
approach and using the prevailing P/E of the KSE-100. Market return was found to be around 24.33%
The return on a 10-year Pakistan Investment Bond was used as a proxy for risk-free return i.e., 15.99%
(as of May 2023)
Since Fatima Fertilizer has not issued any sukuk or bonds recently using comparable bond approach the
yield to maturity was calculated on the Hubco Power, a bond of similar rating (AA+) and maturity. An
upward adjustment of 1.5% was taken to consider sectoral differences.
The offtake for Hubco is generally guaranteed by the GoP due to IPP agreements, although Fatima
operates in a non-cyclical industry with fertilizer being an essential component for higher crop yields, the
offtake is not explicitly guaranteed by the GoP due to which an adjustment has been taken to reflect
increased risk. The final yield to maturity was 22.63%
WACC 21.29%
Free cash flow represents the cash that a company generates to support its operations and maintain its
capital assets.
As per our calculations, Fatima Fertilizer had a negative FCF in the year 2022 as higher operating
expenses and finance costs continue to apply pressure on bottom line growth. This is in stark contrast to
2021, where the FCF was at its highest.
However, FCFE in the year 2022 is positive, indicating the pressure from cash flow stemming from
additional financing being taken up in a rising interest rate environment. With the policy rate touching
Less:Debt 23,694
Estimated Value of Equity 80,534
No. of shares 2,100
Estimated Stock Price per Share 38.35
The current market per share is Rs 28.5 with an intrinsic value at Rs 38.35. The stock is currently
undervalued, and we recommend it a BUY considering its growth and earnings potential. Being an
agrarian economy, fertilizer is a staple commodity hence despite deteriorating macros, we believe that due
to strong fundamentals and operations it will endure the harsh environment and pull through.
The country's economy is facing several challenges, causing a production halt across multiple industries
due to demand contraction and supply-chain disruptions. However, the demand for urea remains stable as
it is necessary for food security. Urea manufacturers can pass on their production costs to customers as
local prices are lower than international prices. Some manufacturers have raised their prices due to an
increase in gas tariffs and PKR devaluation, but not all have followed suit.
The Pakistani government raised gas tariffs for the SSGC and SNGPL network as per the IMF's demand
for tariff rationalization, but major fertilizer players source gas from the Mari network, for which no
explicit notification of a price hike has been issued yet. FFBL and EFERT's Enven plant were hit by the
cost escalation due to gas price hikes by 69% and 47% for feed and fuel, respectively, and have passed on
the impact to urea prices. FFBL raised granular urea prices by PKR440/bag to PKR3,025/bag, while
EFERT raised prices by PKR555/bag to PKR2,994/bag.
To ensure an adequate supply of nutrients and avoid subsidizing expensive RLNG, the government
allowed RLNG-based plants on indigenous gas to operate. Following ECC approval, indigenous gas was
allocated to both plants, and their gas tariff increased from PKR839/mmbtu to PKR1,050/mmbtu for feed
and fuel. As a result, the prices of TARA urea (AGL) and Bubber Sher urea (Fatima Fert) increased by
PKR350/bag, reaching PKR2,791/bag
1. Sovereign default – The forex reserve situation in the country is alarming with high dependency
on the success of the staff level IMF agreement. Currently the government has secured loans from
friendly countries but must address the $ 3-4 billion gap in financing requirements.
2. Imposition of sales tax – as of the Finance Act in 2022, no sales tax is currently imposed on
fertilizer products. Sales tax if introduced will increase the cost of sales for fertilizer companies.
3. Although we believe that the policy rate cannot be hiked any further without jeopardizing
business activities. However, the probability of another rate hike increasing financing costs
cannot be ruled out.
https://tribune.com.pk/story/2405674/two-fertiliser-plants-to-get-indigenous-gas
https://tribune.com.pk/story/2406355/fertiliser-plants-to-get-gas-supply
https://tribune.com.pk/story/2402946/fertiliser-sectors-margins-fall
https://www.nation.com.pk/14-Feb-2023/ecc-increases-gas-prices-to-seal-imf-deal
https://www.thenews.com.pk/tns/detail/968864-the-fault-in-our-fertiliser-industry
https://fatima-group.com/
https://www.engrofertilizers.com/
Net cash generated from operating activities 17,280 6,879 16,559 26,299 8,899
Proceeds from long term finances 2,156 4,000 1,462 3,920 5,623
Repayment of long term finances (7,396) (7,685) (4,967) (5,857) (1,929)
Repayment of lease liabilities - (291) (354) (731) (270)
Dividend paid (4,681) (3,554) (4,349) (3,507) (9,087)
Increase/Decrease in short term finances - net 3,378 10,770 (2,410) (2,584) 3,377
Net Cash used in financing activities (6,543) 3,241 (10,617) (8,759) (2,288)
Net increase/(decrease) in cash and cash equivalents (115) (203) 2,453 9,181 (7,774)
Cash and cash equivalents at the beginning of the year 832 717 (5,991) (3,538) 5,643
Cash and cash equivalents at the end of the year 717 515 (3,538) 5,643 (2,131)
Adjustments for non cash charges and other items: 5,406 5,948 4,527 9,481 10,639
Depreciation on PPE 3,577 2,795 2,933 5,246 5,333
Depreciation in investment property at cost - 0 1 1 1
Amortization of intangible assets 17 28 34 42 43
Impairment of brand - - - 2,360 -
Finance Cost 1,823 3,761 3,469 2,007 2,930
Provision for retirement benefit obligations 141 196 213 129 293
Provision for slow moving stores and spares 22 9 39 75 254
Exchange loss / loss on translation of FCY Loan 355 156 49 (3) -
Profit on loan to related parties (490) (854) (1,201) (839) (1,521)
Gain/loss on remeasurement of investment 42 (65) (412) 87 828
Loss allowance on subsidy receivable from GoP - - 360 110 110
Unwinding of provision/(gain) of GIDC - - (878) 368 274
Share of profit from associates (49) (25) (27) 0 68
Profit from savings accounts (29) (52) (54) (97) (285)
Impairment against advance - - - - 2,226
Loss on transfer of investment property - - - - 79
Gain on disposals of PPE (2) (1) (1) (3) 6
Increase / (decrease) in trade and other payables 3,341 9,720 (2,200) 14,244 15,435