Karachi, June 05, 2014 (PPI-OT): FFC – Time to raise head above the sand!!!
Fauji Fertilizer (FFC) is under pressure for some time as the cost of manufacturing has increases in term of Gas Infrastructure Developement Cess (GIDC) from Rs.197/(mmbtu) on fertilizer sector. However, Standard Capital Limited does not see any decrease in FFC margins going forward, since FFC has to be considered as volume play.
FFC reported a rise in sales in 1QCY14 by 7.41% as compared to 1QCY13 as the fertilizer companies have increased the price of Urea which contributed to higher sales revenue. While the Cost of sales have risen by 17.45% and that leads to a decline in Gross profit margin by 3.7%.
International Urea Prices
Internationally Urea prices in last 3 months have a decreasing trend which is in Jan 2014 352.6/ton as against to Feb 2014 344.13/metric tonne and that leads to 315.75/ton in March 2014. This decreasing trend might put the domestic manufacturers in danger as import might increase in near future.
As Kharif season has started wherein application of urea comes in the plantation of rice and cotton as this the season where Urea sales normally picks up.
Urea constitutes a major portion of production in fertilizers. Standard Capital Limited opinions that here prices of fertilizers would not get increase given government preference of appeasing growers lobby. However, FFC is considered a volume play rather than margins play here and hence Standard Capital Limited sees stable earnings in CY14.
Industry sales increasing with FFC still hero
Demand of fertilizers has been increasing and so the industry is growing as in 2012 the total sales reported were Rs182 Trillion and in 2013 the sales jumped up by 16.48% and reached to Rs212 Trillion.
Yet the sector is not performing to the optimum level as demand is more than the production which results in imported fertilizers. So the sector has an opportunity to perform better and FFC is one of the leading players in the fertilizer industry and utilizing its plant capacity at almost 100%.
Valuation awesome dividend yield of 13.6%
FFC yields CY14 PE of 7.1x wherein it is cheaper vis-a-vis prime competitor EFERT. FFC edges due to expected dividend yield of 13.6%.
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