Fauji Fertilizer Bin Qasim Limited

Financial Analysis Report Period coverage: 1st January 2012 to 31st December 2012

Prepared and Presented by: Dr. Babur Zahiruddin Raza, Corporate Office Consultant in Human Resources & Master Trainer in H.R Applications Research Consultant IT Consultant Ph: 051-5584905, 5792836 Cell: 0332 4923235 Email: baburzahiruddin@yahoo.com, Mr. J. S Khan Mr. Raheel Rustam

AGM of FFBL on 20th March 2013

TABLE OF CONTENTS

SR no 1

Description

Page no

Financial analysis approach ----------------------------------------------

Analytical review ----------------------------------------------- 4 ----------

Key discussion points for AGM ---------------------------------------

AGM of FFBL on 20th March 2013

1. FINANCIAL ANALYSIS APPROACH I have adopted following approach to perform holistic and integrated financial analysis of Fauji Fertilizer Bin Qasim Limited-FFBL

Environmental analysis

Industry analysis

Operational review of FFBL

Financial analysis

AGM of FFBL on 20th March 2013

The under mentioned documents are essential to perform comprehensive analysis of financial position, performance and cash position. 1. Business plan-Year 2013 to 2015 2. Approved budget-Year 2013 to 2015 3. Annual report of Year 2012 4. Audited financial statements-Year 2012 5. Internal audit charter / Terms of reference for internal audit 6. Internal audit reports 7. Audit engagement letters 8. Management letter / Letter of internal control from external auditors 9. Manual of policies and standard operating procedures

AGM of FFBL on 20th March 2013

2. ANALYTICAL REVIEW I have taken into consideration following factors to analyze the business of FFBL 1. Strategic direction; Vision, Mission and Objectives 2. Ownership structure of company 3. Production capacity 4. Group structure 5. Analytical review 2.1 Strategic direction; Vision, Mission and corporate objectives Vision: To be a premier organization focused on quality and growth, leading to enhanced stakeholders value. Mission: Fauji Fertilizer Bin Qasim Limited is committed to remain amongst the best companies by maintaining the spirit of excellence through sustained growth rate in all activities, competitive price, quality fertilizer and providing safe and conducive working environment for the employees. Corporate goals Boost agricultural yield of the country Lead fertilizer business Be environment friendly and socially responsible Company Create new opportunities for business growth and diversification Manufacture prime quality products Maintain operational, technological and managerial excellence Maximize productivity and expand sales Eliminate duplication of resources to economize cost

Corporate strategy Our strategy is based on profitable and sustainable growth, building on an unrivalled market position and a unique flexible business model. We continue to honor the confidence and trust of our customers, suppliers and the Government. We are committed to contribute heavily in the national economy and seize opportunities for diversification and growth to build upon our strengths and competencies.

AGM of FFBL on 20th March 2013

2.2 Ownership structure Serial Categories of shareholders no 1 Charitable Trusts 2 3 4 5 6 7 8 9 10 11 Cooperative Societies Financial institutions Individuals Insurance companies Others Joint Stock Companies Modarabas Mutual funds Investment companies Foreigners Total shares No of shareholders 25 2 25 16,364 11 56 164 8 39 9 46 16,749 No of shares held 171,036,137 13,304 34,405,196 141,785,620 9,869,269 45,392,717 494,992,155 770,500 12,952,417 297,606 22,595,079 934,110,000 Percentage 18.31 0.00 3.68 15.18 1.06 4.86 52.99 0.08 1.39 0.03 2.42 100.00

Share capital and reserves Share capital December 31, 2012 December 31, 2011

AGM of FFBL on 20th March 2013

Share capital

No of shares 934,110,000

Rupees 9,341,100,000

No of shares 934,110,000

Rupees 9,341,100,000

Shareholders equity December 31, December 31,2011 2012 9,341,100,000 9,341,100,000 228,350 228,350 6,380,000 6,380,000 712,205,000 684,073,000 2,342,794,000 3,375,779,000 12,630,829,000 2.3 Production capacity 2012 Tonnes Design capacity Urea DAP Production Urea DAP 551,100,000 650,000,000 2011 Tonnes 551,100,000 650,000,000 13,635,682,000

Share capital Capital reserve Statutory reserve Translation reserve Accumulated profits

281,068,000 648,038,000

433,053,000 662,304,000

2.4 Analytical review of Financial Statements Ratio analysis pertain to financial statements of FFBL

AGM of FFBL on 20th March 2013

Ratio Profitability analysis Gross profit margin Return on capital employed Working capital analysis Inventory turnover Debtors turnover Creditors turnover Acid test ratio Gearing analysis Debt equity ratio Investment analysis Market value per share EPS Breakup value per share Dividend yield

December 31 2012 23.92 31.29

December 31 2011 36.00 63.80

Comments

Declining Declining

42 31 72 0.71

24 12 56 0.90

Declining Declining Improved Declining

09.91

19:81

Improved

38.59 4.64 13.52 11.66

42.43 11.53 14.60 23.57

Declining Declining Declining Declining

AGM of FFBL on 20th March 2013

3. Key discussion points forthcoming AGM of FFCL on 7th March 2013 Question no Description of question Annual report reference

Business profitability
1 Gross profit margin decreased from 36.00% to 23.92%. According to the best of our knowledge and experience, the gross profit margin impairment depends on many factors but in this case it seems to be impaired by two factors namely decrease in sales price and increase in production costs. We would make request to board of directors to explain the underlying reason of substantial decline in the gross profit margin from 36% to 24%.? We would also make request that to board and management to clarify the significant increase in cost of goods manufactured from Rs 35,841,886,000 to Rs 38,106,822,000 in year 2012 whereas actual production of urea and DAP was declined as per disclosure in note 36 # regarding production capacity on page 95 of annual report Why was there no need to perform a cost audit under section 258 of the companies ordinance 1984? Incase of negative findings then special audit under 234/A, should also be done. Urea production was 281,068 tons as compared to 433,053 tons last year DAP production was 648,038 tons as compared to 662,304 tons last year 2 Return on capital employed decreased from 63.80 to 31.29 We would make request to board of directors to explain the underlying reasons of substantial decline of ROCE during the under reviewed financial year. Why risk management was not ensured ? also what is the out of the Page 18 Page 58 Page 18

Page 83 Page 84 Note 24 Page 95 Note 36.1

AGM of FFBL on 20th March 2013

box revival procedure for achieving higher targets next year Appointment of AF Ferguson Chartered Accountants to determine excess cash and prepayment to Government of Pakistan Page 72 We would make request to board of directors to share the report of third party auditors named as AFF regarding the determination of cash and prepayment to GOP Page 73 Status of release of guarantees The financial statement note on page 73 reveals the fact that Since two ECA have yet to release HBL from its responsibility as guarantor therefore, the above referred guarantee and related charge on assets of the Company have not been vacated up to December 31, 2012. The Company is making efforts in getting this guarantee released. The language of the disclosure is not very clear and is dubious and ambiguous as the issue is sensitive hence this should have been explained with greater meticulous dexterity.

Working capital management of Business

3 Stock / inventory days increased from 24 to 42 days Debtor days / debtor turnover increased 12 to 31 days Page 18

The stock days increased from 24 to 42 days which indicates inefficiencies in the production and manufacturing process. Debtor days increased from 12 to 31 days which require clarification from board of directors

The increase in inventory and debtor days had adversely affected the liquidity position of business and it is clearly evident from facts and figures Decrease in the acid test ratio from 0.90 to 0.71 Increase in short term borrowing from Rs 7,476,144,000 to Rs 9,216,660,000 in year 2012 Decrease in interest coverage capacity from 15.86 to 4.55 Page 18 Page 74 Note 10.1

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AGM of FFBL on 20th March 2013

This is causing a dent on the liquidity ratio.

Page 18

EPS, market value per share and breakup value per share
4 Decline in EPS, market value share and breakup value per share The details of decline in EPS, market value per share and breakup value per share are summarized as below EPS decreased from 11.53 to 4.64 Market value per share decreased from 42.43 to 38.59 Breakup value per share decreased from 14.60 to13.52 Page 18

We would make request to board of directors to share with us the details of specific proactive steps to address the declining trend in EPS, market value per share and breakup value per share.

Increase in directors remuneration

5 Substantial increase in the remuneration of Chief Executive Officer The note # 33 on page 88 of annual report reveals the fact that remuneration of CEO was substantially increased during the financial year ended 31st December 2012 and its details are delineated as below: Variance in amount Rupees Rupees Rupees 20,498,000 15,248,000 5,250,000 Year 2012 Year 2011 Variance in % age % age 34% Page 88 Note 33

CEO remuneration

We would make request to board of directors to explain and clarify the underlying reasons of substantial increase in the salary of CEO

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AGM of FFBL on 20th March 2013

during the financial year 2012. This should commensurate with similar increase of pay package for all the employees.

Failure of risk management controls

6 The note # 27 on page 85 of annual report reveals the fact that risk management controls of company failed to detect the risk of unfavorable fluctuations in the foreign currency market and it is explicitly evident from below table: Variance in amount Rupees Rupees Rupees 435,215,000 258,118,000 177,097,000 Year 2012 Year 2011 Variance in % age % age 69% Page 85 Note 27

Foreign exchange loss

Why forward cover was not obtained or properly managed ?

Decrease in dividends on investment in money market funds

7 The note # 29 on page 89 of annual report reveals the fact that dividends on investments in money market funds decreased substantially during the financial year ended 31st December 2012 and its details are delineated as below: Year 2012 Year 2011 Variance in Variance amount in % age Rupees Rupees Rupees % age Dividend on investments in money market funds Page 89

495,280,000 913,955,000 418,675,000

46%

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AGM of FFBL on 20th March 2013

Investment portfolio not properly managed?

Abnormal increase in scrap sales and other receipts

8 The note # 29 on page 85 of annual report reveals the fact that there is abnormal increase in scrap sales and other receipts during the year 2012 and its details are articulated as below: Year 2012 Year 2011 Variance in Variance amount in % age Rupees Rupees Rupees % age Scrap sales and other 186,159,000 10,334,000 175,825,000 1701% receipts What are these assets that you have sold? Page 89 & Page 86 Note 30

Meat processing and export business

9 We would make request to board of directors to share the following key details of operational and financial feasibility of Meat project 1. 2. 3. 4. 5. 6. 7. Previous knowledge and experience of managing meat project Anticipated commence date of meat project Annual demand of meat in domestic and international markets Total estimated capital investment in meat project Projected rate of return on capital employed Projected net cash flows during first 3 years of meat project Payback period Page 48

Contingencies and commitments

10 We would make request to board of directors to share with us the anticipated impact on the value addition by virtue of investment of 5 Page 77 Note 12

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AGM of FFBL on 20th March 2013

billion on behalf of FFBL in the consortium of Fauji Foundation and when will this amount be paid.?

Trade Debts
11 Trade debt has increased to 246, 9, 075 thousand as compared to 646, 516 thousand last year This is an increase of over 5 times. Why have the receivables increased in such a large proportion? Who are the people who owe you this money and what steps you have under taken to mitigate this problem Page 59 Note 17

Short Term Investments

12 You have withdrawn 7.5 Arabs from money market funds and this is reflected in cash flow statements on page 62 as 8, 078, 520 thousand. Why cash flow from investment activity has been under taken on such a short term basis Page 62 Note 32

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AGM of FFBL on 20th March 2013

Conclusion The management of FFBL has been successful in keeping their heads above the water by prudent management despite adverse economic conditions curtailment of GAS and stiff competition from local and imported market and has managed to post an EPS of 4.64 There is need to pay emphasis on the prudent internal control and risk management to offset future contingencies and gas shortages for which the company is indulging in diversification and downstream activity. Emphasis should be paid on better HUMAN Resources management and to change the mindset of the employees for greater end-user interaction explaining the correct and proper use of fertilizer to the farmers and to increase the per Acre yield. The Investment analysis also shows a declining trend and the shareholders are again advised to take a cautious stance for a fresh entry while a hold status is recommended for present holdings.

Shareholders are advised in their own interest to book the possible margins and look for entry into the market again after the 1st quarter results of 2013 are announced which will determine the next year performance of the company.

DR. BABUR ZAHIRUDDIN Financial Analyst

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AGM of FFBL on 20th March 2013