Project Presentation
• References: Corporate Affairs
• Senior Manager Corporate Affairs/Company Secretary
• Brig. Sher Shah (Retired). Email ID: [email protected]
• Location: Head Office, 156-The Mall Rawalpindi
Group Members
• Muhammad Tauseef Ahmad (6319)
• Muhammad Waqas Khan (6371)
• Fawad Ur Rahman (6317)
• Ikhtisham khan (6318)
• Dawood Khan (6324)
COMPANY PROFILE
• Vision – To be a leading national enterprise with global
aspirations, effectively pursuing multiple growth opportunities, maximizing returns to the stakeholders, remaining socially and ethically responsible
• Mission – 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.
Corporate Strategy
• 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.
Company Ownership: • Public company incorporated in Pakistan under the companies Ordinance,
1984,
• Established in 1978 as a joint venture of Fauji Foundation and Haldor Topsoe.
• The first urea complex was commissioned in 1982.
• Plant-1 was improved in 1992, and a second plant was built in 1993.
• In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated at Mirpur Mathelo, District Ghotki from National Fertilizer Corporation (NFC).
• Fauji Fertilizer Bin Qasim Limited, Karachi, Pakistan (FFBL) is another company where FFC has controlling shares.
• FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation and Haldor Topsoe A/S.
• The initial share capital of the company was 813.9 Million Rupees. 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.
Products & Services
Products
• Urea (Nitrogen) Fertilizer Percentage of use in Pakistan: 80%
Percentage of FFC Sales: 93%
• DAP(Phosphate) Fertilizer Percentage of use in Pakistan: 19%
Percentage of FFC Sales: 6%
• SOP (Potash) Fertilizer: Percentage of use in Pakistan: 1%, Percentage of FFC Sales: 1%
• SONA BORON
Fauji Fertilizer Company Limited Fluctuation for the Years 1996-2013
Year Date High Date Low
1998 14-APR-98 89.00 21-OCT-98 31.55
1999 15-MAR-99 57.30 08-FEB-99 39.30
2000 21-JAN-00 67.50 19-OCT-00 36.50
2001 02-FEB-01 50.00 24-SEP-01 28.40
2002 26-DEC-02 73.95 22-May-02 38.85
2003 29-AUG-03 105.95 28-FEB-03 69.15
2004 29-DEC-04 143.90 01-JAN-04 95.75
2005 16-MAR-05 180.00 27-JUN-05 118
2006 31-JAN-06 144.90 29-DEC-06 105.50
2007 13-JUL-07 131.90 05-JAN-07 103.00
2008 02-APR-08 149.85 31-DEC-08 54.30
2009 14-DEC-09 109.90 01-JAN-09 58.90
2010 30-DEC-10 128.50 15-JUN-10 101.10
2011 18-OCT-11 198.35 25-FEB-11 109.82
2013 23-DEC-13 116 27-DEC-13 113
Production and Sale at a Glance Urea Production (Met/Year) Sale (Met/Year)
Years Goth Machi M.Mathelo Total Urea Domestic Urea Export Urea Imported Phos*/ Potassic Total
Plant-I Plant-II Plant-III Sona FFC
1987
632,079 - -
632,079
587,891 - -
2,907 -
590,798
1988
637,737 - -
637,737
642,857 - -
22,542 -
665,399
1989
632,972 - -
632,972
678,430 - -
2,605
162,113/14,086
857,234
1990
652,665 - -
652,665
645,188 - -
134,366
169,943/24,229
973,726
1991
629,266 - -
629,266
643,608 - -
206,244
148,753/18,945
1,017,550
1992
648,178 - -
648,178
647,460 - -
187,058
153,025/16,040
1,003,583
1993
657,376
477,339 -
1,134,715
1,176,611 - -
129,006
207,038/7,147
1,519,802
1994
678,114
659,526 -
1,337,640
1,288,811 - -
33,387
192,002/8,210
1,522,410
1995
680,062
700,031 -
1,380,093
1,422,666 - -
60,604
122,640/9,527
1,615,437
1996
710,862
695,749 -
1,406,611
1,413,907 - -
238,130
144,969/1,446
1,798,452
1997
773,048
734,275 -
1,507,323
1,482,948 - -
146,813
81,181/0
1,710,942
1998
742,599
682,969 -
1,425,568
1,449,201 - -
169,610
187,392/0
1,806,203
1999
726,723
734,689 -
1,461,412
1,581,655 - -
26,277
291,499/0
1,899,431
2000
729,864
695,938 -
1,425,802
1,793,554 -
63,350 0
321,977/9,269
2,188,150
2001
737,607
756,417
- 1,494,024
1,883,849
- - 34,035
340,301/9,377
2,267,562
2002
801,825
713,889
368,575**
1,884,289
2,033,883
328,147
57,000
- 285,776/7,718
2,712,524
2003
784,826
738,327
626,716
2,149,869
2,065,459
598,792
18,500
- 475,491/10,947
3,169,189
2004
741,831
716,621
715,577
2,174,029
2,708,544
148,832
13,500
105,693
515,993/11,451
3,504,013
2005
820,454
772,825
709,526
2,302,805
2,891,882
- - 314,701
572,990/45,293
3,824,866
2006
809,373
760,442
725,839
2,295,654
2,888,668
- - 321,601
824,361/20,426
4,055,056
2007
829,250
810,673
680,442
2,320,365
2,771,861
- - 96,976
562,276/17,305
3,448,418
2008
841,117
797,108
683,986
2,322,211
3,027,245
- - 58,370
348,275/19,364
3,453,254
2009
807,221
846,613
810,323
2,464,157
3,088,382
- - - 708,886/41,128
3,838,396
2010
867,346
806,589
810,706
2,484,641
3,006,074
- - - 722,766
3,728,840
2011
841,755
782,752
711,195
2,395,702
2,839,162
662,387/9,588
3,511,353
2012
799,432
772,307
834,054
2,405,784
2,677,668
677,917/6,489
3,362,286
2013
749,000
784,000
787,000
2,320,000
Capital Budgeting Cash Flow Estimation
Key Definitions
• Capital Budgeting:
• Cost of Capital:
• Net Present Value:
• Internal Rate of Return:
• Payback Period:
• Profitability Index:
Capital Budgeting: Cash Flow Estimation
• We purchase the existing unit at a cost of two million and we dont charge the depreciation on it
• Because we have sale out the unit immedietly
Initial Investment
Installed Cost Of New Asset
Cost of New Asset
2809000
Installation Cost
6500
Total Installed Cost
2815500
After tax sales proceeds from old asset
Net sales proceeds from old asset
1305000
Tax
243250
Total After Tax Sales Proceeds
1548250
Net working capital
Initial Investment
1267250
Operating cash flows • CASH INFLOWS OF NEW MACHINERY YEARS 1 2 3 4 5 6
Revenues
30000000
33000000
50000000
50050000
65000000
72000000
Expenses
1200000
1200000
1350000
1000000
987000
967000
Income before
depreciation and tax
28800000
31800000
48650000
49050000
64013000
71033000
Depreciation
561800
898880
533710
337080
337080
140450
Income before tax
28238200
30901120
48116290
48712920
63675920
70892550
Tax
9883370
10815392
16840701.5
17049522
22286572
24812393
Net Income
18354830
20085728
31275588.5
31663398
41389348
46080158
Add Depreciation
expense
561800
898880
533710
337080
337080
140450
Cash Flows 18916630 20984608 31809298.5 32000478 41726428 46220608
Operating cash flows • CASH INFLOWS OF OLD MACHINERY
YEARS 1 2 3 4 5 6
Revenues 20700000 23700000 26300000 29400000 25900000 23900000
Expenses 800000 800000 900000 750000 987000 967000
Income before
depreciation and tax
19900000 22900000 25400000 28650000 24913000 22933000
Depreciation 400000 640000 380000 240000 240000 100000
Income before tax 19500000 22260000 25020000 28410000 24673000 22833000
Tax 6825000 7791000 8757000 9943500 8635550 7991550
Net Income 12675000 14469000 16263000 18466500 16037450 14841450
Add Depreciation
expense
400000 640000 380000 240000 240000 100000
Cash Flows 13075000 15109000 16643000 18706500 16277450 14941450
INCREMENTAL CASH INFLOWS YEARS NEW OLD INCREMENTAL CASH INFLOWS
1
18916630
13075000
5841630
2
20984608
15109000
5875608
3
31809298.5
16643000
15166299
4
32000478
18706500
13293978
5
41726428
16277450
25448978
6
46220607.5
14941450
31279158
RISK AND REFINEMENTS IN
CAPITAL BUDGETING
RISK AND CASH FLOWS
• NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
• NPV is an indicator of how much value an investment or project adds to the firm. With a particular project,
RISK AND CASH FLOWS If Means Then
NPV > 0 The investment
would add value to
the firm.
The project may be accepted.
NPV < 0 The investment
would subtract value
from the firm.
The project should be rejected.
NPV = 0 The investment
would neither gains
nor loss value for the
firm.
We should be indifferent in the decision whether to accept or
reject the project. This project adds no monetary value.
Decision should be based on other criteria, e.g. strategic
positioning or other factors not explicitly included in the
calculation.
ILLUSTRATION
Fauji Fertilizing company an urea retailer with a 9% cost of capital, is considering investing in either of two mutually exclusive projects, X and Z. Each requires a $1500000 initial investment, and both are expected to provide equal annual cash inflows over their 10-years lives. For either to be acceptable according to the net present value technique, its NPV must be greater than zero. If we let CF equal the annual cash inflow and let CF0 equal the initial investment , the following condition must be met for projects with annuity cash inflows , such as X and Z, to be acceptable.
NPV= [CF (PVIFA k, n)]-CFO
K=9% n=10years CFO=150000,
we can find the breakeven cash inflow necessary
for Fauji projects to be acceptable.
NPV= [CF (PVIFA 9%, 10)-$1500000
NPV=CF (6.418)-$1500000
CF=$1500000/6.418
CF=$233717.66
I n this example we didn’t say that project x is less risky than project z in this example clearly identifies risk as it is related to the chance that a project is acceptable, but it doesn’t address the issue of cash flow variability because both project has equal net present value so the project x has greater chance of loss than project z or vise versa or it might result in higher potential NPVs
SENSITIVITY AND SCENARIO ANALYSIS
Sensitivity analysis of Fauji fertilize of project X and Z.
Note: The Present Values are calculated keeping the discount
rate of 8% for project X and 10% for Project Z and 9 years of
Project life for both Projects.
Project X Project Z
Initial Investment 500000 500000
Outcome:-
Pessimistic 800000 700000
Most likely 450000 450000
Optimistic 900000 850000
Range 100000 150000
Outcome:-
Pessimistic 4497600 3531300
Most likely 2311150 2091550
Optimistic 5122300 4395150
Annual Cash inflows
Net Present Values
APPLYING THE RISK ADJUSTED DISCOUNT RATE • Risk-adjusted discount rate = Risk free rate + Risk premium
• Risk premium = (Market rate of return - Risk free rate) x beta of the project
Plus points of adjusted rate
• It is quite simple and easy to understand.
• Risk adjusted rate has a good deal of intuitive appeal in the eyes of risk averse business person.
• It integrates an attitude towards uncertainty.
Risk adjusted discount rate for the projects by using the CAPM
• Project A: Project E:
• Risk free rate 9.32% Risk free rate 9.32 %
• Market rate 20% Market rate 10%
• Beta 1. Beta 0.90
• CAPM 20% CAPM 10%
• Project B: Project F:
• Risk free rate 9.32% Risk free rate 9.32%
• Market rate 17% Market rate 07%
• Beta 1.10. Beta 0.50
• CAPM 18% CAPM 08%
• Project C: Project G:
• Risk free rate 9.32% Risk free rate 9.32%
• Market rate 15% Market rate 05%
• Beta 1.05. Beta 0.75
• CAPM 15% CAPM 06%
NPV at the Risk Adjusted Discount Rate:
Project
CFO
RADR
PVIFA
Cash Flow
PV
NPV
A
750000
20%
2.990
300000
897000
147000
B
660000
18%
3.127
350000
1094450
434450
C
450000
15%
3.352
400000
1340800
890800
E
550000
10%
3.790
550000
2084500
1534500
F
325000
8%
3.992
700000
2794400
2469400
G
200000
6%
4.212
450000
1895400
1695400
LEVERAGE AND CAPITAL STRUCTURE
TECHNIQUES
• Operating Leverage: DOL= Percentage change in EBIT/Percentage change in Sales
• Financial Leverage: DFL= Percentage change is EPS/Percentage change in EBIT
• Break Even Analysis of FFC: Breakeven Point = Fixed Costs/ (Unit Selling Price - Variable Costs)
• Total Leverage: DTL=DOL * DFL
Operating Leverage
• Referring to the data used in the previous illustration, here we show EBIT for various levels of sales, and what are the effects of each level:
• We used the sales of 60000 in units as a reference point. It is evident how operating leverage works in both directions, either in increasing or decreasing the sales level:
Case 2 Base Case 1
Sales in
Units
40,000
60,000
80,000
Sales
Revenue
68,000,000
102,000,000
136,000,000
Less: V.C
20,000,000
30,000,000
40,000,000
Less: F.C
48,000,000
48,000,000
48,000,000
EBIT
-
24,000,000
48,000,000
Operating Leverage
• Case 1: a 33 percent increase in sales level (from 60,000 to 80,000) results in a in a 100 percent increase in EBIT.
• Case 2: a 33 percent decrease in sales level (from 60,000 to 40,000) results in a 100 percent decrease in EBIT.
Taking in consideration the previous illustration at FFC, we get the following results:
• Case 1: +100% / +33% = 3.
• Case 2: -100% / -33% = 3
Financial Leverage Case 2 Base Case 1
EBIT 14,400,000 24,000,000 33,600,000
Less: Interest 4,000,000 4,000,000 4,000,000
Net Profit Before Tax 10,400,000 20,000,000 29,600,000
Less: Tax 3,640,000 7,000,000 10,360,000
Net Profit 6,760,000 13,000,000 19,240,000
Less: Pref. Dividend 3,000,000 3,000,000 3,000,000
Earnings Available for C.S 3,760,000 10,000,000 16,240,000
No of CS outstanding 10,000,000 10,000,000 10,000,000
Earnings Per Share 0.376 1 1.624
We used the EBIT of 24,000,000 in units as a reference point.
The interest payable on Bonds equals to Rs.4000, 000. The
annual dividends on preferred stock are Rs.3, 000,000. The tax
rate applies is 35%. The previous table shows EPS for various
EBIT levels. Two Scenarios are shown:
Financial Leverage
• Case 1: a 40% increase in EBIT (from 24,000,000 to 33,600,000) resulting in a 62% increase in EPS (from 1 to 1.624).
• Case 2: a 40% decrease in EBIT (from 24,000,000 to 14,400,000) resulting in a 62% decrease in EPS (from 1 to 0.376).
Refereeing to the data illustrated in the table above; we can calculate the degree of financial leverage at FFC:
• Case 1: +62%/+40% = 1.55.
• Case 2: -62%/-40% = 1.55.
Total Leverage
To calculate the degree of total leverage, we use the following formula:
• DTL=DOL * DFL
If we take cases 1 of each leverage consideration, we will end up with a DOL of 3 and a DFL of 1.55
Hence:
• DTL = 3 X 1.55 = 4.65
THANK YOU
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