DHCL was incorporated on 17 April 1968 as a joint venture between Dawood Group of Industries and Hercules Inc USA. It is a public limited company. At the time of its inception, it was the largest ammonia/urea plant in the country. DHCL manufactures and markets urea under the brand name of 'Bubber Sher'.

Moreover, it also provides Anhydrous Ammonia for the manufacture of soda ash, fructose and other miscellaneous chemicals. Its major customers are ICI Pakistan, Sitara Chemicals, Olympia Chemicals and Kamal International.

Total countrywide sales of Urea for the first six months stood at 2,689kt as against 2,036kt for the same period last year (SPLY). Urea industry grew by 33 percent because of its increased demand due to very high DAP prices. Conversely, the DAP off-take demand decreased by 70 percent due to high international prices. Total imports for the period stood at 137kt of urea as against 55kt in the SPLY. On the other hand, costs rose owing to 5.5 percent hike in gas prices. In addition, the fuel price increase and high inflation pushed up the distribution and administrative expenses.

Inventory of Urea in the country as of 30th June 2008 was only 54kt as against 548kt in the SPLY. The reduction is mainly because of significant increase in the off-take of urea, which is 32 percent higher than the SPLY. Trading Corporation of Pakistan (TCP) imported 136kt to bridge the widening gap of demand and supply, as the local industry was able to perform 7 percent higher in terms of production. Recently, the urea and DAP prices are being witnessed an upward trend. The DAP due to high international prices which are a result of accelerating demand in face of stagnant or slow moving supply, while urea prices have increased due to an increase in gas prices plus hoarding pressures in the market which are threatening availability of the urea in the market.

H1'08 RESULTS During the first half of the current fiscal year, the company sold a record 237,110mt of urea, which is 49 percent higher as against 159,040mt in the SPLY. Subsequently, the company's market share has improved to 9 percent against 8 percent in the SPLY. The company's total sales in the first half, stood at Rs 3,115 million, showing an impressive 112 percent growth as compared to SPLY sales of Rs 1,471 million. Cost of goods sold, showed a similar growth of 120 percent in the period under review compared to the SPLY. Higher sales were translated into higher PAT for the company. PAT for the first half of FY08 (Rs 1,214 million) recorded 143 percent growth as compared to SPLY PAT of Rs 500 million. DHCL's growth in profitability has surpassed the industry trend due to a tremendous increase in other income and income from associates.

Overall, the industry sales remained on the higher side with higher gross margins due to increased prices of urea as well as DAP. Inventory gains on DAP were also enjoyed to some extent by the industry on the previous stock of DAP.

During the first half of FY08, the production plant remained closed for 30 days mainly due to gas curtailment and annual turnaround. Despite this, efficient plant operations helped produce 230,286mt of urea as against 235,993mt in the SPLY. Similarly, plant capacity utilization was about 103 percent as against 106 percent last period. Earnings per share for H1'08, along with associate's income stood at Rs 12.21 as compared to Rs 5.03 for the SPLY.

Production in 2007

- Total production increased by 12 percent to 497,940 million tons (2006=446.7mt)

-- Total capacity utilization 112 percent.

-- Urea sales up by 16 percent to 508,540 tons (2006=437.73mt)

-- Sales up by 29 percent to Rs 5,011 million (2006=Rs 3,882 million)

-- Operating profit up by 46 percent to Rs 1,572 million

-- The company's investment portfolio comprises mainly of a 38 percent ownership of Engro Chemicals Pakistan Limited and 19 percent ownership in SNGPL.

-- The second BMR (Balancing, Modernization and Replacement) of 2006 began manifesting results in 2007. This BMR was aimed at providing future capacity enhancement, critical equipment replacement and installation of the latest Distribution Control System and energy conservation. The increased production of 53,000 tons in 2007 over the capacity production of 445,000 metric tons was the outcome of timely decisions regarding the 2006 BMR.

The local market remained suppressed during the first six months of 2007 as a result of which the national urea inventory burgeoned to 800,000kt by the fifth month as compared to 215,000kt in May 2006. This excess supply situation posed a great challenge to the industry in view of the factors in play. DHCL, however, adopted an aggressive marketing strategy, which resulted in surpassing its 2006 record with a growth rate of 16 percent. Urea uptake in the year 2007, stood at 4.90mt depicting a decline of 6.1 percent (2006=5.20mt). This is mainly due to the subsidy offered by GoP on DAP making its use attractive to the farmers. This on the other hand soared DAP's Rabi season sales by 52 percent. Encouraged by this, DHCL imported 42,988kt of DAP in last fall.

In 2007, the company recorded sales of Rs 5,011 million as compared to Rs 3,088 million in 2006. Gross profit for the period under review stood at Rs 1,862 million as against Rs 1,312 million of in 2006. The operating profit showed a healthy increase of 46.2% for the year under review and climbed to Rs 1,572 million as compared to Rs 1,075 million in 2006. The profit before tax and share from associate jumped to Rs 9,795 million from Rs 1,497 million in 2006.

The major source of increase in pre-tax profit is the capital gain of Rs 8,661 million, slightly offset by the increase in financial expenses to Rs 756 million from Rs 555 million in last year. The profit before taxation, including the share from associate, jumped to Rs 11,126 million (LY Rs 2,590 million). The year's profit after taxation including the share of associate has been reported at Rs 10,134 million (LY Rs 2,054 million).

The company's current ratio declined from FY03 to FY06. This is mainly due to higher rate of growth witnessed in current liabilities as compared to current assets. In the FY07, current liabilities decreased by 46 percent mainly due to 61 percent decline in short term running finance. This showed a positive impact on the company's liquidity position such that current ratio jumped to 3.15 in FY07 (LY 1.28).

The company's inventory turnover in days continued its upward trend in FY07 against a declining trend experienced by the rest of the industry. This further widened the gap between an average inventory turnover of the industry and DHCL's inventory turnover so that its inventory turnover now lingers much higher above its competitors.

DHCL has traditionally maintained a very low level of debtors. The FY07 also saw the lowest level of closing debtors over the period under review. This low level of debtors and against the higher sales revenue is reflected in the lowest DSO over the period. However, operating cycle has posted an increasing trend, racing upwards tremendously with a correspondence rise in the inventory turnover (days).

This decline in total asset turnover ratio may then be attributed to an increase in total assets as a result of the BMR activities during the period. The sales to equity increased in FY06 but decreased in FY07. However, this increase in FY06 was partly due to a decline in the fair value reserve on short-term investments and not entirely due to an increase in sales. In FY07, sales/equity ratio declined sharply as the equity growth outpaced the sales growth. In the upcoming months, however, the assets of Dawood Hercules and other fertiliser companies are also expected to increase through expansion and BMR activities. The FY08 is expected to witness a significant increase in the company and industry's assets.

In the FY06, DHCL acquired a significant additional short-term financing resulting in an increased in the debt to assets and debt to equity. The decrease in debt to equity during 2007 is mainly due to higher capital gains realized on the sales on investment in associate amounting to Rs 8,669,697 million, improved profitability and higher sales volume resulting in significant increase in equity.

Similarly, during the year the company changed its approach to capital management by financing its activities through long-term financing rather than short term financing arrangements

This is reflecting in the long-term to assets ratios of the FY07, which increased drastically due to long-term financing by issuing Islamic Sukuk Certificates worth Rs 6,500 million under diminishing musharaka arrangements. It was taken for the purchase of plant and machinery. The Times Interest Earned for DHCL had been better than the industry averages up to FY03 after which it weakened and continued to decline till FY06. The FY07 witnessed an increase in its TIE mainly due to decline witnesses in the short term financing.

At the close of the financial year 07, the market capitalization was Rs 32,633 million, with a market value of Rs 393.80 per share and break-up value of Rs 227.95 per share. The strong performance depicts the market confidence for the company. There was a significant gain in net worth during the year 2007 amounting to Rs 9,616 million which was a rise of 104% over the last year and therefore increased the per share book value from Rs 111.90 to Rs 227.95.

The share of the company outperformed the KSE-100 Index by a considerable margin. During the year, the KSE-100 Index increased by 25% whereas the stock of the company improved by 37% outperforming the benchmark on the yearly basis.

EPS after declining in 2006 to 24.79 jumped up to 122.3 in FY07. This is mainly due to a very high profitability in the FY07 as compared to FY06. Higher EPS effect was witnessed in the dividend payout ratio, which stood at 2.45 in 2007 compared to 32.27 in 2006. In the year 2007, the company declared an interim dividend of Rs 1.50 per share (15%) at the end of the second quarter.

Recent data released by National Fertiliser Development Centre showed that Urea off-take during the seven months (January-July) of FY08 stood at 3.2 million tons, reflecting an increase of 18 percent on year on year basis. While DAP sales, depicting a decline of 77 percent y-o-y and stood at 33k tons and a decline of 71.3 percent YTD to 175k.

Main factor contributing to higher Urea sales is high DAP prices, which increased by 147 percent year on year basis. This has actually encouraged the farmers to shift from DAP to Urea and possible stocking up of urea by the dealers in order to gain from the inventory gains. Similarly, the uncertainty regarding the subsidy to be given on DAP purchase is further discouraging the farmers to purchase DAP. The existing Urea inventory for the industry is very low which indicates a very tight urea demand/supply situation and thus necessitating greater urea imports in the near future.

FUTURE OUTLOOK

A key driver in fertiliser sector performance is the health of the agri sector. Currently, the macro and the agricultural indicators are doing well with increasing credit disbursement to the farmers which has resulted in strong purchasing power of the farmer, better water availability and rising support prices of wheat. Wheat accounts for 50% and 35% of Pakistan consumption of DAP and urea.

Fertiliser manufacturers are likely to have strong pricing power due to widening demand-supply gap, a large domestic and international price differential and continued government focus to improving productivity. This bodes well for future profitability. This tight supply situation is expected to continue in 2008 as well, despite DHCL, Engro, FFC and FFBL output at above 100% of nameplate capacity. Total domestic urea supply is expected to increase to 7.1m tons by 2010.

Even if one keeps the urea consumption constant, domestic production of around 2400kt during the 2nd half of 2008 will fall short of corresponding demand by 500kt. This is mainly because the country wide urea inventory on 30th June 2008 was as low as 50 KT, about 500kt less than that of last year. The government of Pakistan should immediately undertake measures to meet this shortfall through import programmes. This situation will further aggravate, if the domestic production declines due to any factor like curtailment of gas supply to the fertiliser plants.

On the other hand, 31 percent increase in the gas prices from 1st July 2008 may further push up the cost of production. Additionally, the increased fuel prices and very high inflation rates will further push up the administrative and distribution costs.