Engro Corp: profits slip

After a happening 2016, the beginning of CY17 has been a tad slow for Engro Corporation, a leading conglomerate in the country. 2016 was marked with two strategic transactions for ENGRO: divestment in the fertilizer business and Engro Foods’ acquisition by the Dutch company, FrieslandCampina. While the consolidated revenues were down, Engro Corporation Limited’s (PSX: ENGRO) posted earnings of Rs73.6 billion for CY16, which four times more than those in CY15. The main reason behind the profit growth was increase in other income that included the income form strategic sales

However, the key concerns for the conglomerate were weaker fertilizer and milk businesses. EFERT and EFOODS underperformed the market in CY16. CY16 was a challenging year for EFOODs where the firm reported a decline in earnings. Revenues continued to fall and there was some volume and gross profit tightening as volumetric growth remained under pressure in the tea whitener segment due to changes in tax regime and increased competition.

EFOODs continued with its dwindling profit performance in 1QCY17 amid heated competition. Earning for quarter was down by 70 percent year-on-year as the constraints continued their way in FY17 as well. And apart from the squeeze in the tea-whitener sales, the firm has also been facing pressure from higher international milk prices, which is likely to cap gross margins further with already limited pricing power of the industry.

The fertilizer sector has its share of troubles: higher raw material costs, lower margins from lower selling price because of subsidy delay, higher imports and much lower pricing power – all contributed to EFERT’s restrained performance in CY16. Engro Fertilizers’ consolidated profit dropped 23 percent, year-on-year in 1QCY17 due to sluggish sales and notable jump in cost of distribution of products.

However, the jewel in ENGRO’s portfolio has recently been Engro Polymer & Chemicals; the chemicals business saw a major turnaround in CY16. Strong demand and tight supply were the primary drivers of price increase for Engro Polymer & Chemicals, and Ethylene prices also remained stable, improving PVC margins. The rising profitability trend continued in 1QCY17 as PVC margins picked up by more than 46 percent in 1QFY17 on a year-on-year basis, and bearish trend in ethylene prices continued.

ENGRO’s consolidated earnings for 1QCY17 were down by four percent, year-on-year, while the company announced an interim cash dividend of RS5 per share. Also, ENGRO’s focus now seems to be on energy sector, especially after the divestment in the fertilizer business, which was done to support capex in Thar.