Engro Fertilizers Limited

Engro Fertilizers Limited (PSX: EFERT) is a wholly owned subsidiary of Engro Corporation which is the subsidiary of Dawood Hercules Corporation Limited. The company was incorporated in Pakistan in 2009 and is engaged in the manufacturing, purchasing, marketing, and selling of fertilizers, seeds, and pesticides besides providing logistics services.

Pattern of Shareholding

As of December 31, 2021, EFERT has an outstanding share volume of 1.335 million shares which are held by 30,552 diverse shareholders. Associated companies, undertakings, and related parties hold the major share of the pie equaling 56.27 percent of the company’s shares. This is followed by the local general public with a share of 24.10 percent. Banks, Development Financial Institutions, and Non-Banking Financial institutions account for 3.30 percent of EFERT’s shares followed by Modarbas and Mutual Funds with a stake of 3.16 percent. Insurance companies own 1.98 percent shares of the company. The remaining shares are held by other shareholders such as executives, Directors, the CEO, their spouse, minor children, etc.

Historical Performance (2017-2021)

EFERT’s topline is by and large on an inclining course over the years except in 2020 where it experienced a year-on-year downtick of 13 percent. The dip in sales revenue, however, doesn’t mean that the company didn’t outperform the previous year; rather, it was due to low Urea prices which signified a discount of 44 percent to international prices. Low domestic Urea price was a result of huge channel inventory at the start of the year owing to supply chain bottlenecks during the Covid period. This, coupled with low DAP offtake also contributed to a sales dip during the year. However, the effect was partially mitigated by achieving the highest ever volumetric sales of Urea i.e. 2 million MT which made the company grab a market share of 33 percent. Despite volumetric growth in production and sales, the cost of sales nosedived which kept the GP margin almost intact when compared to 2019. The cost containment was the result of lesser purchased and packaged products as the company accomplished better plant utilization supported by higher gas availability and minimum outage days. Other income of the company significantly dropped during the year owing to the higher base effect as in 2019 the company booked a massive gain on the disposal of property, plant, and equipment as well as the disposal of a subsidiary. Finance cost gave some breather to the bottom line as it dipped by 17 percent year-on-year in 2020 due to a low discount rate coupled with a decrease in the company’s long-term loans. During the year, the company also booked a temporary loss allowance on subsidy receivable from GoP and a temporary gain on the remeasurement of the provision of GIDC. Tax expense considerably dropped during the year owing to reversals in tax provisions worth Rs.3.4 billion. All in all, the bottom line grew by 7 percent year-on-year in 2020 with the NP margin clocking in at 17.13 percent vis-à-vis 13.9 percent in the previous year.

2018 was the year when the company boasted the highest topline and bottom-line growth of 42 percent and 56 percent respectively. Topline growth was the result of an increase in production days, stable demand, and higher prices dung the year. GP margin for 2018 clocked in at 32.34 percent versus 30.10 percent in 2019. On the operating front, while distribution and admin expenses grew in line with the higher sales volume, other income couldn’t hold its ground and dropped year-on-year by 65 percent mainly due to a decline in income on sales under government subsidy and also because of lower gain on the sale of property, plant, and equipment. The OP margin showed a marginal downtick during the year to clock in at 24.13 percent in 2018 vis-à-vis 25.05 percent in 2017. As a result of a significant improvement in its working capital, finance costs dipped by 22 percent year-on-year in 2018. Moreover, the budget announcement to reduce the corporate tax rate from 30 percent to 25 percent buttressed the bottom line with NP margin standing at 15.95 percent in 2018 versus 14.46 percent in 2017.

2021 was another year of stellar topline and bottom line growth of 25 percent and 16 percent respectively in the account for high urea offtake and DAP prices during the year. The company was able to entertain the high local demand despite the turnaround at both its plants during the year. Better pricing and cost control owing to operational efficiency enabled the margins of the company to significantly improve during the year, except for the NP margin which dropped from 17.13 percent in 2020 to 15.94 percent in 2021 due to a significant rise in taxation charged for the year.

Recent Performance (9MCY22)

Despite the catastrophic floods which inundated a large agricultural area of Sindh, Balochistan, and Southern Punjab, the demand for urea increased by 2 percent year-on-year during 9MCY22. This was driven by better farm output during the 1HCY22. The local industry continued to support the farmers after the floods with the lower pricing of fertilizer products despite the increase in international urea prices, to ensure steady demand and better farm output.

Talking about EFERT, the urea offtake dropped by 12.7 percent year-on-year to clock in at 1522 KT while DAP sales also showed a plunge of 12.4 percent during 9MCY22. In contrast, the topline boasted a rise of 19.6 percent year-on-year in 9MCY22. High inflation and devaluation of the Pak Rupee wreaked havoc on the GP margin which dropped from 33.45 percent in 9MCY21 to 29.14 percent in 9MCY22. Finance costs also significantly grew on the back of an increase in discount rates during the year.

Then remeasurement loss on the provision of GIDC, loss allowance on subsidy receivable from GoP, and imposition of super tax didn’t fare well on the bottom line which plummeted by 36 percent year-on-year in 9MCY22 to translate into an NP margin of 8.65 percent versus 16.09 percent in 9MCY21.

Future Outlook

While the country heavily depends on the Rabi season for its wheat crop, the farmers are badly suffering from liquidity challenges post floods and don’t have enough working capital to ensure timely sowing. This will also take its toll on the fertilizer offtake. The farmer community pleads for support from the government and donor agencies to bring the agricultural sector back to normalcy.

Mediocre demand expectations(in the absence of an increase in wheat support prices) coupled with inflationary expectations and discontinuation of subsidized gas amidst depleting gas reserves will all contribute towards constricting the margins of fertilizer companies. Fertilizer companies are pinning hopes on the pressure enhancement facilities at Mari Gas Field, Daharki to ensure sustainable gas supply in the long term. However, in order to reap the benefit in the long term, the fertilizer companies have to swallow the bitter pill of cash outflows to support the project.