Engro Corporation Limited

Engro is one of the country's most progressive, growth oriented organisations with a diverse range of companies/subsidiaries. It has come a long way since its inception as a fertiliser manufacturing and marketing company to one of the largest conglomerates in Pakistan.

The history of the organisation dates back to 1965 when the company was incorporated as Esso Pakistan Fertilizer Company Limited, to manufacture and market fertilisers. In 1968, the firm's urea plant was commissioned, which was the largest foreign investment in private sector. In 1978, Esso Pakistan Fertilizer Company Limited was renamed as Exxon Chemical Pakistan Limited.

More than a decade later in 1991, Exxon divested its equity from fertiliser business globally; the company was renamed Engro Chemical Pakistan Limited through an employee led buyout. In 1993, Engro's first post start-up expansion project resulted in increase in production capacity from 268,000 tons to 600,000 tons per annum.

In 1995, Engro entered the chemical storage and handling business in a JV with Royak Vopak of Netherlands. Two years later, the firm entered petrochemicals business as the sole manufacturer of PVC in Pakistan through a JV with Mitsubishi and Asahi Glass. Engro also launched NPK Plant in Karachi at Port Qasim, and its NPK brand- Engro Zarkhez.

In 2003, Engro Eximp was formally launched as a trading entity; it also entered automation/control business by acquiring a majority stake in Avanceon. Two years later, the conglomerate entered the energy business and began work on a 220 MW power plant based on flared gas.

2006 marked the beginning of the organization's food business - EFOODS; the firm sets up its first milk processing plant at Sukkur. In 2007, Engro commenced 1.3 million ton Enven expansion project, the largest industrial investment of $1.1 billion. In 2008, the organisation entered into the largest public-private partnership in the history of Pakistan by setting up Sindh Engro Coal Mining Company with the Sindh Government.

Changes appeared in the organisational structure as Engro Chemical Pakistan Limited de-merged into a diversified conglomerate with Engro Corporation Limited as the holding company. The energy business took a step forward in 2012 when Elengy Terminal Pakistan Limited was incorporated.

In 2013, Engro Fertilizers conducted its IPO, which was oversubscribed by three times. 2014 was market with quite a few developments: Engro commenced groundwork on Thar Coal Project - Block II; it successfully launched Engro Islamic Rupiya in June 2014; Engro Powergen Qadirpur Limited conducted a successful listing through Offer for Sale (OFS); and Engro signed LNG Service Agreement (LSA) for setting up of LNG Terminal. Celebrating 50 years in 2015, the organization's LNG terminal started operations.

Business Operations

The principal activity of the company is to manage its investments in subsidiary companies and joint ventures, engaged in fertiliser manufacturing and trading, PVC resin manufacturing and marketing, food, energy, exploration, LNG and bulk chemical handling terminal and storage businesses. Engro Corporation Limited has a diverse range of businesses including fertiliser, foods, energy, petrochemicals, chemical storage and handling, and trading and processing.

Prior Performance

In 2015, Engro celebrated 50 years of its journey that started in1965, whereas today Engro stands as a conglomerate with business interests in multiple sectors. Over the last six years, the firm has seen tremendous growth in all its lines of businesses.

The consolidated revenues for Engro Corp grew from Rs 80 billion in 2010 to Rs 184 billion in 2015, a CAGR 15 percent over the six-year period. This was primarily due to diversification into the foods, power generation and LNG businesses over the years as well as higher volumes in the fertilisers, dairy and PVC sectors. The company also achieved its highest ever urea and dairy sales volumes during 2015.Costs, especially cost of sales increased in tandem with the revenues as the company has expanded and diversified. During these six years, substantial investment in marketing was made as part of brand building that now enjoy a solid base - reducing the costs as a percentage of sales.

Finance cost, a major source of concern touched the highest in 2013 at Rs 16 billion as borrowings were obtained for foods and power generation business diversification and expansions in fertilisers and polymer businesses. Cash flows from these projects are now being used to deleverage along with easing interest rate environment. Over the last six years, profits grew from Rs 7 billion in 2010 to Rs 14 billion in 2015 - a CAGR of 12 percent, led by diversification into new businesses and expansion projects.

Profitability trend over the six-year horizon show some dips especially in 2012 and 2014 due to gas curtailment issues faced by fertiliser sector, and sharp rupee appreciation and falling commodity prices, respectively. During 2015, profitability improved mainly on account of implementation of concessionary gas for the new urea plant.

9MCY16 Financial Performance

2016 is almost over. With data for 9MCY16 available so far, things have been sanguine at Engro Corp altogether. While the earnings for 1HCY16 were down, Engro Corporation Limited posted a quick turnaround in the bottom-line in the third quarter (3QCY16). Consolidated earnings for the group increased from only Rs 874 million in 3QCY15 to over Rs 3 billion in 3QCY16.

For the nine-month period, Engro's top line was down by 14 percent year-on-year, and the earnings were down by around three percent year-on-year with 2QCY16 being the weak link. Performance in 2QCY16 was dragged by significantly lower revenues of EFERT due to lower fertiliser off take as well as lower revenues from EPQL, EPCL and flattish flows from EFOODS. Particularly in 3QCY16, revenues grew as compared to the same period last year on account of improved sales in fertilizer businesses due to subsidy implementation, higher PVC domestic volumes along with higher availability and utilisation of LNG operations.

However, the performance of the subsidiaries improved in the 3QCY16, especially the fertiliser business. EFERT's earnings for the latest quarter were up by seven percent year-on-year on the back of rebound in Fertilizers off take with commencement of subsidy on fertilizer.

ENGRO's food business (EFOODS) has also been facing some competition and diversification challenges particularly in the dairy segment, and the company saw a six percent year-on-year decline in 2QCY16 earnings. However, EFOODS' profitability grew by around 2.5 percent year-on-year in third quarter despite decline in volumetric sales in dairy and beverage segment. Similarly, the loss in EPCL contracted in the third quarter.

Outlook

From the long-term growth point of view, ENGRO has moved ahead with restructuring for its business portfolio in the country, capitalising on the potential of high growth and high return of the of the energy sector. The group has reduced its stakes in the fertiliser business by 22 percent. In October 2016, FrieslandCampina Pakistan Holding B.V. made a Mandatory Tender Offer (MTO) to acquire 49,828,746 ordinary shares of EFOODS, representing 6.5 percent of the total issued ordinary shares of EFOODs at an offer price of Rs 151.85 per share. FrieslandCampina Pakistan Holding (FC) has recently completed the transaction with the conclusion of MTO.

The latest word from the firm's analyst briefing is that Engro Onaaj wheat pilot project concluded in August. It is currently in the process of a phased closure by the year-end. Engro Corp's stock price has been beating the benchmark. However, during the quarter, A.T.S communicated to the SECP and PSX, about their withdrawal of intention to acquire Engro Polymers, which could be a reason for the scaled-back performance of the share price against KSE100 index in the latest quarter.