Engro Chemicals Pakistan Limited came into existence in 1965 when Exxon Chemical Pakistan Limited divested their fertiliser business on a global basis and sold off 75% shares in the company.
In response to this, the employees of Engro, in alliance with international and local financial institutions bought out Exxon's equity and the company was renamed Engro Chemical Pakistan Limited. Engro is a public limited company, listed on the Karachi, Lahore and Islamabad stock exchanges.
Engro Chemicals is engaged in the business of manufacturing and marketing of chemical fertilisers. It is the second largest producer of urea fertiliser in the country and markets it under its brand name Engro. Moreover, Engro Chemicals also produces crop specific NPK fertilisers which are marketed under the brand name Zarkhez.
The company also markets imported MAP fertiliser under the brand name Zorawar and imported DAP fertiliser. Finally, the micronutrient zinc sulphate is marketed under the name of Zingro and Boron is branded as Zoron.
The FY06 proved to be a milestone for Engro chemicals as it achieved its highest ever production and sales level of Engro urea. The production and sales stood at 969000 tons and 945000 tons for the year, representing an increase of 6% over FY05 and the company managed to maintain its market share at 19%. The overall sales however declined by 4% because of a decline in Engro Zarkhez sales because of lower acreage of major crops, over supply situation in the market, and subsidy expectation from the government.
The company acquired rights for allocation of 100 MSCFD gas from Qadirpur gas field. This will enable it to set up a new plant, costing $950 million, which is expected to start functioning in the first half of 2010. The enhanced capacity from the new plant will increase Engro's market share in Urea to 35% from the current 19%.
Zarkhez/Engro NP production was 108kt in 2006 as compared to 157kt in 2005 because of reasons mentioned above. Engro's Potash market share is 78%. In 2006, overall phosphates industry grew by 7% to 1.6 million tons. The market remained bearish during first three quarters due to inventory build-up and subsidy expectations. However, following the subsidy announcement by the Government, Phosphates sales registered an impressive growth as dealers and farmers invested in Phosphatic products at the onset of Rabi season.
Engro's imported DAP sales volume grew by 5% to 295,000 tons from 281,000 tons in 2005. In an environment of increasing phosphate prices, Engro made timely purchase decisions and gained considerable cost advantage over competition for both DAP and Zorawar. Engro also sold 92kt of its own Phosphate, Zorawar. Engro's market share in phosphates is 23%, following aggressive marketing strategy by the company.
The gross and net margins remained below the industry average throughout the period under study. Despite a decline in sales, higher capacity utilisation and a capital gain on the sale of land to Engro Asahi led a rise in gross and net profit margins in FY06. Hence net profit grew at 9.8% for the FY06 as compared to FY05. Higher dividend income from subsidiaries also contributed to a growth in profits.
Urea prices remained higher than FY05, leading, once again to higher profit margins. Engro has maintained higher ROA than its competitors throughout the period, however the company's ROE fell below the industry average during the FY06. This may be a result of an increase in equity due to higher retained profits for the year.
The company's historical trend of lower than average inventory turnover continued for the FY06. The inventory turnover of Engro decreased as against the increasing industry trend in FY06. The oversupply situation in the industry as a result of excessive imports by TCF led to increasing inventory levels in other companies but the level of inventory fell for Engro.
This may be attributed to a 33% decline in sales of Zarkhez accompanied by a fall in the production of Zarkhez during the year. The company had also increased its imports of DAP in light of the increasing phosphate prices, resulting in higher inventory levels in the FY05 and as stocks wore out, inventory levels decreased, leading to a decrease in inventory turnover in FY06.
The DSO has been on a positive trend for the last three years, rising above the industry average during the FY05. The ratio for Engro is now much higher than the industry.
The total assets turnover and sales to equity saw a decline in the FY06 despite capacity utilisation of 113% as compared to 106% in FY05. This was a combined result of lower sales, a rise in assets as a result of investment in Engro Foods and higher inventory levels. The EPS rose above the industry average for the FY06 as the industry average dipped whereas Engro's EPS remained fairly constant.
This was result of an increase in profit margins overshadowing the increase in the number of shares issued. The book value however declined fore the year despite an increase in total equity. The DPS declined to 9 from 11 in FY05.
The liquidity position of Engro has fluctuated over the last few years, all the while remaining below the industry average. In FY06, the current ratio registered a decline, but has remained at a comfortable level.
The lower than average debt to asset and debt to equity ratios indicate a lower level of debt financing at Engro as compared to its major rivals. However despite its lower level of gearing, Engro lags behind the industry average in terms of TIE. The TIE suffered a drastic decline in FY06 as financial charges increased. The long-term debt to equity has also remained below average throughout the five-year period considered.
Engro's earnings declined in the first quarter of FY07 as the sales volume of urea declined. At the same time, Engro also increased the prices of DAP by 6.19% because of an increase in world prices.
The company also issued 15% right shares to finance its urea expansion project. This project, once complete, will enhance the production capacity and allow it to capture 35% of the market compared to its current market share of 19%. Moreover, the fixing of natural gas at a discounted price of 70cents/mmbtu will provide a cost advantage for Engro. With this and earnings from its other investments like Engro Foods, the future hold good prospects company.
FEDERAL BUDGET FY08 AND ITS IMPLICATIONS FOR THE INDUSTRY:
The increase in subsidy on DAP from Rs400 to Rs470 per bag in the FY08 will lead to an increase in the demand for the fertiliser as the lower subsidised prices spur greater use. Besides this, the GDP growth rate for the FY08 is expected to be 0.5% higher than last year. This too will increase the demand for fertiliser, especially with the government's focus on the growth of the agroeconomy.
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ENGRO CHEMICALS PAKISTAN LIMITED
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INCOME STATEMENT
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(Rs in '000) FY'02 FY'03 FY'04 FY'05 FY'06
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Net Sales 10,893,319 12,173,006 12,797,662 18,276,277 17,601,783
Cost of Sales -7,343,132 -8,309,937 -9,528,215 -14,364,288 -13,364,524
Gross Profit 3,550,187 3,863,069 3,269,447 3,911,989 4,237,259
Selling & Dist expenses 1,233,089 1,328,731 -1,036,509 -1,270,703 -1,481,730
Other income 231,398 392,093 558,154 1,144,987 1,338,854
Financial and other charges -575,510 -371,810 -285,711 -280,070 -362,551
Taxation -702,562 -766,468 -704,478 -900,469 -897,330
Profit after tax 1,133,163 1,556,783 1,610,575 2,319,082 2,547,326
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BALANCE SHEET
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(Rs in '000) FY'02 FY'03 FY'04 FY'05 FY'06
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Share Capital 1,390,364 1,529,400 1,529,400 1,529,400 1,682,340
Reserves-revenue 3,794,240 4,129,240 4,429,240 4,429,240 4,429,240
Total Equity 5,330,276 6,198,829 6,585,884 7,375,566 9,370,097
Non Current Liabilities 4,368,340 4,272,111 3,614,324 3,935,970 2,968,304
Current Liabilities 4,585,096 2,394,057 2,985,149 2,800,094 3,642,415
Total Liabilities 8,953,436 6,666,168 6,599,473 6,736,064 6,610,719
Fixed Assets 7,194,577 7,175,581 7,106,268 6,861,676 6,575,665
Long Term Investments 1,340,000 1,424,557 1,424,557 2,172,757 3,657,596
Current Assets 5,408,306 4,189,636 4,602,604 5,011,555 5,684,446
Total Assets 14,283,712 12,864,997 13,185,357 14,111,630 15,980,816
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ASSET MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06
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Days Sales Outstanding 17 19 15 11 13
Inventory Turnover Days 45 28 30 51 33
Operating Cycle 63 47 45 62 46
Total Assets Turnover 0.76 0.95 0.97 1.3 1.1
Sales/Equity 2.04 1.96 1.94 2.48 1.88
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DEBT MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06
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Total Debt to Total Assets 0.63 0.52 0.5 0.48 0.41
Total Debt to Total Equity 1.68 1.08 1 0.91 0.71
Times-Interest-Earned (TIE) 4.19 7.25 9.1 12.5 10.5
Long term Debt to Equity 0.82 0.69 0.55 0.53 0.32
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PROFITABILITY FY'02 FY'03 FY'04 FY'05 FY'06
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Net Profit Margin 10.40% 12.80% 12.60% 12.70% 14.50%
Gross Profit Margin 32.60% 31.70% 25.50% 21.40% 24.10%
Return on Assets 7.90% 12.10% 12.20% 16.40% 15.90%
Return on Equity 21.30% 25.10% 24.50% 31.40% 27.20%
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LIQUIDITY FY'02 FY'03 FY'04 FY'05 FY'06
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Current 1.18 1.75 1.54 1.79 1.56
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MARKET VALUE FY'02 FY'03 FY'04 FY'05 FY'06
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Earnings per Share 8.15 10.18 10.53 15.16 15.14
Price/Earnings(P/E) 8.14 8.49 9.44 8.7 12.28
Book Value/Share 38 40.5 43.1 48.2 56
Dividend Per Share 7.5 8 8.5 11 9
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