The year 2009 closed one chapter of Engro's history. At the end of year 2009, Engro Chemical Pakistan Limited demerged and transferred its core business into a new subsidiary, Engro Fertilizers Limited.
This demerger is part of Engro Chemical Pakistan Limited's conversion into a holding company structure, namely Engro Corporation Limited. Engro Corp will be one of Pakistan's largest conglomerates, with a diversified portfolio, including fertilizers, foods, energy & power, PVC resin, chemical handling and storage, industrial automation and trading.
Industry snapshot
The fertiliser industry in Pakistan is of an oligopolistic nature, with the four major players being Engro, FFC, FFBL and Dawood Hercules. FFC has the highest share of urea production (38%), followed by Engro (14%), FFBL (10%) and Dawood Hercules (8%).
During the year under review, the Urea off take of industry grew 17% to 6.4 million tons. This was mainly due to record wheat support prices of Rs 950/ mound for Rabi 08/09 and 09/10 resulting in highest ever returns for the farmers, increase in acreages under BT cotton requiring more urea and, rising cotton prices encouraging increased fertiliser use. Domestic urea production during 2009 on national basis was 5.05 million tons as compared to 4.98 million tons in 2008. To fill the demand supply gap, GoP imported 1.6 million tons of urea which was distributed through National Fertiliser Marketing Limited.
Recent results 1H10:
The consolidated net sales of the Engro Corp showed an increase of 48% and stood at Rs 50.59 billion for the first half of 2010, as compared to the Rs 34.15 billion in the same period last year, while gross profit increased from Rs 7.30 billion in 1H 2009 to Rs 13.88 billion this half. Net Profit rose 183% to Rs 8.21 bn in 1H 2010 as compared to the same period last year. Meanwhile, PAT increased to Rs 4.59 bn, rising 221% since the corresponding period last year.
In the fertiliser business, urea sales were 492,000 tons up by 17% from 419,000 tons for the same period last year primarily due to higher availability of product on account of higher production. Engro Fertilizers recorded the best ever first half production with 504,000 tons during the six months ended June 30, 2010, a 16% increase over the 436,000 tons produced during the same period last year. The market share also increased to 16% from 14% last year.
The market demand for urea, during the first half ended June 30, 2010 was 3.1 million tons showing a marginal increase of 3% over the same period last year. The sale of company manufactured blended fertilizers (Zarkhez and Engro NP) was 44,800 tons vs 43,500 tons during same period last year. Zarkez sales increased to 28,900 tons from 23,000 tons in the corresponding period previous year as a result of a 55% growth in the potash industry which was witnessed during the first half of 2010 on account of subsidy announced by the Government and subsequent imports by other potash players. NP sales declined to 15,900 tons this year from 20,500 tons in the comparable period last year due to a decline in the phosphate industry due to higher phosphate prices, poor farmer economics and water shortage.
The net profit for the six months ended June 30, 2010 was Rs 2.01 billion which was better than expected due to better plant production and efficiency. The urea expansion project at Daharki site, at 40th month of execution is mechanically 98% complete. Mechanical completion as well as commissioning activities are expected to take place in 3Q 2010.
Financial statement analysis:
During FY09, the company produced 952,000 tons of urea, which is 4% lower than 995,000 tons of 2008 production; this was mainly due to the planned maintenance shutdown in the second quarter. The company sold 933,000 tons of urea and consumed 20,000 tons in the Zarkhez operations. Also there has been a decline in Engro's share because of production remaining constant having reached the maximum capacity and while there was a growth in urea demand, the distribution of imported urea was handled directly by NFML.
During the year under review, the company sold 357,000 tons of phosphates as compared to 128,000 tons in 2008, achieving a market share of 21% against 16% in 2008. The growth was based on the focus on anticipating demand and market trends. As a result of the higher international potash prices in 2009, the potash nutrient industry registered a 33% decline during the year. Being the largest player in the potash market, Zarkhez sales dropped to 55,000 tons, a decline from 69,000 tons levels of 2008. However, the market share of potash increased from 51% in 2008 to 65% in 2009.
The net sales of the company have shown an increasing trend over the last 5 years. The stood at Rs 18,276 million in FY05, whereas in FY09 they have increased to Rs 30,172 million. The gross profits have also shown an increase, increasing from levels of Rs 3,912 million in FY05 to Rs 6,931 million in FY09.
The profits after tax have been showing a fluctuating trend over the last 5 years. They stood at Rs 4,240 million in FY08, and declined to Rs 3,957 million in FY09. This fluctuating profitability trend has lead to fluctuations in the profitability ratios of the company. The net profit margins in FY09 stood at 13% in FY09 as compared to 18% in FY08 and 14% in FY07. Also, the gross profit margins stood at 23% in FY09 as compared to 27% in FY08 and 21% in FY07.
The return on assets and return on equity have been declining over the last 5 years. The RoA declined from 15% in FY05 to 4% in FY09. The RoA stood at 7% in FY08. There has been a massive increase in the total assets of the company. They increased from Rs 57,164 million in FY08 to Rs 93,709 million in FY09. The property, plant and equipment have increased from Rs 33,553 million in FY08 to Rs 69517 million in FY09. The property, plant and equipment have increased mainly on account of the urea expansion project. The property, plant and equipment included in capital work in progress due to urea expansion project increased to Rs 47,081,203 thousands in FY09 as compared to Rs 23,064,182 thousands in FY08. The RoE has declined from 18% in FY08 to 15% in FY09. This has been due to the increase in the equity. The equity increased from Rs 21,054 million in FY08 as compared to Rs 26,888 million in FY09.
The total liabilities of the company have been increasing over the last 5 years. They have increased from Rs 36,111 million in FY08 to Rs 66,821 million in FY09. Tremendous increase has been seen in the long term liabilities. They have increased from Rs 30,112 million in FY08 to Rs 60,426 million in FY09. The borrowings of the company have increased from Rs 27,757 million in FY08 to Rs 58,565 million in FY09. The increase in the borrowings has been for the urea expansion project. Included in these are the loans from consortium of Development Finance Institutions comprising of DEG, FMO and OFID for an amount of US $85,000. Also the company has contracted a loan with International Finance Corporation for US $50,000.
Another major increase on the liabilities front has been in the employee housing subsidy. In 2008, the company announced a medium term Employee Housing Subsidy Scheme for its employees who were not entitled to Employee Share Options. The company has completed disbursements of Rs 395,606 thousands in FY09 as compared to Rs 152,223 thousands in FY08. With the increase in the liabilities the Total debt to equity ratio of the company has reached a level of 2.49 as compared to 1.61 in FY08. Even the debt to total assets has increased to 0.71 as compared to 0.62 in FY08.
The current ratio of the company has been declining over the years. During FY09 it declined to 1.7 as compared to 2.6 in FY08 and 3 in FY07. During FY09 the current liabilities of the company increased from FY08 levels of Rs 5,999 million to Rs 6,395 million. Increase was seen in derivative financial instruments, which have increased from Rs 155 million to Rs 740 million. The company has entered into forward exchange contracts to hedge its foreign exchange exposure. The company has forward contracts to purchase Euro 9,543 in FY09 as compared to Euro 130,505 in FY08. Also, the company has entered into foreign exchange option contracts to hedge its currency exchange against US dollars relating to the expansion project. The country had foreign exchange options amounting to Euro 12,628 in FY09. The company has entered into an interest rate swap agreement to hedge its interest rate exposure on floating rate committed borrowing from a consortium of Development Finance Institutions for notional amount of US $85,000. During FY09 the current assets of the company declined to Rs 10,749 million in FY09 from Rs 12,042 million in FY08.
With the increasing net profits after tax for the last 6 years, the earnings per share have also increased. The net income stood at Rs 1,611 million in FY04 as compared to Rs 3,957 million in FY09. Also, the EPS has increased to Rs 14 in FY09 as compared to Rs 8.3 in FY04. The dividend per share has been fluctuating over the last 5 years. In FY05 the dividend was Rs 11 which has declined to Rs 6 in FY09 showing a payout ratio of 43%, as compared to a payout of 100% in FY05.
The above graph shows the price of Engro's stock against KSE 100 Index. It is quite evident from the graph that the Stock has been performing in almost the same trend as the KSE 100 Index.
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ENGR0 FERTILIZERS LIMITED
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FY'04 FY'05 FY'06 FY'07 FY'08 FY09
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INCOME STATEMENT
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(Rs in '000)
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Net Sales 12,797,662 18,276,277 17,601,783 23,183,222 23,317,198 30,171,520
Cost of Sales (9,528,215) (14,364,288) (13,364,524) (18,262,793) (17,120,635) (23,240,176)
Gross Profit 3,269,447 3,911,989 4237,259 4,920,429 6,196,563 6,931,344
Selling & Dist expenses (1,036,509) (1270,703) (1,481,730) (1,641,724) (1,657,815) (1,945,176)
Other rncorne 558,154 1,144,987 1,338,854 1,831,260 2,754,330 1,973,467
Financial and
other charges (285,711) (280,070) (362,551) (535,023) (1,508,948) (1,320,579)
Taxation (704,478) (900,469) (897,330) (1,080,929) (964,144) (1,257,696)
Profit after tax 1,610,575 2,319,082 2,547,326 3,154,583 4,240,430 3,957,250
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BALANCE SHEET
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(Rs in'OOO)
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Share Capital 1,529,400 1,529,400 1,682,340 1,934,692 2,126,161 2,128,161
Reserves-revenue 4,429,240 4,429,240 4,429,240 4,429,240 4,429,240 4,429,240
Total Equity 6,585,884 7,375,566 7,555,453 15,740,651 23,084,068 26,888,238
Non Current Liabilities 3,614,324 3,935,970 2,968,304 17410,060 31,205,105 60,425,731
Current Liabilities 2,985,149 2,800,094 3,642,415 5,264,674 5,999,353 6,395,469
Total Liabilities 6,599,473 6,736,064 6,610,719 22,674,734 37,204,453 66,821,200
Fixed Assets 7,106,268 6,861,676 6,575,665 13,818,674 33,395,762 69,517,512
Long Term Investments 1,424,557 2,172,757 3,657,596 7,764,482 11,091,857 12,998,657
Current Assets 4,602,604 5,011,555 5,684,446 15,685,335 15,323,158 10,748,871
Total Assets 13,185,357 14,111,430 15,980,816 38,415,385 60,288,526 93,709,438
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DEBT MANAGEMENT
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Total Debt to Total Assets 0.50 0.48 0.47 0.59 0.62 0.71
Total Debt to Total Equity 1.00 0.91 0.90 1.44 1.61 2.49
Time5 -Interest-Earned (TI 6.64 9.28 8.03 6.90 3.81 4.00
Long term Debt to Equity 0.55 0.53 0.43 1.11 1.35 2.25
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PROFITAPILITY
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Net Profit Margin 13% 13% 14% 14% 18% 13%
Gross Profit Margin 26% 21% 27% 21% 27% 23%
Return on Assets 12% 16% 11% 8% 7% 4%
Return on Equity 24% 31% 22% 20% 18% 15%
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LIQUIDITY
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Cuirent Ratio 1.5 1.8 1.6 3.0 2.6 1.7
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MARKET VALUE RATIO
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Dividend Per Share 8.50 11.00 9.00 7.00 6.0 6
Earnings per Share 8.30 11.33 12.40 13.54 16.8 14
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