Aug 17 - 23, 1996

When the Management Association of Pakistan (MAP) announced the names for Corporate Excellence Award for 1994 last month and the name of Engro was missing from the list, many financial analysts were a little alarmed. However, the results for 1995 were better and the results of the first half of 1996 were a pleasant surprise. The Company has earned an after tax profit of Rs. 529 million as compared to Rs. 222.7 million earned during the first six months of 1995, registering an increase of over 137 per cent.

While the sales for the period under review have improved by 83% amounting to Rs. 3.027 billion as against Rs. 1.652 billion in the corresponding period of 1995, the cost of goods sold took a quantum jump from Rs. 914 million in the first half of 1995 to Rs. 2.048 billion in the first six months of 1996 - attributable to the higher cost of imported urea at the price of locally manufactured one.

Both, gross profit and profit from operations have increased by 32.26% and 37.79% respectively. In the absence of any explanatory notes regarding the colossal increase in the cost of goods sold, the other conceivable factor for the poor capacity utilization could be curtailment of natural gas to the fertilizer factory during the first quarter of this year.

In spite of adversities the company has declared a cash dividend of 25% i.e. Rs.2.5 per share with a face value of Rs. 10 but being traded at Rs.139.

The urea demand in Pakistan has been growing rapidly and the indigenous production has increased to the extent that urea was exported during last year but its import was necessitated due to curtailment of gas to fertilizer factories. Engro has already expanded its production capacity to 750,000 tonnes per annum and will cross one million tonnes after the expansion being undertaken in two phases is over.

As the expansion cost of Engro is much lower compared to the creation of a new facility, its overall cost of production is also about one-third of its competitor, Fauji Fertilizer.

The earning potential of the Company would also improve once it achieves one million tonnes production capacity. The Board has also approved an investment in a joint venture company named Engro Paktank Terminal for a jetty and terminal facility at Port Qasim to handle bulk liquid chemicals at an estimated cost of US$ 65 million.

Fauji Fertilizer Company

Fauji Fertilizer, another important manufacturer enjoying a major share in the urea market in the country has posted Rs. 970 million after tax profit for the first six months of operation in 1996 ending June 30, indicating 12% increase from Rs. 865 million earned in the corresponding six months of 1995.

Global Securities in its analysis has attributed two factors for the reduced earnings. The cost borne on the import of 132,000 tonnes of urea which, although it was 40% more expensive than locally produced one, had to be sold at local price level which has reduced the earnings of the company by Rs. 360 million. The second factor responsible for the decline in earnings was more than expected tax rate. Whereas, according to AKD Securities, owing to heavy tax provision due to the reduction from back date in initial depreciation allowance from 40% to 25% announced in the present budget, effective tax rate has shown a huge increase from 30% to 46% for the first half of the year

However, the Company has received an SRO from CBR exempting fertilizer industry from the above budgetary measure. The Company will subsequently adjust its final tax liability in the full year results.

Fauji has surprised the market by skipping dividend. According to the management it was due to KSE's insistence on restricting the number of interims to just two. Fauji has already given its 20% interim.

Fauji enjoys highly subsidized and fixed feedstock gas rates on 47% of its total capacity, thus shielding part of its earnings from gas price increase. While the prices of urea are expected to rise by 5% it would offset an expected 25% increase in feedstock gas prices and 22% rise in fuelstock gas rates.

Fauji has taken a 30% equity stake in Fauji Jordan Fertilizer which will be manufacturing both urea and DAP type fertilizers.

Reckitt & Colman of Pakistan

Reckitt and Colman of Pakistan released its half yearly results for January-June 1996 period. While the sales of the company have registered 22% increase to Rs. 562 million as compared to Rs. 460 million during the same period in 1995, the cost of sales have increased from Rs. 328 million for the first six months of 1995 to Rs. 406 million for the period in 1996 depicting over 25% increase, thereby increasing the gross profit by 17.5% only.

It is also important to note that for the period under review while the other income has registered 17.48% increase the other charges have gone up by over 43% leading to only 7.16% increase in profit before taxation. However, the after tax profit has increased by nearly 20% from Rs.51 million for the six months in 1995 to Rs.61 million for the first half of 1996.

The Company has also declared an interim dividend of 13% i.e Rs.1.3 per share of Rs.10 being traded at Rs.94.50.

The operations of the Company are spread over two sections, household products and pharmaceuticals. While the sales of house hold products have been increasing, the cost of production of both the sections have also been increasing as a result of inflationary pressure and the depreciating Pak rupee.

However, due to the agreement with the government arrived at in early 1994, the Company had last increased prices of decontrolled drugs in July 1995. The Company had only one option: to optimize its cost of production. As this agreement was in force upto June 30, 1996 it has also affected the earnings of the company during the first six months of the current year.

As regards future prospects, the environment is expected to remain gloomy as the government has imposed 5% sales tax and enhanced the regulatory duty to 10% besides imposing duties and taxes on packaging material. Since there are no prospects of increase in the prices of pharmaceutical products, the depreciating rupee and other factors are expected to put strong pressure on the earnings of the Company in the second half of the year.