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Engro's results above market expectations

The weaker gross margin was compensated for by cost optimization

Feb 05 - 11, 2001

Engro Chemical Pakistan Limited (ECPL) announced full year results for the year 2000 posting Rs 1,126.33 million profit after tax as against Rs 1,047.6 million for the previous year — an increase of 7.5 per cent. This improvement in profit was even more interesting in the light of its half-yearly results. The profit was above market expectations.

According to a report by KASB, the reasons for the surprising results are:

* The first half of the year usually has lower fertilizer off-take, which usually increases in third and fourth quarter. While there was approximately 49 per cent higher offtake in fourth quarter, urea prices improved by 17 per cent during this period.

* The weaker gross margin was adequately compensated for at the operating level with a Rs 304 million cut in selling and distribution expenses. There was also Rs 70 million rise in other operating income.

* The jump in other income of 54 per cent seems to have originated from foreign exchange gains on its US$ deposits with the GoP where it got an 11 per cent benefit from the rupee depreciation alone and another Rs 45 million from Engro Vopak.

* Profit before tax improved nominally but the effective tax rate came down from 22 per cent for the preceding year to 17 per cent for the year 2000.

The production of Engro urea was marginally higher than last year's record production, but lower than the design capacity of 850,000 tonnes due to temporary equipment limitation. New redesigned equipment to overcome the limitation is ready for installation during the planned maintenance shutdown of March 2001.

The Company's total fertilizer sales volume at 1,023,000 tonnes was 4 per cent lower than last year because there was no requirement to sell imported urea in 2000 in view of adequate supply in the country. Aside from 800,000 tonnes of urea sales, the Company sold 223,000 tonnes of imported DAP, NP, MOP and NPK fertilizers.

The net profit for the year is up 7 per cent due to the improved marketing environment in the second half of 2000. The Company also benefited appreciably from cost control measures, favourable one time fiscal and tax adjustments and dividend from a joint venture. The Board of Directors have proposed a 30 per cent final dividend. This brings the cumulative cash dividend for the year to 70 per cent versus as against 60 per cent pay out for the previous year. The Board of Directors have also recommended the issue of 15 per cent Bonus Shares. The Bonus Shares shall not be eligible for the dividend declared for the year ended December 31, 2000.

The Company's first joint venture, Engro Vopak Terminal Limited, achieved an estimated profit of Rs 208 million and was able to declare a maiden cash dividend of 10 per cent which yielded Rs 45 million for ECPL. The second joint venture, Engro Asahi Polymer and Chemicals Limited, completed its first full year of operations but suffered an estimated loss of Rs 356 million due to the limited size of the domestic market. The company is making a concerted effort to expand the size of the domestic market and increase export sales.

The construction of the 100,000 tons per annum NPK fertilizer facility at Port Qasim is progressing satisfactorily. The project is expected to be completed on schedule till April 2001 and within the budgeted amount of US$ 10 million. The Company also firmed up its plan to enter the seeds business early in 2001. Initially the business is based on marketing of imported hybrid seeds.

Although, a significant earnings turnaround has emerged, it falls far short of an indication of things to come, as the fertilizer sector as a whole continues to remain overcast in a pall gloom. Climbing global prices of various types of fertilizers have yet again proved to be the savier for the manufacturers in Pakistan so far.

According to the KASB report, "Continuous delays in implementing Fertilizer Policy, strong oil prices and the onset of massive capacity buildup in China and the Middle East will directly impact the financial health of the fertilizer sector as a whole. In the longer term, we may witness a structural decline in "normal" margins for the sector, as global players exploit their cost advantage to gain global share. Till then a healthy dose of high import tariffs, high oil prices and generous gas subsidies will allow fertilizer companies to cater to the domestic agricultural demand and maintain stable operating revenues.