ENGRO CHEMICAL PAKISTAN LIMITED-EMERGING CONGLOMERATE

About the Company

MARIAM NASIR
Manager Research
Sep 17 - 23, 2007

Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan. The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited until 1991. Engro accomplished significant progress not only in its base urea fertilizer business but also in diversification projects. Urea production was increased from an annual capacity of 270,000 tons in 1991 to 850,000 tons in 2001. As part of their growth and diversification plans, they have established a US$60 million 50:50 Joint Venture company named "Engro Vopak Terminal Limited" in 1995, between Engro and Royal Vopak (formerly Royal Pakhoed), a Netherland based company and one of the foremost terminal operators in the world. This joint venture company has built a modern Jetty & Terminal at Port Qasim, Karachi for handling and storage of bulk liquid chemicals, which was completed in 1997. Engro has also formed another Joint Venture company with Mitsubishi and Asahi Glass of Japan named "Engro Asahi Polymer & Chemicals Ltd." to develop a Polyvinyl Chloride (PVC) resin project at Port Qasim, Karachi, with an initial capacity of 100,000 tons per year based on imported Vinyl Chloride Monomer. The project has been successfully completed and commenced production in November 1999. In April 2003 Engro acquired 51% interest in the Automation & Control Division of Innovative (Private) Limited, a Lahore (Pakistan) based company that provides process control industrial solutions in the knowledge based services sector. Recently, Engro has set up a milk processing facility to produce and market branded UHT milk, cream and other milk products. The plant which is located in Sukkur cost Rs 1 billion and was completed in March 2006.

FINANCIALS OF THE COMPANY

Engro Urea sales were 391,000 tons, down 11%, and imported urea sales were 4,000 tons compared to 47,000 tons in the similar period last year due to lower industry volume. Total market share for urea was 19% the same as the first half of 2006. The plant produced 476,000 tons against 481,000 tons in the same period last year. The sale of Company manufactured blended fertilizers (Zarkhez and Engro NP) was 64,000 tons vs. 56,000 tons in the first half of last year. Production stood at 61,000 tons vs. 63,000 tons in the first half of last year. The Company s sale of imported phosphatic fertilizers, DAP and Zorawar, increased by 90% to 165,000 tons versus 87,000 tons in the first half of 2006 due to timely availability of the product.

As a result revenue of the company during the half year period rose by 17% to Rs.8,120m from Rs.6,934m earned in the half year period of last year. Cost of sales increased by 21% to Rs. 6,102m from Rs. 5,046m in HY/CY06. A significant rise has been marked in company's other income by 38% from Rs. 395m during CY06 to Rs. 546m in CY07 mainly due to dividend income generated from subsidiaries. The net profit increased by 17% to Rs. 1,103 (EPS: Rs.6.56) from Rs. 945m (EPS: Rs.5.61) in the preceding period. The increase in earnings is mainly attributable to higher phosphates sales, as well as higher dividend from Engro Polymer & Chemicals Limited (formerly Engro Asahi Polymer & Chemical Limited).

FINANCIALS

(Rs. m)

2Q/CY06

2Q/CY07

Chg %

HY/CY06

HY/CY07

Chg %

Net Sales Revenue

4,005

6,201

55%

6,934

8,120

17%

Cost of Sales

3,081

4,886

59%

5,046

6,102

21%

Gross Profit

924

1,315

42%

1,888

2,018

7%

Sell & Dist Expense

312

400

28%

603

629

4%

Operating Profit

612

915

50%

1,285

1,389

8%

Other Income

218

404

85%

395

546

38%

Financial & Other Charges

110

135

23%

238

241

1%

WWF

17

24

37%

29

34

18%

WPPF

36

59

65%

72

85

17%

Profit Before Taxation

666

1,101

65%

1,341

1,574

17%

Taxation

193

321

66%

396

471

19%

Profit After Taxation

473

780

65%

945

1,103

17%

RATIOS

Diluted EPS (Rs.)

2.81

4.63

65%

5.61

6.56

17%

Gross Margins (%)

23%

21%

 

27%

25%

 

Operating Margin (%)

15%

15%

 

19%

17%

 

Net Margin (%)

12%

13%

 

14%

14%

 

UREA EXPANSION PROJECT

Engro urea expansion project is on way for that as a part of project funding, company offered 15% right shares at Rs. 125 per share to the shareholders including premium of Rs. 115 per share. The total issue including share premium will amount to Rs.3.2 billion and will be received by Aug. 2007. The company has also announced Rs.4.0 billion TFC issue, of which, Rs. 3.0 billion have already been received. The IPO for the balance Rs. 1.0 billion is expected in August 2007. Engro's 1.3mn tons per annum urea plant will come online by 2011 and will plug the demand supply gap in the fertilizer industry. It will place Engro with 33% market share close to its rival Fauji Fertilizer Limited.

OTHER GROUP COMPANIES

Engro Polymer & Chemicals Ltd. expansion and back-integration and Engro Vopak's ethylene storage projects are progressing well whereas Engro Foods Limited expansion is in progress. The company plans to increase its milk production capacity threefold. A new plant in Sahiwal (200k litres per day initial capacity) will be operational in 2007. In addition, the expansion of Sukkur and Sahiwal plants of 100k litres per day each is likely to be completed by May 2007 and Sep 2007, respectively, bringing the total capacity to 600k liters per day. Engro Energy (Private) Limited has obtained tariff determination from NEPRA and is in the process of obtaining Letter of Support from Pakistan Power and Infrastructure Board.

FUTURE OUTLOOK

Engro urea sales during the last 4 years (2003-06) grew by 2% annually which was primarily due to capacity constraint not only for the company but for the whole industry. The commissioning of new urea plant by Engro in 2011, will boost company's urea sales. Apart from that company's investment in its subsidiary will also reap benefit to the company in the years to come. If all falls well for the company Engro Chemical will emerge as one of the biggest conglomerate in the manufacturing industry of Pakistan.