ENGRO CHEMICAL - CY07 RESULTS

MARIAM NASIR
Manager Research, PAGE

Feb 25 - Mar 02, 2008

Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan and is planning to build a new size urea plant which would make it the biggest player in the industry. The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited until 1991, when Exxon decided to divest their fertilizer business on a global basis and sold off its equity of 75% shares in our company. The core business is manufacturing and marketing of chemical fertilizers. The company also produces crop specific NPK fertilizers at Port Qasim Karachi and these are marketed under the brand name of "Zarkhez". Engro also markets imported MAP fertilizer under the brand name of "Zorawar" and imported DAP fertilizer. The company also markets micro nutrients Zinc Sulphate branded as "Zingro" and Boron branded as "Zoron"

DIVERSIFICATION STRATEGY

As part of their growth and diversification plans, they have established a US$60mn 50:50 Joint Venture company named "Engro Vopak Terminal Limited" in 1995, between Engro and Royal Vopak, a Holland 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.

Construction of Engro's 100,000 tons p.a. capacity NPK fertilizers plant at Port Qasim at a cost of US$10mn was completed in 2001. The plant is in production and considerably benefiting the country's agriculture by providing balance nutrition to improve farm yields. During the year 2004 the product's generic name of NPK was replaced by Zarkhez.

In April 2003 Engro acquired 51% interest in the Automation & Control Division of Innovative (Private) Limited, a Pakistan based company that provides process control industrial solutions in the knowledge based services sector. The joint venture has been named as "Innovative Automation & Engineering (Private) Limited".

Engro Foods (Pvt) Limited (EFL) has been established in 2005 as part of a diversification process at the Engro Group. The plant located at Sukkur on 23 acre land, has the raw milk reception capability of 300,000 liters per day and UHT milk capacity of 200,000 liters per day. The plant has been established at a cost of Rs.1bn which provides direct employment to 750 people. Engro Foods positions the company to leverage its corporate social responsibility initiatives and work closely with rural communities to promote integrated farming and livestock development.

FINANCIAL PERFORMANCE

The company and its subsidiaries performed exceptionally well in 2007. This resulted in a tremendous growth in 2007. Revenue earned by the company surged by 32% to Rs.23bn as against Rs.17.6bn in 2006. Increase in revenue can be attributed to the increase in product prices of the nutrients as well as increase in volume of the product sold. Cost on the other hand rose as the government increased the prices of gas during the year. As a result, gross profit grew by 16% to Rs.4.9bn as against Rs.4.2bn in 2006. However gross margins remained depressed as the increase in proportion of cost was greater than increase in sales revenue. Distribution and administrative expense increased by 11% as the year was marred with high inflationary pressure. Financial and other charges of the company rose tremendously and registered a growth of 35% to Rs.874mn as against Rs.650mn in 2006. Company has embarked upon higher debt for the financing of its expansions. The amount is mix of loan from local and foreign institutions as well as internal equity financing. Other income earned by the company rose remarkably by 37% to Rs.1.8bn, mainly because of exceptional performance of its subsidiaries.

Profit before tax and profit after tax was higher by 23% and 24% to Rs.4.2bn and Rs.3.15bn respectively. Earning per share at 193mn outstanding shares stood at Rs16.31 as against Rs13.17 in 2006.

FINANCIALS

RS.MN

CY06

CY07

CHG %

Net Sales Revenue

17,602

23,183

32%

Cost of Sales

13,365

18,263

37%

Gross Profit

4,237

4,920

16%

Dist & Admn Expense

1,482

1,642

11%

Operating Profit

2,756

3,279

19%

Other Income

1,339

1,831

37%

Financial & Others Charges

650

874

35%

Profit Before Taxation

3,445

4,236

23%

Taxation

897

1,081

20%

Profit After Taxation

2,547

3,155

24%

RATIO

EPS (Rs.) Basic & Diluted

13.17

16.31

24%

Gross Margins (%)

24.1%

21.2%

-

Operating Margin (%)

15.7%

14.1%

-

Net Margin (%)

14.5%

13.6%

-

PROJECTIONS

The company has acquired significant loan from the financial institution to finance its expansions. And as per the company projections it would be generating revenue of Rs.27.7bn, Rs35.45bn and Rs49bn in 2008, 2009 and 2010 respectively. Such a tremendous growth in revenue would trickle down on to the profits which are anticipated to surge to Rs.2.9bn, Rs2.78bn and Rs4.56bn in 2008, 2009 and 2010 respectively.

FUTURE OUTLOOK

Engro has increased its urea and DAP fertilizer prices by Rs20 per bag and Rs570 per bag to stand at Rs585 per bag and Rs2, 250 per bag, respectively. Previously, urea and DAP prices stood at levels of Rs565 per bag and Rs1, 680 per bag, respectively. As per management, urea price this time has been increased mainly on the back of inflationary pressures and also for gradually bringing the price in line with global urea prices which are way above, standing at US$390-410 per ton (Rs1,209-1,271 per bag). DAP price, on the other hand, has been increased locally due to pricing pressure from the International market. With such tremendous jump in prices the company is banked upon increasing the shareholders worth and its financial standing.