ENGRO CHEMICALS PAKISTAN LIMITED

HAMADULLAH ABRO,
RESEARCH ANALYST, PAGE

Mar 10 - 16, 2008

COMPANY PROFILE

Engro Chemical Pakistan Limited is an agri based company, engaged in the business of manufacturing and marketing of fertilizers. The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited until 1991. It is the second largest producer of Urea fertilizer in Pakistan and markets under the brand name Engro. Engro Chemicals also produces crop specific NPK fertilizers which are marketed under the brand name Zarkhez. The company also markets imported MAP fertilizer under the brand name Zorawar and imported DAP fertilizer. Besides, the micro nutrient zinc sulphate is marketed under the name of Zingro and Boron is branded as Zoron.

The company has formed joint venture named VOPAK Terminal Ltd for ethylene storage capacity and owns subsidiaries which are engaged in PVC resin manufacturing and marketing, Control and Automation, Food and Energy Businesses.

Company has received 25 times Top Companies Award in recognition of its financial performance and won consecutively 4th time Environment Excellence Award. Company is recognized as socially responsible organization of Pakistan in recognition of its contribution in different social programs.

Its assets are worth Rs.38.2bn with paid up capital of Rs1.9bn. Its total outstanding shares are 193.5mn where individual holdings amount to 25.5% of the total. Market Capitalization stands at Rs.64.19bn as on 7th March 08, Assets increased by 22.2bn in FY07 showing a growth of 139% over last year, posted PAT Rs 3.1bn increased by 24% in FY07 over last year, which translated into EPS of Rs 17.17 posted growth of 18.17% over same period last year.

FINANCIAL PERFORMANCE FY07

During the FY07 industry sales lower by 6% at 4.9mT (5.23mT in 2006) which translate into lower Engro Urea sales by 8% (in terms of Volume); the decline is attributable to an industry correction following 5% annual growth in recent years and country political instability. However, Company reported net sales revenue of Rs 23.2bn against Rs 17.6bn showing growth of 32%, due to high domestic demand for Phosphate and Zarkhez. Company maintained its 19 % Urea Market share in FY07. Its Cost of sales has increased by 37% to Rs 18.2bn against Rs 13.3bn over last year, due to rise in the prices of raw materials though sales volumes were low. Gross profit margin has declined to 21.22% in FY07 from mainly due to higher cost of sales.

The administrative, selling and distribution expenses also increased by 10.8% the same period owing to a rise in product freight and handling costs. Other Income rose to Rs1.8bn in FY07 against Rs1.34bn in FY06 as a result of dividends received from EEL and EAPCL, showing growth of 37%.

Company's financial and other charges showing growth of 47.6% in FY07 over last year, financial charges increased to Rs5.3mn in FY07 against Rs3.6mn in FY06, owing to increase in mark-up on long term loans. PAT increased to Rs3.2bn in FY07 as against Rs2.5bn in FY06 showing growth of 24% which translate into EPS of Rs 17.17 in FY higher than Rs14.53 in same period last year showing growth of 18%.

INCOME STATEMENT (RS 000)

31-DEC-07

31-DEC-06

CHANGE%

Net Sales

23,183,222

17,601,783

31.71

Cost of Sales

(18,262,793)

(13,364,524)

36.65

Gross Profit

4,920,429

4,237,259

16.12

Selling & Dist expenses

(1,641,724)

(1,481,730)

10.80

Other income

1,831,260

1,338,854

36.78

Financial and other charge

(535,023)

(362,551)

47.57

Taxation

(1,080,929)

(897,330)

20.46

Profit after tax

3,154,583

2,547,326

23.84

Earnings per Share (Rs)

17.17

14.53

18.17

DUPONT ANALYSIS (ROE)

Profit margin has declined to 13.61% in FY07 from 14.47% in FY06 mainly because of higher cost of sales and financial cost (higher long term debt to finance expansion). Net profit margin is expected to improve because demand for fertilizer will increase in current year in response to government's efforts to improve agricultural performance. Company's Asset turnover has declined to 0.61 in FY07 from 1.10 in FY06 due to increasing long term liabilities to finance its expansion that's why ROE is higher than ROA substantially which is 8.6% in FY07(2006:17.25%). Equity multiplier has increased to 2.46 in FY07 from 1.71 in FY06 due to higher growth in assets than equity. Decrease in Net profit margin, higher retained earnings and Asset turnover are major causes of lower ROE which stood at 20.38% in FY07 lower than 27.19% in FY06.

DUPONT ANALYSIS (ROE)

31-DEC-07

31-DEC-06

Net Profit Margins%

13.61

14.47

Asset Turnover

0.61

1.10

Equity Multiplier

2.46

1.71

ROE %

20.38

27.19

PAKISTAN AGRICULTURE SECTOR

Pakistan is an agrarian economy. Agriculture sector is considered as back bone of Pakistan's economy and economic growth engine. It contributes 21% to GDP and employees 48% total workforce. Besides, it also contributes substantially to Pakistan's export earnings. In the last decade, Pakistan has progressed from a purely agriculture based economy to relatively balanced economy dependent on services sector, consequently Pakistan's GDP has been growing at an impressive rate of 7% on average annually but share of agriculture in GDP has been decreasing. Government has realized the fact and now paying the required heed to agricultural sector and committed to improve its performance as a result agriculture showed a growth of 5% in FY06-07 and expected to grow at 4.8% in FY07-08.

FERTILIZER INDUSTRY: DEMAND-SUPPLY SITUATION

The current situation in the industry is that of excess demand, domestic supply capacity is 5.8mT per annum and demand is 6.8mT per annum creating gap of 1mT which is shortage, met through imports. Hence, all the major players are in expansion phase to increase market share. Engro has started Urea Expansion Project which is expected to be operating by mid 2010, which will increase production capacity to 2.4mT from existing capacity of 1.13mT.

FUTURE DEMAND GROWTH DRIVERS

* Government policies to improve agricultural productivity

* Fertilizer consumption is positively correlated with economic growth of country. Pakistan has been witnessing impressive growth on average 7% for last five year and expected to grow, same goes to demand for fertilizer

* Domestic demand is higher than domestic supply. To capitalize on this opportunity manufactures are in expansion phase, expectedly which will result in surplus output. Surplus can be exported to neighboring countries since world demand for fertilizer has been increasing due to increasing world population and usage of bio-fuels as alternative energy source

FUTURE OUTLOOK

Future outlook of fertilizer industry is quite favorable. Agriculture sector after exhibiting mixed growth trend for last five years is now on growth trajectory. Number of factors contributing in it like Government policies, government's efforts to improve yield per hectare by improving contents of soil, population growth which gave rise to more food demand, domestic demand-supply gap which has been increasing, use of bio-fuels as an alternative source of energy and steps are taken to improve irrigation system. All these demand drivers will certainly improve company's future profitability.