ENGRO CHEMICAL PAKISTAN LTD.

S.M.ABBAS ZAIDI,
Research Analyst
, PAGE
Nov 30 - Dec 06, 2009

Engro Chemical Pakistan Limited is an agri-based company, engaged in the business of manufacturing and marketing of fertilizers. The company's current manufacturing base includes urea nameplate capacity of 975,000 tons per annum and blended fertilizer (NPK) capacity of 160,000 tons per year and is the second largest producer of urea fertilizer in Pakistan.

Additionally, the company imports and sells phosphatic fertilizers for balanced fertility and improved farm yields. Engro's share of Pakistan's phosphates market mirrors or exceeds its urea market share. Expansion plans include a new urea plant of 1.3 million tons annual capacity, also at Daharki. The US$ 1 billion project is well underway and on track for commercial production in mid 2010.

This addition will increase Engro's urea market share to 35% from 19% at present. Engro Chemical Pakistan Limited is a public listed company incorporated in Pakistan. The company has also invested in joint ventures and other entities engaged in chemical related activities, industrial automation, food, and energy businesses.

Urea sales were 673,000 tons, down by 15% for the same period last year due to higher inventories carried forward during first quarter of 2008 and lower production during the current period. The plant produced 689,000 tons during the nine months ended September 30, 2009 against 740,000 tons during the same period last year as a result of a planned turnaround during the second quarter of 2009. This combined with government's decision to distribute imported urea through National Fertilizer Marketing Limited, resulted in decline of its market share to 14% from 20% last year.

OPERATING PERFORMANCE
(RS. IN "000")

INDICATORS 9 MONTHS SEP 2009 9 MONTHS SEP 2008
Net Sales 20,850,210 14,681,956
Cost Of Sales (15,951,610) (9,527,379)
Gross Profit 4,898,600 5,154,577
Finance Cost (980,865) (961,112)
Profit Before Taxation 3,496,104 4,409,739
Profit After Taxation 2,599,443 3,359,350
Earnings per share (Rs) 9.44 13.45

The sale of company manufactured blended fertilizers (Zarkhez and Engro NP) was 72,500 tons vs. 71,000 tons during same period last year. Reduction in sugarcane acreage and reduced availability of financing with sugar cane growers along with higher potash prices caused a decrease in Zarkhez sales, which reduced to 37,800 tons as compared to 54,000 tons during the same period last year.

The company however sold 34,700 tons of its Engro NP fertilizer against 17,000 tons in the comparative period.

The company's sale of imported phosphatic fertilizers, DAP and Zorawar, was 240,000 tons against 54,000 tons for the same period last year as a result of high market demand due to reduction in international market prices.

The net profit for the nine months ended September 30, 2009 was Rs. 2,599 million as compared to Rs. 3,359 million for the same period last year. The decrease in earnings is mainly attributable to lower margins on Zarkhez, lower dividend income partially offset by higher phosphate sales. The urea expansion project at Daharki site, at 30th month of execution, is progressing satisfactorily.

PAKISTAN'S FERTILIZER MARKET

FERTILIZER INDUSTRY

MANUFACTURER

UREA CAPACITY CAPACITY UTILIZATION MARKET SHARE
FFC 1,904,000 118% 45%
Engro 850000 107% 20%
FFBL 551,100 105% 13%
Dawood Hercules 445,500 91% 11%
Pak American 350,000 100% 8%
Pak Arab 92,400 124% 2%

Total

4,193,000

110%

100%

The market demand for urea, during the nine months ended September 30, 2009 was 4.7 million tons, an increase of 18% over the same period last year (4 million tons). The increase is attributable to two major reasons, which are better farm economics for wheat which led to increased sowing and sowing of BT cotton which requires greater application of urea over conventional cotton varieties.

Domestic production at 3.74 million tons was almost the same as compared to 3.73 million tons during the same period last year.

International urea prices declined during the period. Current landed price of imported urea is approximately Rs. 1,323 per bag ($ 290/ton) as against the domestic price of Rs. 730 per bag. By keeping domestic prices substantially lower than international prices, the fertilizer industry provided benefit of approximately Rs. 31 billion to farmers. Industry-wide sale of phosphatic fertilizers increased to 1.13 million tons as compared to 0.30 million tons for the same period last year. Industry demand remained high primarily due to the decrease in phosphate prices.

MARKET SHARE

The fertilizer industry in Pakistan is of an oligopolistic nature, with the four major players i.e. Engro, FFC, FFBL, and Dawood Hercules forming 90% of the total urea production in Pakistan. FFC has the highest share of urea production (45%), followed by Engro (20%), FFBL (13%), and Dawood Hercules (11%).

FUTURE OUTLOOK

Urea demand is expected to remain robust in the backdrop of short supply sentiment, which is expected to persist in the near term. However, urea imports have started coming in for Rabi to meet industry demand. Industry is however carrying enough inventories of phosphatic fertilizers to meet Rabi demand.