Engro Corporation 1QCY12: jolted

Asad Umars departure was not the only bad news for Engro as the conglomerates profitability for the 1QCY12 dipped massively entering the red zone, shortly after posting a marvellous performance in CY11. The reasons for such abysmal performance are many, as apart from Engro PowerGen and Engro Foods, other business ventures reported largely disappointing results.
Fertilizer segments performance was the major dampener, as Engro Fertilizers reported a hefty loss of Rs.1.4 billion-an amount that was nearly the same for the same period of last year, only difference being that it was in the profit zone.
Fertilizers top line performance remained jittery as the industry-wide urea off-take remained on the slower side. To top it off, the presence of cheap imported urea in bulk put more pressure on local manufacturers sales as evident by a nearly three-time year-on-year drop in urea off-take for Engro during the period.
Engros new fertilizer plant continued to face extended gas curtailment, as a result of which, urea production during the quarter remained largely flat. Gross margins were under severe pressure after the revised feedstock gas prices. Ideally, Engro could have mitigated the margin loss through production from its new plant which receives (if at all) gas at concessional rates-but that didn happen.
The bottom line was further jolted by a massive hike in financial charges for the period, which were even higher than the cost of sales for the period. This is what sent the P&L in the red zone-something which Engro Fertilizers wouldn have seen coming going into expansion.
The food business, on the other hand, continues to grow organically and an improved performance in the dairy segment fetched Engro Foods healthy profits, which quadrupled during the period when compared to the corresponding period of last year.
Going forward, there might be some respite in gas curtailment to Engros new urea plant, but the high urea inventory in the country and more imports in the pipeline could keep the pressure on urea sales in the near term. Financial charges will continue to eat a sizeable chunk from profits-so, for a while, the respite will have to come from the food, energy and trade business.