Engro hit hard by imports low urea sales

ARTICLE: Lower urea sales, trimmed gross margins and a slide in other income pushed Engros net earnings lower by 23 percent during the nine months ending September. Although the firm managed to increase its revenue by a sizeable amount, its overall sales volume remained depressed on year-on-year basis. Urea sales dropped by 15 percent to 0.673 million tons compared to the same quarter last year, as production fell 8 percent due to plant turnaround in the first half of the year.
The sale of Engros blended fertiliser product Zarkhez dipped by 30 percent owing to slippages in sugarcane acreage and lower financing available to sugarcane growers. There was, however, more than three times escalation in imported phosphate fertilisers, DAP and MAP, which strengthened the firms top line, as reduction in international price of these products boosted their demand.
But the higher contribution of low margin imported fertiliser in the revenue mix had its darker side as well; gross margins were clipped to mere 23 percent as against the industry average of 34 percent for the same period. The bittersweet nature of imported fertiliser for Engro clearly reflects in the other income segment which has a significant weight in its overall bottom-line.
The increase in excess of 200 percent in imports meant Engros trading arm - Engro Eximp - did an exemplary job specially in the third quarter when DAP imports were on a high. Although, Engros other income fell on year-on-year basis, it is largely because of the high base affect, as last year saw an abnormal divided contribution from Eximp.
With the companys plant back to operating at full capacity and high urea off-take season seen beginning soon- the margins should improve in the last quarter of CY09. This said, the country is sitting high on DAP inventory to cater for the final quarter, which could mean lesser activity at Eximp and lower other income and revenues for 4QCY09. The construction of Engros new plant is going smoothly and has entered the 30th month of execution. From CY11, the company would be all set to improve its gross margins and reduce that gap with its peers. Also, the plan of de-merger is expected to add efficiencies to the system, without diluting shareholders value.

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ENGRO P&L

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RS (MN)              3QCY09   3QCY08   % CHG   9MCY09   9MCY08   % CHG

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Sales                10,143    5,858     73%   20,850   14,682     42%

Cost of sales         8,192    4,087    100%   15,952    9,527     67%

Gross profit          1,951    1,771     10%    4,899    5,155     -5%

Gross margins            19%      30%   -36%       23%      35%   -33%

Finance cost            342      728    -53%    1,247    1,295     -4%

Other income            901    1,368    -34%    1,159    1,612    -28%

PAT                   1,556    1,803    -14%    2,599    3,359    -23%

EPS - diluted(Rs)      5.22     6.05    -14%     8.72    11.28    -23%

DPS (Rs)                2.0      2.0              2.0      2.0

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