ENGRO in CY16

From divestment in in the fertiliser business to Engro Foods acquisition, Engro Corporation Limiteds (PSX: ENGRO) 2016 revolved around significant strategic restructuring in its fertiliser and foods business. ENGROs consolidated revenues or CY16 were down by 16 percent, year-on-year, whereas the earnings of Rs73.598 billion for the same period were more than four times of what they were in CY15.

The prime factor for the significant jump in CY16 profit after tax for Engro Corp was unconventional increase in other income. This included the one-off gain from partial stake sale of EFOODS its food business to Royal Friesland Campina (RFC), and divestment of EFERT its fertiliser business.

However, ENGROs announcement of the financial performance of CY16 dragged the index to red because of lower dividend announcement than expected, especially at a time when the group is apparently sitting on fat cash. The company announced final cash payout of Rs4 per share along with the results, taking total payout to Rs24.00 per share, while the expectations were for at least Rs10 per share.

Also, the conglomerates financial performance would sans the exponential increase in other income does not show the same exponential increase in earnings, which was because of weaker fertiliser and milk businesses. EFERT and EFOODS underperformed the market in the outgoing year.

EFOODS felt the rising competition pressure; 2016 has seen some volume and gross profit tightening as volumetric growth remained under pressure in the tea whitener segment due to changes in tax regime and increased competition.

The fertiliser sector has its share of troubles: higher raw material costs, lower margins from lower selling price because of subsidy delay, higher imports and much lower pricing power all contributed to EFERTs restrained performance in CY16.

From the long-term perspective, ENGRO decision of a strategic shift by reducing shareholding from its existing businesses will define its route in future. Historically, the firm has been focusing on fertilizer, energy and foods; however, after the divestments, the focus now seems to be on energy mostly. The fertiliser divestment was also done to support capex in Thar. ENGROs chemical business segment, Engro Polymer & Chemicals however, saw a marked turnaround in CY16. Strong demand coupled with supply tightness was the primary driver of price increase for Engro Polymer & Chemicals, and Ethylene prices also remained stable, improving PVC margins.