ENGRO Corp in 1HCY17

The largest conglomerate of the country, Engro Corporation Limited (PSX: ENGRO) has had a busy 2016 with two strategic transactions including divestment in the fertiliser business, and Engro Foods’ acquisition by the Dutch counterpart, FrieslandCampina. Strategic sales resulted in spiked earnings for CY16.

However, 2017 seems to have slowed it down for the conglomerate; ENGRO’s consolidated top line saw an attrition of 22 percent year-on-year, while the 2QCY17 revenues on a consolidated basis came down by 11 percent year-on-year. The consolidated earnings for the corporation for the first half of 2017 attributable to the holding company were down by 32 percent year-on-year, while the second quarter was weaker with the bottom-line receding by 52 percent.

A key concern for the conglomerate has been its food and fertiliser business. ENGRO as a whole has underperformed the benchmark index as well in the last year where the stock performance was pulled down by all business segments like EFERT and EFOODS except Engro Polymer and Chemicals Limited (EPCL).

Segment wise analysis shows that EFOODS continued to under perform with declining bottom-line due to increased competition and adverse tax regime. Revenues of the conglomerate were down due to the reclassification of EFOODS to Associate from Subsidiary post its partial divestment, and profits from the said investment are now recorded in “share of profits from associates”.

The foods business (EFOODS and Eximp) saw earnings for 1HCY17 go down by over 90 percent, while the corporation saw growth in the earnings of its fertiliser, chemical and power business. EFERT saw an increase of 47 percent year-on-year in its bottom-line due to strong growth in its top line, increased urea off take and rapid deleveraging (resulting in lower finance cost).

EPCL depicted a turnaround where profits for 1HCY17 were up by over 26 times! This was due to higher PVC sales, and increased gross margins. Whereas, the growth in EPQL’s earnings was due to normalization of grid issues and increased load factors due to recent overhaul.

Going forward, unfavourable supply/demand dynamics in fertilizer industry and reorganization of EFOODS by the new management remain key tasks for the company.

However, the growing size of petro-chemical industry coupled with lower ethylene prices will prove beneficial for the polymer business that expects to post upbeat earnings growth in the near future.

Moreover, ENGRO’s outlook also remains sanguine due to its investment in power and energy, especially in the long term with key projects.

It is recent analyst briefing, the management highlighted the smooth sailing of its flagship Thar coal mining and power project – currently four months ahead of schedule.