Engro Chemicals (ENGRO) reported a 33 percent drop in net earnings on Tuesday as declining gross margins and over the top financial charges kept the firms revenue growth in check, during the six months ending June 2009. In a notice released by the Karachi Stock Exchange (KSE) Engro said it earned a profit of Rs 3.95/share for first half 2009 (1HCY09) which was lower than the consensus estimates of Rs 4.28/share.
The negative result pushed down its stock price by 2 percent to Rs 134.5 by market close. The company also declared an interim cash dividend of Rs 2/share. Engros revenue soared by 21 percent during the period mainly because of 183 percent surge in imported phosphate fertiliser sales despite the urea sales dwindling by 16 percent during the period. Low urea off-take hugely shows the affect of annual plant turnaround in April 2009 - whereas increase in DAP sales is mainly because of the small base effect last year.
However, gross profit margins show a grim picture - offsetting the revenue growth - during the period especially in 2QCY09 where they went down to a meagre 20 percent. The sales mix was chiefly responsible behind easing gross margins, which was heavily tilted towards the low margin imported phosphate sales. And although, urea prices swelled by 21 percent during the period, it couldnt do much to boost the margins because of its low contribution in the revenue, while high carry over inventory also weighed on margins.
ENGRO P&L But the biggest blow of all came from financial charges. The firm had to pay the price of injecting Rs 1.3 billion during 2QCY09 into its subsidiary businesses, mainly in Engro Foods. Increased short-term borrowings for this purpose led to a staggering 60 percent increase in total financial charges.
Meanwhile, inflows in the form of other income - mainly dividend income from its subsidiaries - failed to live up to expectations. Though it remained almost flat but Engro EXIMP, the company involved in imports of fertiliser, did not pay any dividend due to its shallow performance.
Although, things do not look all that bleak in the longer run with the companys urea plant expected to commence operations by the end of CY10, there are concerns in the near term as the pressure on margins would not completely ease off with more phosphate imports in the near future.
Moreover, Engros plans to de-merge its fertiliser business and treat it as a new company have also caused a few raised eyebrows; since it implies that Engros other income would go down substantially once the plan is finalised. Hence, it is time to hold your horses and watch.
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ENGRO P&L
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RS (MN) 2QCY09 2QCY08 % CHG 1HCY09 1HCY08 % CHG
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Sales 4,974 4,259 17% 10,708 8,824 21%
Cost of Sales 3,964 2,526 57% 7,760 5,441 43%
Gross profit 1,011 1,733 -42% 2,948 3,384 -13%
Gross margins (%) 20% 41% -50% 28% 38% -28%
Finance cost 379 301 26% 904 567 60%
Other income 212 14 1378% 257 244 5%
PAT 349 737 -53% 1,044 1,556 -33%
EPS (Rs) 1.30 2.89 3.95 6.11
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