The blue chips result season has started with Engros full year CY09 financial results positively surprising the market. Not that the companys profits increased on year-on-year basis, but the 6 percent decline outweighed the consensus estimates by a good 12 percent. Although, the firms topline took good care of the profit and loss statement, other non-operating factors lopped the impact of its revenue growth.
Sales revenue was mainly spurred on the back of higher sales of imported fertilizer specially DAP, which soared by a staggering 192 percent (11MCY09) in comparison to previous year. A lot of this has to be attributed to the low base effect as skyrocketing prices in the latter half of CY08 had almost halted DAP off-take. Higher sales volume achieved during the period was good enough to outweigh the 27 percent year-on-year decline in DAP fertilizer prices.
The story of domestically produced urea was not as happy, though, as urea sales during the period went down by 12 percent despite an increase of 5 percent in the overall urea off-take across the country. The companys lower efficiency level of 99 percent (CY08:105 percent) attained during the period in discussion has to be blamed for the under-par performance. The drop in sales volume was made to look worse when accounted for the 4 percent reduction in urea prices - which never picked the pace after mid CY09.
DAP and urea per ton margins, despite the drop in sales price, remained almost at the previous year levels - as any increase/decrease in feedstock gas prices is immediately passed on to the end consumer and DAP being an imported product is mostly sold on constant margins. However, it was the sales mix which was more tilted towards low margins imported DAP and other products that caused the slump of 14 percent in gross margins during the period.
What dented the bottom line the most was indeed a substantial fall in companys other income mainly in the form of dividend receipts from its subsidiary companies. The companys trading arm Engro Eximp posted a loss in 1QCY09, which is why the other income shows a significant reduction. This said, the 4QCY09 performance alone has provided enough impetus to the dividend income as the inventory gains and DAP off-take both spurred simultaneously.
A much needed respite to the bottom line came from lower interest rates, as financial costs have a significant say in the companys bottom line determination.
Going forward, CY10 promises to be more or less of a repeat of performance of CY09 despite a vibrant surge in DAP off-take. But, in the recent months DAP prices have increased by more than 40 percent, which would invariably lead to a sharp reduction in DAP demand as the product is no more subsidized by the government.
Urea off-take is expected to be in the same vicinity and it will eventually come down to the plant operational efficiency. Certainly, the best years ahead will start from CY11 when the urea plant commences production and Engro Foods breaks even. A vigilant eye needs to be kept on the interest rates, as they would have a key role to play given the highly leveraged books of the company.
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ENGRO
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Rs (mn) CY09 CY08 % chg
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Sales 30,172 23,317 29%
Cost of sales 23,240 17,121 36%
Gross profit 6,931 6,197 12%
Gross margins (%) 23% 27% -14%
Other income 1,973 2,754 -28%
Financial charges 1,745 2,089 -16%
PBT 5,215 5,205 0%
PAT 3,975 4,240 -6%
EPS (Rs) 14.08 16.81
DPS (Rs) 6.00 6.00
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Source: KSE notice
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