Few companies in Pakistan have expanded as much as Engro in the past couple of years - from fertiliser to energy, and from foods to chemicals - Engro is vastly diversified. But the fertiliser business of Engro Corporation continues to be the mainstay as evident by the 1QCY11 results announced on Wednesday.
The profits soared by 12 percent, most of which was attributable to the fertiliser segment. Despite facing gas curtailment for its new plant during nearly the entire period - the top line of the fertiliser business grew by 27 percent year-on-year. The production was undoubtedly down, but the massive 35 percent year-on-year surge in urea prices led to a healthy top line.
What is amazing is the improvement in gross margins of the fertiliser business, which jumped to a whopping 53 percent for the quarter, well above the peer average. It was the massive price increase after the gas curtailment that helped Engro attain higher gross margins - meaning that Engro managed to more than pass on the impact of gas curtailment, hence improving the primary contribution margin.
The healthy nature of the fertiliser business can be gauged from the fact that despite contributing slightly over one-third to the top line, its contribution to the bottom line exceeds two-thirds of the overall profits.
Other than fertiliser, most of the other businesses are believed to have done well, with the exception of Engro Polymer which could not break its loss-making spree. Engro Foods Tarang has reportedly beaten the older brand Olpers in term of sales already, and is actually gaining market share across the country. The food segment is believed to have contributed a fair bit to the profits, as segment-wise break-up is still awaited.
One glitch in an otherwise healthy income statement is the massive surge in financial charges, which is no surprise given the companys highly leveraged books.
The new fertiliser plant is now producing urea as the gas supply was restored on April 20 2011, according to company sources. It will be interesting to keep an eye on whether the gas is supplied on a continuous basis - something which has eluded the new plant thus far.
In a rather interesting move, Engro fertilizer has filed a case in the provincial high court against the suspension and curtailment of gas - just a few days after it was restored.
It is worth mentioning here, that the management was not too keen to enter litigation over the matter till April 21, 2011. What has now forced the company to go to the courts raises doubts over the sustainability of the recently restored gas to the new plant.
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ENGRO CORPORATION
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(Rs mn) 1QCY11 1QCY10 chg
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Sales 21,848 16,859 30%
Cost of sales 15,723 12,177 29%
Gross profit 6,125 4,682 31%
Gross margin 28% 28% 1%
Other income 344 135 155%
Finance cost 1,451 904 61%
PAT 2,015 1,805 12%
EPS (Rs) 5.22 4.80
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Source: KSE notice