ENGRO FERTILIZERS LIMITED - Analysis of Financial Statements Financial Year 2005-1Q'10
The year 2009 closed one chapter of Engro's history. At the end of the year 2009, Engro Chemical Pakistan Limited demerged and transferred its core business into a new subsidiary, Engro Fertilizers Limited.
This demerger is part of Engro Chemical Pakistan Limited's conversion into a holding company structure, namely Engro Corporation Limited. Engro Corporation will be one of Pakistan's largest conglomerates, with a diversified portfolio, including fertilizers, foods, energy and power, PVC resin, chemical handling and storage, industrial automation and trading.
Recent results (3Q10)
The world food demand has increased significantly from 2009 to 2010 leaving some of the forecasters to predict food crisis in 2011. The increasing demand of food and limited availability of the uncultivated land has put a lot of pressure on the productivity of the land to solve the world food shortage problem. Fertiliser is considered to be an important source of raising the productivity of land. The demand for fertiliser has increased significantly in the year 2010, the world fertiliser sales and consumption has increased by 13% and 7% respectively. Considering the above trends this year, International Fertilization Association (IFA) has invested around US $40 billion for building up new plants for the nutrients (nitrogen, phosphorus and potassium).
Industry overview
The fertiliser industry in Pakistan is of an oligopolistic nature, with the four major players in the market - Engro, FFC, FFBL and Dawood Hercules. Considering the urea market, FFC and FFBL have the highest share of urea production ie 48%, Engro 15%, Dawood Hercules 6% and 20% is imported and distributed through NFML. And considering the phosphorus market, FFC and FFBL captured high share of 47%, Engro 28%, Agri tech 2%, RG 1% and around 22% is imported.
The agriculture sector of Pakistan was very badly affected due to recent floods. It had damaged around 30% of the agricultural area of Pakistan and resulted in a loss of crop valuing $2.5 billion.
The damage done to agricultural sector also affected the fertiliser industry. The demand of fertiliser was very badly affected due to soil erosion and loss of land. The demand of the urea in Pakistan stood 4.2MT compared to 4.6MT last year showing a decrease of 10%, while the demand of DAP stood 0.7MT compared to 1.2MT signifying a decrease of 40% compared to the same period last year.
Considering the performance of Engro Fertiliser, the sales of the Engro urea remained 665kt compared to 688kt last year showing a decrease of 3.4% compared to average industry drop of 10% in the same period. The sales of Zarkhez have decreased to 66kt from 73kt signifying a decrease of 10% and the sale of phosphate decreased from 235kt to 196kt showing a decrease of 16.5%. The overall sales of the Engro Fertiliser in the current 9-month period were around 12 billion compared to 20 billion of the same period last year, showing a decrease of 38%.
Despite the decrease in the sales, the gross profit margin of the company has increased to 46% against the 23% of the last year. The gross profit margin has increased throughout the industry due to low import cost of DAP in the first two quarters and an increase in the price of urea from 730 to 830 rupees in the domestic market. The gross profit margin remained higher than average industry 40%.
The net profit margin ratio of the company has increased from 11% to 23%. Despite highest gross profit margin in the industry, the net profit margin remained lower than industry average 26%, because of a significant increase in operating and other expenses. The 9-month 2,878,534 thousand rupees profit also included the 762 million rupees obtained from the sale of land and tax reversal which shows the normal profit margin was even lower than 23%.
There came a significant change in the financing structure of the company. The mode of financing of the company has shifted from equity to debt financing. The non-current liabilities of company were Rs 68.6 billion as against Rs 54.1 billion of the last year signifying an increase of 25%, while current liabilities have increased from Rs 4.8 billion to Rs 12.4 billion, signifying an increase of 160%. The overall debt of the company has increased by 35% during the 9-month period.
During the same period, the share capital of the company has decreased from Rs 13.7 billion to RS 10.5 billion, showing a decrease of 23%, while reserves of the company have decreased from Rs 12.5 to Rs 2.1 billion showing a decrease of 82%. The overall equity of the company has decreased by 50% during the same period. The reason for the decrease in equity is scheme arrangement (mentioned in the introduction of the company) under which the ownership of subsidiary company was transferred to the new company from the parent company and also due to the issuance of bonus shares and employee stock options during the same period. The bonus shares were issued in the ratio 2280 for every 100 shares.
Debt to equity has increased significantly from 2.22 times to 6.28 times portraying the shift in the mode of financing of the company.
The EPS of the company has increased from Rs 9.44 to Rs 9.66. But, due to the change in the mode of financing the book value has decreased significantly from Rs 94.5 to Rs 43 compared to the same period of last year.
The beta of Engro Corporation was 1.29 during the period showing that the stock prices of the parent company has moved in the same direction as of KSE-100 index but with little higher magnitude.
Financial statement analysis
During FY09, the company produced 952,000 tons of urea which is 4% lower than 995,000 tons of 2008 production; this was mainly due to the planned maintenance shutdown in the second quarter. The company sold 933,000 tons of urea and consumed 20,000 tons in Zarkhez operations. Also there has been a decline in Engro's share because of production remaining constant having reached the maximum capacity and while there was a growth in urea demand, the distribution of imported urea was handled directly by NFML.
During the year under review, the company sold 357,000 tons of phosphates as compared to 128,000 tons in 2008, achieving a market share of 21% against 16% in 2008. The growth was based on the focus on anticipating demand and market trends. As a result of the higher international potash prices in 2009, the potash nutrient industry registered a 33% decline during the year. Being the largest player in the potash market, Zarkhez sales dropped to 55,000 tons, a decline from 69,000 tons levels of 2008. However, the market share of potash increased from 51% in 2008 to 65% in 2009.
The net sales of the company have shown an increasing trend over the last 5 years. The stood at Rs 18,276 million in FY05, whereas in FY09 they have increased to Rs 30,172 million. The gross profits have also shown an increase, increasing from levels of Rs 3,912 million in FY05 to Rs 6,931 million in FY09.
The profits after tax have been showing a fluctuating trend over the last 5 years. They stood at Rs 4,240 million in FY08, and declined to Rs 3,957 million in FY09. This fluctuating profitability trend has lead to fluctuations in the profitability ratios of the company. The net profit margins in FY09 stood at 13% in FY09 as compared to 18% in FY08 and 14% in FY07. Also, the gross profit margins stood at 23% in FY09 as compared to 27% in FY08 and 21% in FY07.
The return on assets and return on equity have been declining over the last 5 years. The RoA declined from 15% in FY05 to 4% in FY09. The RoA stood at 7% in FY08. There has been a massive increase in the total assets of the company. They increased from Rs 57,164 million in FY08 to Rs 93,709 million in FY09. The property, plant and equipment have increased from Rs 33,553 million in FY08 to Rs 69517 million in FY09. The property, plant and equipment have increased mainly on account of the urea expansion project. The property, plant and equipment included in capital work in progress due to urea expansion project increased to Rs 47,081,203 thousands in FY09 as compared to Rs 23,064,182 thousands in FY08. The RoE has declined from 18% in FY08 to 15% in FY09. This has been due to the increase in the equity. The equity increased from Rs 21,054 million in FY08 as compared to Rs 26,888 million in FY09.
The total liabilities of the company have been increasing over the last 5 years. They have increased from Rs 36,111 million in FY08 to Rs 66,821 million in FY09. Tremendous increase has been seen in the long-term liabilities. They have increased from Rs 30,112 million in FY08 to Rs 60,426 million in FY09. The borrowings of the company have increased from Rs 27,757 million in FY08 to Rs 58,565 million in FY09. The increase in the borrowings has been for the urea expansion project. Included in these are the loans from consortium of Development Finance Institutions comprising of DEG, FMO and OFID for an amount of US$ 85,000. Also the company has contracted a loan with International Finance Corporation for US$ 50,000.
Another major increase on the liabilities front has been in the employee housing subsidy. In 2008, the company announced a medium-term Employee Housing Subsidy Scheme for its employees who were not entitled to Employee Share Options. The company has completed disbursements of Rs 395,606 thousands in FY09 as compared to Rs 152,223 thousands in FY08. With the increase in the liabilities the Total debt to equity ratio of the company has reached a level of 2.49 as compared to 1.61 in FY08. Even the debt to total assets has increased to 0.71 as compared to 0.62 in FY08.
The current ratio of the company has been declining over the years. During FY09 it declined to 1.7 as compared to 2.6 in FY08 and 3 in FY07. During FY09 the current liabilities of the company increased from FY08 levels of Rs 5,999 million to Rs 6,395 million. Increase was seen in derivative financial instruments, which have increased from Rs 155 million to Rs 740 million. The company has entered into forward exchange contracts to hedge its foreign exchange exposure. The company has forward contracts to purchase euro 9,543 in FY09 as compared to euro 130,505 in FY08. Also, the company has entered into foreign exchange option contracts to hedge its currency exchange against US dollars relating to the expansion project. The country had foreign exchange options amounting to Euro 12,628 in FY09. The company has entered into an interest rate swap agreement to hedge its interest rate exposure on floating rate committed borrowing from a consortium of Development Finance Institutions for notional amount of US$ 85,000. During FY09 the current assets of the company declined to Rs 10,749 million in FY09 from Rs 12,042 million in FY08.
With the increasing net profits after tax for the last 6 years, the earnings per share have also increased. The net income stood at Rs 1,611 million in FY04 as compared to Rs 3,957 million in FY09. Also, the EPS has increased to Rs 14 in FY09 as compared to Rs 8.3 in FY04. The dividend per share has been fluctuating over the last 5 years. In FY05 the dividend was Rs 11 which has declined to Rs 6 in FY09 showing a payout ratio of 43%, as compared to a payout of 100% in FY05.
Future outlook
The consumption of fertiliser in Pakistan is one of the lowest in the world. The demand of fertiliser in the future is expected to increase due to the Rabi season, increase in the rain-fed area and water availability due to floods, increasing food prices in the country and due to general reliance on productivity to meet the food needs of the growing population. However, the supply of fertiliser is going to badly hit if the current gas crisis lead to extension of gas curtailment policy to the fertiliser industry.
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ENGRO FERTILIZERS LIMITED
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FY'04 FY'05 FY'06 FY'07 FY'08 FY09
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INCOME STATEMENT
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(Rs in '000)
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Net Sales 12,797,662 18,276,277 17,601,783 23,183,222 23,317,198 30,171,520
Cost of Sales (9,528,215) (14,364,288) (13,364,524) (18,262,793) (17,120,635) (23,240,176)
Gross Profit 3,269,447 3,911,989 4,237,259 4,920,429 6,196,563 6,931,344
Selling & Dist expenses (1,036,509) (1,270,703) (1,481,730) (1,641,724) (1,657,815) (1,945,176)
Other income 558,154 1,144,987 1,338,854 1,831,260 2,754,330 1,973,467
Financial and other
charges (285,711) (280,070) (362,551) (535,023) (1,508,948) (1,320,579)
Taxation (704,478) (900,469) (897,330) (1,080,929) (964,144) (1,257,696)
Profit after tax 1,610,575 2,319,082 2,547,326 3,154,583 4,240,430 3,957,250
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BALANCE SHEET
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(Rs in '000)
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Share Capital 1,529,400 1,529,400 1,682,340 1,934,692 2,128,161 2,128,161
Reserves-revenue 4,429,240 4,429,240 4,429,240 4,429,240 4,429,240 4,429,240
Total Equity 6,585,884 7,375,566 7,555,453 15,740,651 23,084,068 26,888,238
Non Current Liabilities 3,614,324 3,935,970 2,968,304 17,410,060 31,205,105 60,425,731
Current Liabilities 2,985,149 2,800,094 3,642,415 5,264,674 5,999,353 6,395,469
Total Liabilities 6,599,473 6,736,064 6,610,719 22,674,734 37,204,458 66,821,200
Fixed Assets 7,106,268 6,861,676 6,575,665 13,818,674 33,395,762 69,517,512
Long Term Investments 1,424,557 2,172,757 3,657,596 7,764,482 11,091,857 12,998,657
Current Assets 4,602,604 5,011,555 5,684,446 15,685,335 15,323,158 10,748,871
Total Assets 13,185,357 14,111,630 15,980,816 38,415,385 60,288,526 93,709,438
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DEBT MANAGEMENT
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Total Debt to Total Assets 0.50 0.48 0.47 0.59 0.62 0.71
Total Debt to Total Equity 1.00 0.91 0.90 1.44 1.61 2.49
Times-Interest-Earned (TIE 6.64 9.28 8.03 6.90 3.81 4.00
Long term Debt to Equity 0.55 0.53 0.43 1.11 1.35 2.25
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PROFITABILITY
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Net Profit Margin 13% 13% 14% 14% 18% 13%
Gross Profit Margin 26% 21% 27% 21% 27% 23%
Return on Assets 12% 16% 11% 8% 7% 4%
Return on Equity 24% 31% 22% 20% 18% 15%
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LIQUIDITY
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Current Ratio 1.5 1.8 1.6 3.0 2.6 1.7
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MARKET VALUE RATIO
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Dividend Per Share 8.50 11.00 9.00 7.00 6.0 6
Earnings per Share 8.30 11.33 12.40 13.54 16.8 14
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].