In the interest of better managing and overseeing businesses of subsidiaries and affiliates that are currently part of Engro's capital investments, Engro Chemical Pakistan Limited converted into a holding company structure. As part of this process, two major changes occurred with effect from January 1, 2010; Engro Chemical was renamed as Engro Corporation Limited and it demerged and transferred its fertiliser business into a separate wholly owned subsidiary, Engro Fertilisers Limited.
Currently Engro Corporation's portfolio consists of seven businesses which include chemical fertilisers, PVC resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and commodity trade. Besides providing the long-term vision for the company and overseeing performance of the subsidiaries and affiliates, Engro Corporation Limited is also responsible for allocation of capital, management of talent, leadership development, HR guiding policies, leadership role in public relations and CSR activities, control structures, legal and IT support.
From its inception as Esso Pakistan Fertiliser Limited in 1965 to Engro Corporation Limited in 2010, Engro has come a long way and will continue working towards its vision of becoming a premier Pakistani company with a global reach.
OVERVIEW OF INDIVIDUAL BUSINESSES Engro Fertilisers contributed 23.28 percent of the overall consolidated five percent growth in Engro Corporation's top line. Declining farm economics coupled with poor liquidity of the average farmer and the anticipation of price reduction badly affected demand and caused a significant shrinkage in the overall industry. The industry, and Engro Fertiliser, was further damaged by gas supply limitations (only 33 days worth of gas in the first six months of CY12), untimely rains putting a strain on the already faltering water efficiency system of Pakistan, and a 30 billion rupees' subsidy on imported fertiliser posing significant price challenges to the industry. At 55 percent capacity utilisation, urea production for Engro Fertilisers remained at its all time quarter lowest.
Engro Foods outstripped Engro Fertiliser for the first time with a 35.44 percent contribution to Engro Corp's top line. This came at the heel of a 38 percent increase in sales revenues primarily fuelled by higher dairy business volumes. The dairy and juice segments grew by 40 percent over the corresponding nine-month period of 2011. Tarang maintained its leadership as the largest volumetric contributor to the sales of Engro Corp. The ice-cream segment was the only one to post a decline - measuring in at one percent from the corresponding previous period - and reported net losses as a result of continued investments in product development and cold chain infrastructures coupled with extraneous external factors.
Engro Polymer contributed 18.75 percent to Engro Corp's top line. International PVC prices gained upward momentum during the nine months of CY12 on the back of higher demand in the region, coupled with cost-push inflation from increasing feedstock prices precipitating from geo-political unrest in the Middle East. Improved operating levels following the planned annual turnaround also contributed to the growth.
Engro PowerGen grew to a healthy 10.31 percent contribution to the group's overall sales. The company dispatched 1,316 GwH to the national grid with a stellar load factor of 93.5 percent - impressive compared to the industrial average which was constrained by the issues of circular debt and rising fuel prices. The plant also demonstrated a billable availability of 100.3 percent during the first nine months of CY12. Overdue receivables continued to weigh down on the balance sheet amounting to Rs 4,374 million from Pepco, while total receivables were Rs 6,355 million. Engro Eximp and Engro Vopak both posted healthy bottom line returns with a group top line contribution of 11.16 percent and 2.1 percent respectively.
PERFORMANCE SNAPSHOT 9MFY12
For the period under review, the shareholder-based DuPont Analysis showed a disappointing downward trend in return on equity (ROE) from 4.34 percent in 9MFY11 to 3.75 percent in 9MFY12 despite an increasing financial leverage position (a ratio of total assets to total equity) from 1.27 to 1.29. The reduction was attributable to a downward trend in the holding company's return on total assets (ROA) from 3.4 percent to 2.9 percent. The 50 basis points down-shot came at the heels of a decreasing net profit margin from 130.57 percent to 72.11 percent - a decrease that is largely explained by a 47.44 increase in finance costs (which also contributes to an augmented risk profile in which the interest cover ratio of the company fell from 3.4 times in 9MFY11 to 2.42 times in 9MFY12) on the company's income statement, coupled with a 10.31 percent increase in operating expenses which reduced operating margins from 203.83 percent to 134.89 percent. The counter-intuitive operating margin of over 100 percent is explained by the fact that the "Other Income" (largely a reflection of the investments of surplus capital in Engro Corp) weighed in at 73.2 percent of gross income (from dividends from subsidiaries and royalty incomes) in 9MFY11 and 34.47 percent in 9MFY12. In both years, consequently, operating profits were actually greater than the gross income of the company.
The other key indicator of health and contribution to absolute shareholder value is the bottom line. A reduction of 12.61 percent in the bottom line was further troubling from a shareholder's perspective.
In terms of liquidity, short-term borrowings to fund working capital requirements were a high 21.18 percent of total assets, thus explaining the increasing finance cost referred to earlier in this report. The reason that short-term borrowings had to be expanded by 14 percent over the corresponding period under study from last year is the worrisome liquidity position of the company, which troubled managers. The current ratio fell from an abysmal 0.38 to 0.36, while the acid test ratio fell from 0.35 to 0.06. All of these factors put a question mark on Engro Corp's ability to meet short-term obligations as they fall due. At the same time, net operating cash flows remained negative and decreased by 55 percent compared to 9MFY11's negative Rs 252,923,000. Net operating cash flows to current liabilities therefore fell to -0.05 times from -0.04 and the ratio of net operating cash flows to net income fell to -0.39 times from -0.22 times in 9MFY11.
Price performance of Engro Corporations share on the Karachi Stock Exchange was also disappointing. Prices fell from Rs 143.49 at the close of 9MFY11 period to Rs 106.77 at the close of 9MFY12. The price-to-book ratio fell from Rs 27.93 to Rs 20.64 thus showing a reduced market-value addition by the company; and despite the nearly 13 percent reduction in EPS, the price-to-earnings ratio fell from Rs 64.59 to Rs 55.04.
FUTURE OUTLOOK The two largest subsidiaries (in terms of top line contributions to the group) are Engro Fertilisers and Engro Foods. Engro Foods promises to continue steady growth as the new products gain traction and old investments come to fruition in subsequent periods.
With regards to Engro Fertilisers, several positive indicators are present in terms of the future outlook. Urea sales are expected to pick up in CY2013. The company has been working on securing off-network sources of gas and the Government has agreed in-principle to provide network based plants from dedicated fields. Specific gas allocation proposals for short- and long-term solutions in this regard are under consideration by various government bodies. With continuing strong operational performances in the other subsidiaries, Engro Corporation seems well positioned for the coming periods.
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Engro Corporation Limited
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9MFY12 9MFY11
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PROFITABILITY
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Gross profit margin % 119.89% 139.03%
Operating profit Margin % 134.89% 203.08%
Net profit margin % 72.11% 130.57%
ROCE % 3.74% 4.33%
ROA % 2.90% 3.40%
ROE % 3.75% 4.34%
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LIQUIDITY
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Net Working capital Rs In 000s -4,935,341 -4,406,825
Current ratio times 0.36 0.38
Acid Test Ratio times 0.06 0.35
Days in Receivables days 25.94 29.54
Days in Payables days 309.07
Days in Inventory days 180.82 337.70
Cash Conversion Cycle days -102.31 367.24
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ACTIVITY
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Total asset turnover times 0.04 0.03
Fixed asset turnover times 0.04 0.03
Working capital turnover times -0.28 -0.20
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LEVERAGE
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Financial Leverage times 1.29 1.27
Interest Cover Ratio times 2.42 3.40
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MARKET/INVESTMENT
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Price-to-Earnings Ratio Rs 55.04 64.59
Price-to-Book Ratio Rs 20.64 27.93
Dividend Yield % N/A N/A
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CASH FLOW RATIOS
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Cash to Current Liabilities times -0.05 -0.04
Cash Flow to Sales Ratio % -28.44% -29.02%
Cash Flow to Net Income Ratio times -0.39 -0.22
Cash Flow Interest Cover Ratio times -0.47 -0.43
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