Introduction to Business FinanceCase Study: Engro Fertilizers Submitted to: Sir Kamran A. Rabbani Group Members: Muhammad Yousuf 9821 Zariyan Hassan 10285 Jazib Ali 11900 Mohsin Ali 12071 Usman Maniar 12078 Chairman's Message Engro has come through a very challenging year in which it was tested to the full. It is under such trying circumstances that the true worth of a company and its adherence to its values can be evidenced. During the year whilst we were subjected to severe external pressures we performed in complete consonance with our core values of ethics & integrity, safety, innovation and risk taking. Resultantly, we were able to deal successfully with all challenges through this prism without any compromise. With the President's desire to take early retirement, the Company determined a broad change in the senior leadership which was a test of our succession planning. This event again proved that Engro's genetic makeup constitutes both, robust management systems, and a professional workforce that is unparalleled in its depth and breadth. Our people remain our core strength. In the years ahead, we will further invest in our employees to improve their skills and capabilities by growing the enabling work environment to facilitate their development and contribution. Our definition of sustainability starts with our vision which is to make a positive difference in people's lives, and includes accountability for the results we achieve with the communities we engage with. Through Engro Foundation, and by collaboration with other organizations, we provide services in the areas of education, health, livelihood, infrastructure development, and emergency relief. While pursuing profitable activities, we continue to identify and implement sustainable ways for growing our businesses. Our strategy revolves around achieving greater eco-efficiency through efficient use of natural resources; stewarding product safety; increasing commitment to climate change with a focus on an environmental management system that continues to lower costs and increase efficiencies. We intend to continue our efforts to operate safely, keeping in consideration the long-term economic, social and environmental effects of our operations. The company markets primary and secondary fertilizers like Engro Urea. have given the new plant a clean bill of health. On June 24. not only by providing farmers with quality fertilizers. Our demonstrated transparency in all our corporate engagements form the signature of our company performance. Engro Fertilizers has successfully developed a loyal customer base all across Pakistan. Engro Fertilizers Limited announced the start of commercial operations at its new fertilizer facility in Daharki today. with a total capacity of 1. Plant evaluations carried out by licensors. including our shareholders. investors and suppliers. Engro DAP.3 million tons per annum.1 billion. In 2010. the company achieved mechanical completion and started trial production of its urea expansion project at Daharki which is the world’s largest single train urea-ammonia plant. the company sells phosphate fertilizers for balanced fertility and improved farm yields. Company Profile Engro Fertilizers Limited. It is the largest private sector industrial investment in Pakistan Operations: Engro Fertilizers. . 2011. but also through extensive market development activities.Most importantly. Engro’s share of Pakistan’s phosphates market mirrors or exceeds its urea market share. A premier brand and nationwide presence of the company ensures sellout production. is fertilizer manufacturing plant. is the world’s largest single train urea production plant in the world. a wholly owned Engro subsidiary. Engro Zarkhez and Zingro. Engro Zorawar. as well as a lender appointed independent engineers. This report is a manifestation of our uncompromising commitment to excellence. Engro’s new plant. is a premier fertilizer manufacturing and marketing company with products that focus on balanced crop nutrition and increased yield. set up at a cost of USD 1. employees. we remain unflinchingly committed to all our stakeholders. We will continue to implement action consistent with our corporate motto "Enabling Excellence" in everything that we think and do. a subsidiary of Engro Corp. Additionally. power generation and commodity trade. PRODUCTS Engro DAP Engro Urea Engro Zarkhez Zingro Zorawar Engro Envy . industrial automation. nationwide production and marketing infrastructure and produces leading fertilizer brands optimized for local cultivation needs and demand. Currently Engro Corporation’s portfolio consists of seven businesses which include chemical fertilizers. PVC resin. foods. BOILER PLATE About Engro Corporation Limited: Engro Corporation Limited is one of Pakistan’s largest conglomerates with businesses ranging from fertilizers to power generation. About Engro Fertilizers Limited: Engro Fertilizers Limited is a wholly owned subsidiary of Engro Corporation and a renowned name in Pakistan’s fertilizer industry. a bulk liquid chemical terminal. Engro holds a vast.Engro’s new fertilizer facility is Pakistan’s most energy efficient and state of the art ammonia / urea complex and incorporates highly advanced technology and unique features that provide added benefits such as optimized urea production and the utilization of waste gases for energy production. which are marketed extensively across Pakistan as phospatic fertilizers. Engro is also a leading importer and seller of Phosphate products. Engro Fertilizers' Investors Free Float: . Key Figures: Engro at a Glance (Contribution of Engro Fertilizers) . Market Share FFC ENGROFert NFML Dawood Dawood Hercules 6% and 20% is imported and distributed across NFML. phosphate and micronutrient business” The demand of fertilizer was extremely badly altered due to dirt erosion and defeat of earth. alongside the four main contestants in the market . But the Engro urea doesn’t order the alike marketplace premium as competitors Fuji fertilizers product sona” Sona urea is vended in the Punjab area. whereas engro has strong niche in sindh. The finished sales of the Engro Fertilizers in the . FFC. RG 1% and concerning 22% is imported.4% contrasted to average industry drop of 10% in the alike period. The demand of the urea in Pakistan stood 4.7MT compared to 1.2MT compared to 4. seed business.2MT signifying a cut of 40% contrasted to the alike era last year. And pondering the phosphorus marketplace. FFC and FFBL seized elevated allocate of 47%. The sales of Zarkhez have cut to 66kt from 73kt signifying a decrease of 10% and the sale of phosphate cut from 235kt to 196kt displaying a cut of 16. Engro 15%. as the demand of DAP stood 0. Engro 28%. Considering the presentation of Engro Fertilizer. that is because of present deluge in Pakistan. NPK Fertilizer company. FFBL and Dawood Hercules. the sales of the Engro urea stayed 665kt compared to 688kt last year displaying a cut of 3. Agri tech 2%.FFC 48%.. The in-house diversification includes. Thinking the urea marketplace.6MT last year displaying a cut of 10%.e.Sales and Market Perspective The fertilizer industry in Pakistan is of an oligopolistic nature.5%. FFC and FFBL have the highest allocate of urea creation i.Engro. employees are 1664.100.so total lives touched engro is 3.500 . customers are 68000.353 a year ago. vendors are 3.000. generally due to the plummet in production. recording in at 270. ECPL is considered as a expert firm possessing one of the best association teams in the country employing the highest standards of company governance and company strategy In addition to meeting sales targets. shareholders are 11365. Engro operates in exceedingly safeguard marketplaces alongside stable Demand being the forte of their company models. it was no match to the defeats borne by the firm across the year. commercial prices corrode the earnings Substantially and cut worth supplement for the stake holder. ECPL's marketing strategy has focused on farmers' education on the effective use of fertilizers Over the years.5% to Rs30.275.300. Though.000 tons. the last quarter saw substantial enhancement in creation. students are 4. dairy farmers are 51. According to BMA Capital. Engro has commitment to sustainable development. Some of the key factors that made EngroFertilizer stand out from its competitors are as follows Engro has always emphasized quality assurance in its product and its operations. the company’s urea creation dropped 22% to 977.000 tons in 2012. patient are 32. The Decline Engro Fertilizers’ net sales shrunk 2. These are stakeholders of engro. ECPL's advertising campaigns have introduced mass education to aid farmers in choosing the most favorable package for their crops. . The sales and Promotion efforts have provided valuable merchandising assistance to ECPL dealers.626 billion across the year contrasted to Rs31.500. up 45% quarter-on-quarter. consumers are 3.334. displaying a cut of 38%.present 9-month era were concerning 12 billion contrasted to 20 billion of the alike era last year. The company's approach to corporate and social responsibility (CSR) is built on respect for the environment and maintaining strong relationship with all key stakeholders.000. External forces such as gas shortage leading to production losses and floods in areas of Sindh and Punjab led to loss of demand. it is no small matter that the following three factors played a key role in the decline of sales revenues and overall destruction of these relationships. 1.Sales Revenue/year As can be understood a major proportion of Engro Fertilizers sales were of the business to business type and even in consumer-based model it had strong sense of building relationships that involved mutual trust and benefit. helped by bumper industry sales across the Rabi period. conflicts were made at the upper management level between CEOs of the umbrella corporations of Engro Corp. producing 76% to 345. Internal management conflicts leading to loss of control and inefficiencies. Government fine for levying of urea selling prices up to 86% in most cases all the while availing subsidies.000 tons. 3. urea sales additionally enhanced across the quarter. 2.Separately from enhanced creation. 6 5 4 FFC 3 EngroFert NFML 2 1 0 2009 2010 2011 2012 . . even board members were involved. 054 billion (Rs 200 Crore) translated into loss of Rs 649 million (Rs 65 Crore) losses in the first quarter of 2012. Initially when the gas agreement was signed so Engro Fertilizers invested around 1. “When the agreement was signed with the government in 2006. showing a grim financial situation for the business conglomerate to maintain itself in the green zone going foward. Hence the largest conglomerate of Pakistan faced a loss after its largest subsidiary found it hard to function because of gas shortage.8 billion in the same .9 billion for the first quarter 2012.Unfortunatley in 2011 this plant received gas for only 189 days and in 2012 this plant received gas for only a month and a half while on the contract it was written nonstop suppy of gas. The methane gas is the basic ingredient to produce ammonia and this is then mixed with carbon dioxide in order to make urea. This plant has a production capacity of 1.The revenue of the company stood at Rs. “This is the first time in 50 years that government has turned back on its commitment with us. Impact on Profitability and liquidity of Engro Fertilizers After receiving gas supply of only 45 days Engro’s New Fertilizer plant closed its operation and was shut down.But sadly this contract was not followed properly.3 million tons per annum. 2. as compared to Rs 21.This plant is unable to handle an abrupt reduction of gas supply. we could not imagine that the supply of our basic raw material will be stopped. The Engro company huge quarterly profit of Rs.Main cause behind the financial crises The main problem that leads to the financial crises in Engro Fertilizers was the shortage of gas supply. If there is no gas supply so no fertilizers can be produced and sold.It is designed to run continuously for three years. Vice President Marketing at Engro.If this plant doesn’t receives nonstop supply of gas so 50 of its productivity decreases.” Engro Fertilizers had an agreement with the government that it will receive 100 cubic feet per day (MMCFD) of gas suppy.” said Khalid Mir. textile factories and households.1 $ billion in order to build the world’s largest Urea plant in Pakistan and the World Bank was the debt and equity investor of this project. 22. An energy crisis in the nation has forced the government to decrease the supply of gas supply to all the fertilizer plants so that it can be redirected to power plants. Engro fertilizers sales decreased from 2. This issue together with the increasing financial charges caused the company a huge loss for the second consecutive quarter of 2012. In this Urea sales have registered a decline of 12% to reach 5. The company’s urea production fell 22% to 977000 tons in 2012. which is Rs197 per million British thermal unit (mmbtu)and Rs50 per mbtu on feed and fuel gas on the fertilizer sector. which is the steepest annual decline in recent history.5 % to Rs 30.935 billion in 2012 as compared to a profit of Rs 4. .2 million tons in the calendar year 2012. Engro Fertilizers which was the highest profit making unit for several years faced a loss of Rs 2.The net profit after tax was Rs 1333million as compared to a net profit after tax of Rs 8. 2012 as opposed to the EPS of Rs.Excessive gas curtailment besides gas infrastructure development cess (GIDC) also forced Engro Fertilizers’ margins to shrink to 32% for the year. the fertilizer producer paid the tax for the full year. Though. All this decline in sales revenue is attributed to loss in production due to gas reduction.353 billion a year ago. Though the GIDC has been declared illegal recently.77 billion. The company managed to make a gross profit of Rs9.9 billion.262 billion in 2012 as compared to Rs 31. where the cost of sales incurred were Rs20. clocking in at 270.06 million and this shows a decrease of 83 % in overall profitability. 2. squeezing from 53% in 2011.period last year.000 tons.59 billion in 2011.77 in 2011. 15.61 for the year ended December 31. The company announced an EPS of Rs. it was no match to the losses borne by the company throughout the year. the last quarter saw considerable improvement in production. The overall consolidated revenue of the Engro Company was Rs 125 billion s compared to Rs 115 billion in 2011.These figures shows the damage done by the Engro Fertilizers unit. up 45% quarter-on-quarter. Engro Fertilizers registered a decline of its market share to 8% as opposed to 20% in the same period last year due to lower sales volumes and high depreciation & financial costs. Engro Corp has been rescheduling its loan that it has taken from various financial institutions such as commercial and . Fertilizer business contributed 66% to the financial charges but only 24% to revenue.In the year 2012 the company’s short term borrowings increased by more than Rs 5. has to make principal repayments of Rs10 billion and interest payments of Rs8 billion in 2012”.The finance cost of the company increased by 95 % to Rs8. Engro Corporation’s Chief Financial Officer (CFO) Naz Khan said” part of Pakistan’s largest private-sector conglomerate Engro Corporation.“The massive finance cost was the only reason which has pushed the company into loss”.The reduction in gas supply has indeed significantly the cash flows and liquidity of Engro Fertilizers. said Summit Capital analyst Muhammad Sarfraz Abbasi.6 billion as compared with the insignificant Rs4 million in 2011.6 billion due to the fertilizers new urea plant. financial charges would not ease off in near to medium term. If Engro is unable to reschedule its payments and loans other liabilities that defaults are bound to occur and company’s share price and reputation will decrease further more. “International lenders who have invested in the project wonít take risk with other investments in the country. Thus. We have to pay off billions of rupees of loans and that’s the only way to keep the revenue stream running. The fine was imposed by a two-member bench after almost a year and a half’s efforts in completing the investigation process. Recall that Engro Fertilizer has sought debt re-profiling and hasn’t been making principal retirements on local bank loans since June12. Financial charges in fiscal year 2012 have been solely responsible for pushing the company into red bottom-line. This fine further reduced the profitability and had an adverse impact on the liquidity of Engro Fertilizers.” In the last two years. fertilizer price has increased to Rs1. as the firing up and shutting down the plant takes considerable time. Mr.state banks and private individuals because the company is going through a liquidity crisis in the absence of cash flows from its fertilizer business. The government subsidises gas which is used in making fertilizer. adding that Enven received gas for only five and a half months last year.14 billion fine was imposed on Engro Fertilizers.5 billion in the last 18 months since Enven became operational.700 per bag from just Rs800. . Khan said” We’re running short of cash because the original debt repayment schedule was based on regular gas supplies of 100mmbtu from the SNGPL. Engro has been increasing the price of fertilizer to make up for the production loss at its new plant.” ` Furthermore the government has imposed a maximum penalty of 10 percent of the sales revenue of the company for increasing the prices of urea from 2010. Mir said. of which production could take place for 33 days only.” she said. CFO.A total of Rs 3. It has received gas for 44 days in 2012. “We can’t help it. Engro officials said that the corporation’s other projects also face problems because of the government’s failure to meet its commitments.Engro Fertilizers has made principal repayments and interest payments amounting to Rs26. Admin Expenses.62 Billion Rupee Sales in 2012. Engro Fertilizers registered a decline of its market share to 8% as opposed to 20% in the same period last year due to lower sales volumes and high depreciation & financial costs.000 tons on a yearly basis due to gas supply issues.76 Billion Rupees which is around 67.9 Billion Rupees. which is approximately only 9% of annual operational capacity. The company’s urea sales fell 30% to 397. Availability of subsidized imported urea is another key reason. This limited operation of the Enven plant has severely put burden on the company’s cash flows.8% of the total. Selling and distributing. in Daharki with the huge investment of $1. leaving Gross Profit of 9.93 Billion Rupees after other income and tax benefit for the year ended 2012.20 Billion Rupees leaving a net loss of 2. Although the government is bound to provide Enven with 100 million cubic feet per day (mmcfd) of gas through Sui Northern Gas Pipelines Limited (SNGPL). Subsidized imported urea and gas shortage has dented sales of urea – the most widely used fertilizer – by approximately 68 per cent. Sui Northern Gas Pipelines-based fertilizer plants. it has been diverting gas supplies to other sectors of the industry. said BMA Capital analyst Farid Aliani. both Engro and Dawood Hercules Fertilizers received gas for only 33 days of operations in the first six months of 2012. the company’s revenue rose by 5% to Rs12.Expenses at Engro Fertilizers: Out of the 30. COGS have been 20.8 billion. which has led to recurring gas suspension for the fertilizer plant. the world’s largest single train ammonia-urea plant. other operating expenses and Financial Costs have been around 14. A major reason for this loss is the reduced sales as compared to previous year due to shortage of Gas supply to Engro’s Enven plant.1 billion (Pakistan Rs 99 Billion). due to higher prices. said an official of the company. Steps Taken to Combat Crisis: Engro Fertilizers set up its new fertilizer plant in 2011. However. . raising concerns about company’s future. enhancement of margins and significant increase in the operational cash flows. The Company. Since the ECC has allocated gas therefore the Company has initiated . as stated below comes on stream.5 years of grace period in the existing repayment schedule. Such conversion has been approved by Ministry of Petroleum and Natural Resources (MPNR) on Jan 2.The vision was strong to be self-sufficient in Urea production at national level primarily and expanded corporation size in exploiting its expertise of the production of most essential ingredient in profitable sector of agriculture. has filed an application in respect of Contempt of Court under article 199 & 204 of the Constitution of Pakistan. In 2nd Quarter of 2012. The worsening gas supply to Enven plant has placed the company under severe financial pressure. The application is pending for hearing and no orders have yet been passed in this regard. 2011 in which the High Court of Sindh has ordered the SNGPL should supply 100 MMCFD of gas per day to the company’s Enven Plant). in the aforementioned application has submitted that the SNGPL and MPNR has failed to restore supply of gas to the company’s plant despite the order by High Court of Sindh. Based on discussion with MPNR the company is confident that this approval would be extended till has from the alternative/ new gas reserves. the company approached majority of the lenders for re-profiling of various finance facilities by allowing 2 to 2. 2013 for a further period of 8 weeks. However. considering the liquidity situation. which have already borne results: Enven plant was successfully converted to run on Mari gas resulting in incremental 10% to 15% production. A show cause notice has also been issued to SNGPL and MPNR. Lenders agreed to re -profile finance facilities after formal gas allocation by ECC and in the interim deferred one installment. management cognizant of deteriorating cash flow and financial situation took numbers of steps to augment the situation as summarized below. The Company. The conversion helped the company coming into profits in 4 th Quarter of 2012. upon continual curtailment of gas supply after the decision of High Court of Sindh (dated Oct 18. Ths process to formalize the gas allocation and finalization of Gas Supply Agreements has been initiated and the inflow of gas is expected to start around first/second quarter of 2014. Engro Corporation is going to list its fertilizer business on the stock market by the end of 2013 which. the MPNR has issued a formal notification that the Economic Co-ordination Committee (ECC) of the cabinet has allocated 202 mmcfd gas from new discoveries to a consortium of four fertilizer plants.” said a research note issued by Foundation Securities on Thursday. Listing Engro Fertilizers at Stock market would provide cash aid of 6-12 Billion Rupees. according to analysts. This conversion has been approved till Dec 31. Effectiveness of Steps taken: Subsequent to the year end.” . The management expects to finalize it by 1st half of 2013. From a loss-after-tax of Rs1. This includes allocation of 79 mmcfd gas to Enven Plant. enhancement of margins and significant increase in the cash flows. 2013 and the management is confident that this approval would be extended till the gas from alternative/new gas reserves comes on stream.4 billion in the first quarter of 2012. Enven plant ran successfully on Mari gas resulting in incremental 10% to 15% production. which received major gas supply from Mari (93 mmscfd) and small quantity from SNGPL (around 12-13 mmscfd).discussion on re-profiling with lenders subsequent to the year end. mainly due to efficient operations of its Enven plant. this would provide a big cash relief of Rs6-12 billion. Engro Fertilizers posted a profit-after-tax of Rs 646 million in the corresponding period in the current year. “The strong 1QCY13 result was on the back of higher production and a three-fold rise in urea off-take. “Assuming Engro Corporation divests a 10%-20% stake of its holding (in Engro Fertilizers). will provide the largest private-sector conglomerate of the country with a substantial cash cushion. this would provide a big cash relief of Rs6-12 billion.6% to 129. The company’s urea sale fell 30%. So it is better for the whole economy and for the company if the government allows gas supply to the most efficient plat of the country so that production can increase and every one can enjoy benefits. “Assuming Engro Corporation divests a 10%-20% stake of its holding (in Engro Fertilizers). For example the Guddu power plant with product efficiency of 22 percent is allowed to operate while the most efficient plant which is Engro Fertilizers new plant of the country with a product efficiency of 47 % is closed. Listing of the Engro ferts will provide further cash cushions to the company. And soon it will come down to Rs 49 billion in the end of current year. Whereas net debt to equity ratio is also expected to come down from 162. Rs 67 billion debt was recorded in 2012.the most commonly used fertilizer. it has been diverting gas supplies to other sectors of the industry. And other inefficient plants are operating. This contract has already been made and will be operational in . The gas problem affected the sales of Engro fertilizers as it affected the sale of urea. Conclusion on Engro Fertilizers: It is reported that the debts on Engro ferts will come down in the ending period of 2013.5%. Micro Level: Specific to Engro Fertilizer: A new and authentic long term contract with the government has to be made so that there is no gas shortage to the company.according to a research note prepared by Elixir Securities. Although the government is bound to provide Enven with 100 million cubic feet per day (mmcfd) of gas through Sui Northern Gas Pipelines Limited (SNGPL). a brokerage house based in Karachi. which has led to recurring gas suspension for the fertilizer plant. Group Recommendations: On Macro Level: The most efficient Urea plant of the company is closed due to gas shortage. “Clarity on gas supply … and Engro Corporation’s plans to list its fertilizer arm by year-end may serve to unlock the valuation and provide big cash relief. The company should start looking alternative supply of gases. Increasing the prices of Engro Fertilizers products such as Urea has proved to be really beneficial overall and if cost of production increases so company has to increase its price with it. .2014. For example there are plans to set up factories in South Africa which has abundant supply of gas.If government honors this contract so Engro Fertilizers profits will increase substantially and its share price will increase. Appendix .