Engro Chemical Pakistan Limited COMPANY PROFILE Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan. The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited until 1991, when Exxon decided to divest their fertilizer business on a global basis and sold off its equity of 75% shares in company. The Employees of Engro, in partnership with leading international and local financial institutions bought out Exxon’s equity and the company was renamed as Engro Chemical Pakistan Limited.
Engro is a public limited company listed on the Stock Exchanges of Karachi, Lahore and Islamabad. Engro accomplished significant progress not only in its base urea fertilizer business but also in diversification projects. Urea production was increased from an annual capacity of 270,000 tons in 1991 to 850,000 tons in 2001. Further expansion plans are being developed to increase plant capacity to 1. 2 million tons in stages. In addition, Engro has over thirty years of experience of fertilizer marketing in Pakistan with an elaborate dealer network.
As part of growth and diversification plans, Engro have established a $60 million 50:50 Joint Venture company named “Engro Vopak Terminal Limited” in 1995, between Engro and Royal Vopak (formerly Royal Pakhoed), a Netherlands based company and one of the foremost terminal operators in the world. This joint venture company has built a modern Jetty & Terminal at Port Qasim, Karachi for handling and storage of bulk liquid chemicals, which was completed in 1997. This is a key infrastructure for the development of capital intensive chemical industry in the heavy industrial zone of Port Qasim, Karachi.
Engro has also formed another Joint Venture company with Mitsubishi and Asahi Glass of Japan named “Engro Asahi Polymer & Chemicals Ltd. ” to develop a Polyvinyl Chloride (PVC) resin project at Port Qasim, Karachi, with an initial capacity of 100,000 tons per year based on imported Vinyl Chloride Monomer. The project has been successfully completed and commenced production in November 1999. The plant production is being marketed both in domestic and export market under the brand name SABZ. Engro has 50% equity in this $74 million venture. Construction of Engro’s 100,000 tons per annum capacity NPK fertilizers lant at Port Qasim at a cost of US $10 million was completed in 2001. The plant is in production and considerably benefiting the country’s agriculture by providing balance nutrition to improve farm yields. During the year 2004 the product’s generic name of NPK was replaced by Zarkhez. In April 2003 Engro acquired 51% interest in the Automation & Control Division of Innovative (Private) Limited, a Lahore (Pakistan) based company that provides process control industrial solutions in the knowledge based services sector. The joint venture has been named as “Innovative Automation & Engineering (Private) Limited (IAEL)”.
The acquisition was part of Engro’s diversification strategy. Seeds business completed four years of operations and during this period, the Company has made significant progress in developing its own hybrid seeds of maize and sunflower crops and launched two new maize hybrids of imported origin. All seed products are being marketed under the brand name of Bemisal. Engro is an agri based company. Engro’s core business is manufacturing and marketing of chemical fertilizers. Engro is Pakistan’s one of the largest producers of urea fertilizer which is manufactured at Daharki and marketed under brand name Engro.
Engro also produce crop specific NPK fertilizers at our plant at Port Qasim Karachi and these are marketed under the brand name of Zarkhez. Engro also markets imported MAP fertilizer under the brand name of Zorawar and imported DAP fertilizer. Recognizing the importance of seeds as an essential agricultural input, Engro has also launched seed business and is marketing imported hybrid and open pollinated seeds of maize and sunflower crop under the brand name of Bemisal. Current Performance In fertilizer industry urea sales rose up from 5% to 4. 7 million tons and phosphates sales rose up from 11% to 1. million tons. Average retail price of urea is at Rs 447 per 50/kg bag was over 50% below international price. Engro urea production at 870,000 tons was new record for a turnaround year. Engro has achieved urea sales of 928,000 tons of which Engro urea was 871,000 tons. NPK was re-launched and branded as Zarkhez by Engro. It was profitable year for purchased phosphates fertilizers. Engro has attained record profit after tax of Rs 1. 6 billion. Engro has record profits at joint ventures – Engro Vopak Rs 384 million; Engro Asahi Rs 365 million and IAEL Rs. 24 million. Engro has paid cash dividend of Rs. . 50 per share. Future Plans (Engro Foods) Engro has announced plans to set up a milk processing facility to produce and market branded UHT milk, cream and other milk products. The plant to be located in Sukkur is expected to cost Rs 1 billion and will be completed by March end 2006. All major equipment is on order and civil construction is expected to commence soon. Engro plans to procure raw milk supplies from Sindh and lower Punjab. Vision 2010 To be the premier Pakistani enterprise with a global reach, passionately pursuing value creation for all stake holders Mission
To help farmers maximize their farm produce by providing quality plant nutrients and technical services upon which they can depend. To create wealth by building new businesses based on company and country strengths in Petrochemicals, Information Technology, Infrastructure and other Agricultural sectors. In pursuing the mission we shall at all times be guided in our conduct and decision making by our Core Values. Engro Chemical Pakistan Ltd Balance Sheet As At December 31, 2004 (AMOUNTS IN THOUSAND) 20042003 (Rupees) SHARE CAPITAL AND RESERVES Share Capital Authorized 200,000,000 Ordinary shares of Rs. 0 each2,000,0002,000,000 Issued, subscribed and paid-up1,529,4001,529,400 Reserves – revenue4,429,2404,129,240 Unappropriated profit627,244540,189 5,056,4844,669,429 6,585,8846,198,829 NON CURRENT LIABILITIES Redeemable capital2,575,0002,661,500 Long term loan-574,000 Liability against asset subject to finance lease4,515- Deferred taxation966,295848,722 Retirement and other service benefits68,514187,889 3,614,3244,272,111 CURRENT LIABILITIES Current portion of: – redeemable capital 1,086,500587,500 – long term loans 594,500- – liability against asset subject to finance lease2,085- – Other service benefits22,47123,421
Short term borrowings-322,635 Trade and other payables1,236,7901,247,570 Taxation-158,931 Dividends42,80354,000 2,985,1492,394,057 CONTINGENCIES AND COMMITMENTS 13,185,35712,864,997 (AMOUNTS IN THOUSAND) 2004 2003 (Rupees) FIXED ASSETS Property, plant and equipment 7,096,330 7,158,655 Intangible assets 9,938 16,926 7,106,268 7,175,581 LONG TERM INVESTMENTS 1,424,557 1,424,557 LONG TERM LOANS AND ADVANCES 51,928 75,223
CURRENTASSETS Stores, spares and loose tools 587,288 566,922 Stock-in-trade 484,748 385,582 Trade debts 522,608 640,243 Loans, advances, deposits and prepayments 477,636 124,768 Other receivables 64,662 55,031 Taxation 160,291 – Short term investments 864,223 766,022 Cash and bank balances 1,441,148 1,651,068 4,602,604 4,189,636 3,185,357 12,864,997 Engro Chemical Pakistan Ltd Income Statement For The Year Ended December 31, 2004 (AMOUNTS IN THOUSAND EXCEPT FOR EARNINGS PER SHARE) 20042003 (Rupees) Net sales12,797,66211,884,302 Cost of sales(9,528,215)(8,309,937) GROSS PROFIT3,269,4473,574,365 Selling and distribution expenses(1,036,509)(1,040,027) 2,232,9382,534,338 Other income558,154392,093 Other operating charges(190,328)(231,370) Financial charges(285,711)(371,810) (476,039)(603,180) PROFIT BEFORE TAXATION2,315,0532,323,251 Taxation(704,478)(766,468) PROFIT AFTER TAXATION1,610,5751,556,783
Earnings per share – Basic and dilutedRs. 10. 53Rs. 10. 18 Purpose of Financial Analysis The purpose of financial statement analysis is to make a quick assessment about a firm’s financial situation . It is also used to identify the major strengths and weaknesses of a business enterprise. Tools of Financial Statement Analysis (1) Financial Ratio Analysis (2) Common Size Income Statements Financial Ratios Financial ratios are a ratio of 2 numbers, at least one of which comes from the firm’s financial statements. A financial ratio has very little meaning unless it is compared to some other ratio.
Two types of comparisons are cross-sectional analysis and time-series analysis. Cross-Sectional AnalysisCompare ratio for firm A at time t to industry average Time-Series Analysis Compare ratio for firm A at time t to ratio for firm A at time t-1, etc. Financial ratio analysis is a fascinating topic because it can tell us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy!
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if a business is doing better or worse than other businesses doing and selling the same things. What do we want ratio analysis to tell us? We have to start working on ratio analysis with the following question in our heads: What are we trying to find out? We can use ratio analysis to try to tell us whether the business •is profitable •has enough money to pay its bills •could be paying its employees higher wages •is paying its share of tax is using its assets efficiently •has a gearing problem •is a candidate for being bought by another company or investor and more, once we have decided what we want to know then we can decide which ratios we need to use to answer the question or solve the problem facing us. Users of Analysis Information Now we know the kinds of questions we need to ask and we know the ratios available to us, we need to know who might ask all of these questions! This is an important issue because the person asking the question will normally need to know something particular.
Of course, anyone can read and ask questions about the accounts of a business; but in the same way that we can put the ratios into groups, we should put readers and users of accounts into convenient groups. The list of categories of readers and users of accounts includes the following people and groups of people: •Investors •Lenders •Managers of the organization •Employees •Suppliers and other trade creditors •Customers •Governments and their agencies •Public •Financial analysts •Environmental groups •Researchers: both academic and professional
The users of accounts that we have listed will want to know the sorts of things we can see in the table below: this is not necessarily everything they will ever need to know, but it is a starting point for us to think about the different needs and questions of different users. InvestorsTo help them determine whether they should buy shares in the business, hold on to the shares they already own or sell the shares they already own. They also want to assess the ability of the business to pay dividends. LendersTo determine whether their loans and interest will be paid when due.
ManagersMight need segmental and total information to see how they fit into the overall picture. EmployeesInformation about the stability and profitability of their employers to assess the ability of the business to provide remuneration, retirement benefits and employment opportunities. Suppliers and other trade creditorsBusinesses supplying goods and materials to other businesses will read their accounts to see that they don’t have problems: after all, any supplier wants to know if his customers are going to pay their bills!
CustomersThe continuance of a business, especially when they have a long term involvement with, or are dependent on, the business. Governments and their agenciesThe allocation of resources and, therefore, the activities of business. To regulate the activities of business, determine taxation policies and as the basis for national income and similar statistics Local communityFinancial statements may assist the public by providing information about the trends and recent developments in the prosperity of the business and the range of its activities as they affect their area.
Financial analystsThey need to know, for example, the accounting concepts employed for inventories, depreciation, bad debts and so on. Environmental groupsMany organizations now publish reports specifically aimed at informing us about how they are working to keep their environment clean. ResearchersResearchers’ demands cover a very wide range of lines of enquiry ranging from detailed statistical analysis of the income statement and balance sheet data extending over many years to the qualitative analysis of the wording of the statements. Which ratios will each of these groups be interested in? . Interest GroupRatios to watch
Investors Return on Capital Employed Lenders Gearing ratios / Leverage Ratio Managers Profitability ratios Employees Return on Capital Employed Suppliers and other trade creditors Liquidity Customers Profitability Governments and their agencies Profitability Local Community This could be a long and interesting list Financial analysts Possibly all ratios Environmental groups Expenditure on anti-pollution measures Researchers Depends on the nature of their study Ratio Analysis ?Liquidity Ratios ?Current Ratio = Current Assets Current Liabilities For Year 2003 Current Ratio = 4,189,636 2,394,057 =1. 75:1 For Year 2004
Current Ratio =4,602,604 2,985,149 =1. 54:1 Comments: Both Current assets and current liabilities are derived from balance sheet. ?Quick Ratio = Current Assets-Inventory Current Liabilities For Year 2003 Quick Ratio = 4,189,636-(566,922+385,582) 2,394,057 =1. 35:1 For Year 2004 Quick Ratio = 4,602,604-(587,288+484,748) 2,985,149 =1. 18:1 Comments: Inventory includes stock-in-trade and stores, spares and tools (note 18 and 17 respectively). ?Net Working Capital= Current Assets – Current Liabilities For Year 2003 Net Working Capital =4,189,636-2,394,057 =1,795,579 For Year 2004 Net Working Capital = 4,602,604 – 2,985,149 = 1,617,455 Working Capital to Sale Ratio= Networking Capital*100 Sales For Year 2003 W C to Sale Ratio = 1,795,579 / 11,884,302 = 15. 11 For Year 2004 W C to Sale Ratio= 1,617,455 /12,707,662 = 12. 73 Comments: Sales are taken as net (net sales) as only information is available. ?Cash to Current Liabilities Ratio= Cash + Cash Equivalent Current Liabilities For Year 2003 Cash to C L Ratio = 1,651,068 2,394,057 = 0. 69:1 For Year 2004 Cash to C L Ratio= 1,441,148 2,985,149 = 0. 83:1 Comments: Short term investments as cash equivalent are not included here as their maturity period is greater than 3 months. ?Cash to Current Assets Ratio = Cash + Cash Equivalent Current Assets For Year 2003 Cash to C A Ratio = 1,651,068 4,189,636 = 0. 3941:1 For Year 2004 Cash to C A Ratio= 1,441,148 4,602,604 = 0. 31:1 Comments: Short term investments as cash equivalent are not included here as their maturity period is greater than 3 months ?Activity Ratios ?Inventory turnover ratio = Cost of goods sold
Ending Stock of Inventory For Year 2003 Inventory turnover ratio = 8,309,937 / 385,582 = 21. 55 For Year 2004 Inventory turnover ratio= 9,528,215 / 484,748 = 19. 66 Comments: I have taken stock-in-trade balance as ending stock of inventory from balance sheet. ?Average age of Inventory = No. of Working days Inventory turnover For Year 2003 AAI = 360 / 21. 55 = 16. 71 For Year 2004 AAI = 360 / 19. 66 = 18. 31 Comments: Working days for Engro are 360. ?Average collection Period = Accounts Receivable Average credit Sales per day For Year 2003 Average Credit Sales per day = 11,884,302 / 360 = 33,012 ACP = 640,243 33,012 = 19. 9 Days For Year 2004 Average Credit Sales per day = 12,797,662 / 360 = 35549. 06 ACP = 522,608 35,549 = 14. 70 Days ?Accounts Receivable turnover = No. of Working days Average collection Period For Year 2003 AR Turnover= 360 / 19. 39 =18. 57 For Year 2004 AR Turnover= 360 / 14. 70 =24. 49 ?Average Payment Period = Accounts Payable Avg. Credit Purchase per day For Year 2003 Average Credit Purchase per day = (1,395,271 + 3,885,632) 360 = 14669. 17 Average Payment period = 515,887 14669. 175 = 35. 17 days Accounts Payable turn over = 360 35. 17 =10. 24 times For Year 2004 Average credit Purchase = 2,287,659 + 40,84,679) 60 = 17700. 94 Average payment period = 296915 17700. 94= 16. 77 days Accounts payable turnover = 360 16. 77 = 21. 46 times ?Operating Cycle and Cash Conversion Cycle Operating cycle = Average Age of Inventory + Average Collection period Cash Conversion Cycle = Operating Cycle – Average payment Period For Year 2003 Operating cycle = 16. 71 + 19. 39 = 36. 1 days Cash Conversion Cycle= 36. 1 – 35. 17 = 0. 93days For Year 2004 Operating Cycle = 18. 31+ 14. 70 = 33. 01 Cash Conversion Cycle = 33. 01 – 16. 77 = 16. 24 ?Fixed Asset Turnover Ratio = Sales Total Fixed Assets For Year 2003
FA Turnover = 11,884,302 / 7,175,581 = 1. 656 times For Year 2004 FA Turnover = 12,797,662 / 7,106,268 = 1. 80 times ?Total Asset Turnover Ratio = Sales Total Assets For Year 2003 Total Assets Turnover = 11,884,302 / 12,864,997 = 0. 92 For Year 2004 Total Assets Turnover = 12,797,662 / 13,185,357 = 0. 97 ?Net Worth = Total assets – Total liabilities ?Net worth turn over = Sales Net worth For Year 2003 Net Worth = 12,864,997 – (4,272,111 + 2,394,057) = 12,864,997– 6666168 = 6,198,929 Net Worth turn over = 11,884,302 / 6,198,929 = 1. 92 For Year 2004 Net Worth = 13,185,357– (3,614,324 + 2,985,149) 13,185,357- 6599473 = 6,585,884 Net Worth turn over = 12,797,662 / 6,585,884 = 1. 94 ?Debt Ratio ?Debt ratio = Total Liabilities *100 Total Assets For Year 2003 Debt Ratio = (4,272,111 + 2,394,057) *100 12,864,997 = 51. 81 % For Year 2004 Debt ratio = (3,614,324 + 2,985,149) 13,185,357 = 50. 05 % ?Debt Equity Ratio = Total Debt *100 Stock holders Equity For Year 2003 Debt Equity Ratio = (4,272,111 + 2,394,057) *100 6,198,829 = 107. 5 % For Year 2004 Debt Equity Ratio = (3,614,324 + 2,985,149) 6,585,884 = 100. 26 % ?Equity Multiplier = Total Assets Stock holders Equity For Year 2003
Equity Multiplier = 12,864,997 6,198,829 = 2. 075 For Year 2004 Equity Multiplier = 13,185,357 6,585,884 = 2. 002 ?Time earning ratio = EBIT Interest For Year 2003 Time earning ratio = 2695061 (648+312,365+15,159) = 8. 21 For Year 2004 Time earning ratio = 2600764 (30+279,853+2,745) = 9. 20 ?Profitability Ratios ?Gross profit ratio = Sales – CGS *100 Sales For Year 2003 Gross profit ratio = 3,574,365 *100 11,884,302 = 30 % For Year 2004 Gross profit ratio = 3,269,447 *100 12,797,662 = 25. 54% ?Operating Profit Ratio = Operating profit *100 Sales For Year 2003
Operating profit ratio = 2,534,338 *100 11,884,302 = 21. 32 % For Year 2004 Operating profit ratio = 2,232,938 *100 12,797,662 = 17. 45 % ?Net Profit ratio = NPAT*100 Sales For Year 2003 Net profit ratio = 1,556,783 *100 11,884,302 = 13. 10 % For Year 2004 Net profit ratio = 1,610,575, *100 12,797,662 = 12. 58 % ?Return on Assets= NPAT *100 Total Assets For Year 2003 Return on Assets = 1,556,783*100 12,864,997 = 12. 10 % For Year 2004 Return on Assets = 1,610,575*100 13,185,357 = 12. 21% ?Return on Equity = NPAT*100 S. H. E For Year 2003 Return on equity = 1,556,783*100 6,198,829 = . 2511 For Year 2004
Return on Equity = 1,610,575*100 6,585,884 = . 2445 ?Marketability Ratios ?Earning Per Share = NPAT – Dividend on P. S. Outstanding common stock For Year 2003 Earning per share = 1,556,783 152,940 = 10. 18 For Year 2004 Earning per share = 1,610,575 152,940 = 10. 53 ?Dividend per share = Dividend paid Outstanding common stock ?Dividend payout ratio = Dividend per share Earning per share For Year 2003 Dividend per share = 1,258,875 152,940 = 8. 23 Dividend payout ratio = 8. 23*100 10. 18 = 80. 85 % For Year 2004 Dividend per share = 1,234,716 152,940 = 8. 07 Dividend payout ratio = 8. 07*100 10. 3 = 76. 67 % ?Retention Ratio = (1 – Dividend payout) *100 For Year 2003 Retention Ratio = (1 – 80. 85 %) *100 = 19. 15 % For Year 2004 Retention Ratio = (1 – 76. 67 %) *100 = 23. 33 % ?Dividend Yield = Dividend per share *100 Current Market Price For Year 2003 Dividend Yield = 8. 23 *100 92. 80 = 6. 69 % For Year 2004 Dividend Yield = 8. 07 *100 129. 30 = 6. 56 % ?Breakup value per share = S. H. E Outstanding Stock For Year 2003 Breakup value per share = 6,198,829 152,940 = 40. 53 For Year 2004 Breakup value per share = 6,585,884 152,940 = 43. 06 ?Price Earning Ratio = Market Price of stock
Earning per Share For Year 2003 Price earning ratio = 92. 80 10. 18 = 9. 16 For Year 2004 Price earning ratio = 129. 30 10. 53 = 12. 27 ?Market to Book Ratio = Market price Book Value For Year 2003 Market to Book ratio = 92. 80 40. 53 = 2. 28 For Year 2004 Market to Book Ratio = 129. 30 43. 06 = 3. 002 ?Growth Ratio = Retention Rate * ROE For Year 2003 Error! No table of contents entries found. Growth Ratio = 19. 15 % *. 2511 = 4. 81 For Year 2004 Growth Ratio = 23. 33 % *. 2445 = 5. 70 All Ratios-At Glance 20032004 Change 2004-2003 Rupees in Thousands Liquidity Ratios Current Ratio1. 751. 54(0. 21) Quick Ratio1. 351. 18(0. 7) Net Working Capital (in Rs)1,795,5791,617,455(178,124) Net Working Capital to sales15. 10912. 728(2. 381) Cash to Current Liabilities0. 680. 4830. 197) Cash to Total Assets Ratio(%)0. 3940. 313(0. 081) Activity Ratio Inventory turnover ratio(times)21. 55219. 656(1. 896) Average age of Inventory (Days)16. 70418. 3151. 611 Average credit Sales per day33011. 9535549. 062537. 1 Average collection Period (Days)19. 39414. 701(4. 69) Accounts Receivable turnover(times)18. 56224. 4885. 92 Avg. Credit Purchase per day1466917700. 943032 Average Payment Period (Days)35. 1716. 7718. 4 Operating Cycle 36. 1332. 9 Cash Conversion Cycle0. 316. 2417. 16 Fixed Asset Turnover Ratio(times)1. 6561. 8010. 145 Total Asset Turnover Ratio (times)0. 9240. 9710. 047 Net worth Turnover Ratio (times)1. 921. 940. 02 Solvency Ratios Debt ratio (%)51. 81%50. 05%(2%) Debt Equity Ratio (%)107. 50%100. 21%(7%) Equity Multiplier 2. 0752. 002(0. 073) Time Interest Earning ratio(times)8. 219. 200. 99 Profitability Ratios Gross profit Ratio 30. 07%25. 54%(4. 53%) Operating Profit Ratio 21. 32%17. 45%(3. 87%) Net Profit ratio13. 10%12. 58%(0. 52%) Return on Assets12. 10%12. 21%0. 11% Return on Equity0. 2510. 245(0. 007) Marketability Ratios Earning Per Share (in Rs)10. 1810. 530. 5 Dividend per share 8. 238. 07(0. 16) Dividend payout ratio (%)80. 84%76. 64%(4. 21%) Retention Ratio 19. 16%23. 36%4. 21% Dividend Yield 8. 87%6. 24%(2. 63%) Breakup value per share (in Rs)40. 5343. 062. 53 Price Earning Ratio 9. 1612. 273. 11 Market to Book Ratio 2. 283. 0020. 722 Growth0. 0480. 0570. 009 Common base Analysis Engro Chemical Pakistan Ltd Common base Analysis (Income Statement) For The Year Ended December 31, 2004 Accounts20042003Change% change 2004-2003 Rupee in Thousands Net sales12,797,66211,884,302913,3607. 69% Cost of sales9,528,2158,309,9371,218,27814. 66% GROSS PROFIT3,269,4473574365(304,918)8. 53%
Selling and distribution expenses1,036,5091,040,027(3,518)(0. 34%) Operating Profit2,232,9382,534,338(301,400)(11. 89%) Other income558,154392,093166,06142. 35% Other operating charges190,328231,370(41,042)(17. 74%) Financial charges285,711371,810(86,099)(23. 16%) PROFIT BEFORE TAXATION2,315,0532,323,251(8,198(0. 35%) Taxation704,478766,468(61,990)(8. 09%) PROFIT AFTER TAXATION1,610,5751,556,78353,7923. 46% Earnings per share – Basic and diluted10. 5310. 180. 353. 44% Engro Chemical Pakistan Ltd Common base Analysis (Balance Sheet) For The Year Ended December 31, 2004 Accounts20042003Change% change 2004-2003 Rupee in Thousands
Fixed Assets Property and Plant Equipment7,096,3307,158,655-62,325(0. 871%) Intangible Assets9,93816,926-6,988(41. 29%) 7,106,2687,175,581-69,313(0. 966%) Long Term investment1,424,5571,424,55700% Long Term Loans and Advances51,92875,223(23,295)(30. 97%) Current Assets Stock, spares and tools587,288566,92220,3663. 59% Stock-in-trade484,748385,58299,16625. 72% Trade debt522,608640,243(7,635)(18. 37)% Loans advances deposits and Prepayments477,636124,768352,868282. 82% Other receivables64,66255,0319,63117. 50% Taxation160,291- Short term investment864,223766,02298,20112. 82% Cash and cash balances1,441,1481,651,068(209,920)(12. 1%) 4,602,6044,189,636412,9689. 86% Share Capital and Reserves Share Capital-Issued subscribed and paid1,529,4001,529,400 Reserves-Revenue4,429,2404,129,240 Unappropriate Profit627,244540,18987,05516. 12% 5,056,4844,669,429387,0558. 29% 6,585,8846,198,829387,0556. 24% Non Current Liabilities Redeemable Capital2,575,0002,661,500(86,500)(3. 25%) Long term loan-574,000 Liability against assets subject to financed lased4,515- Deferred Taxation966,295848,722117,57313. 85% Retirement and other service benefits68,514187,889(19,375)(63. 53%) 3,614,3244,272,111(657,787)(15. 40%) Current Liabilities Current Portion of:
Redeemable Capital1,086,500587,500499,00084. 94% Long term loan594,500- Liability against assets subject to financed lased2,085- Other service benefits22,47123,421(950)(4. 06%) Short term borrowing-322,635 Trade and other Payable1,236,7901,247,57010,780)(0. 86%) Taxation-158,931 Dividends42,80354,000(11,197)(20. 74%) 2,985,1492,394,057591,09224. 69% Engro Chemical Pakistan Ltd Component Analysis (Income Statement) For The Year Ended December 31, 2004 Accounts20042003% in2004 % in 2003 Rupee in Thousands Net sales12,797,66211,884,302100. 00%100. 00% Cost of sales9,528,2158,309,93774. 45%69. 92% GROSS PROFIT3,269,447357436525. 5%30. 08% Selling and distribution expenses1,036,5091,040,0278. 10%8. 75% Operating Profit2,232,9382,534,33817. 45%21. 33% 0. 00%0. 00% Other income558,154392,0934. 36%3. 30% Other operating charges190,328231,3701. 49%1. 95% Financial charges285,711371,8102. 23%3. 13% 0. 00%0. 00% PROFIT BEFORE TAXATION2,315,0532,323,25118. 09%19. 55% Taxation704,478766,4685. 50%6. 45% PROFIT AFTER TAXATION1,610,5751,556,78312. 58%13. 10% Earnings per share – Basic and diluted10. 5310. 180. 000082%0. 000086% Component Analysis Engro Chemical Pakistan Ltd Component Analysis (Balance Sheet) For The Year Ended December 31, 2004 Accounts 2004 003 2004 (%age) 2003 (%age) Rupee in Thousands Fixed Assets Property and Plant Equipment7,096,3307,158,65553. 82%55. 64% Intangible Assets9,93816,9260. 08%0. 13% Long Term investment1,424,5571,424,55710. 80%11. 07% Long Term Loans and Advances51,92875,2230. 39%0. 58% Current Assets Stock, spares and tools587,288566,9224. 45%4. 41% Stock-in-trade484,748385,5823. 68%3. 00% Trade debt522,608640,2433. 96%4. 98% Loans advances deposits and Prepayments477,636124,7683. 62%0. 97% Other receivable64,66255,0310. 49%0. 43% Taxation160,291-1. 22% Short term investment864,223766,0226. 55%5. 95% Cash and cash balances1,441,1481,651,06810. 3%12. 83% 4,602,6044,189,63634. 91%32. 57% Share Capital and Reserves Share Capital-Issued subscribed and paid1,529,4001,529,40011. 60%11. 89% Reserves-Revenue4,429,2404,129,24033. 59%32. 10% Unappropriate Profit627,244540,1894. 76%4. 20% 5,056,4844,669,42938. 35%36. 30% 6,585,8846,198,82949. 95%48. 18% Non Current Liabilities Redeemable Capital2,575,0002,661,50019. 53%20. 69% Long term loan-574,0004. 46% Liability aagainst assets subject to financed lased4,515-0. 03% Deferred Taxation966,295848,7227. 33%6. 60% Retirement and other service benefits68,514187,8890. 52%1. 46% 3,614,3244,272,11127. 41%33. 21% Current Liabilities
Current Portion of: Redeemable Capital1,086,500587,5008. 24%4. 57% Long term loan594,500-4. 51% Liability against assets subject to financed lased2,085-0. 02% Other service benefits22,47123,4210. 17%0. 18% Short term borrowing-322,6352. 51% Trade and other Payable1,236,7901,247,5709. 38%9. 70% Taxation-158,9311. 24% Dividends42,80354,0000. 32%0. 42% 2,985,1492,394,05722. 64%18. 61% Statement of Source and Uses 20042003 SourcesUses Fixed Assets Property and Plant Equipment7,096,3307,158,655-62,32562,325 Intangible Assets9,93816,926-6,9886,988 Long Term investment1,424,5571,424,5570 Long Term Loans and Advances51,92875,223-23,29523,295
Current Assets Stock, spares and tools587,288566,92220,36620,366 Stock-in-trade484,748385,58299,16699,166 Trade debt522,608640,243-117,635117,635 Loans advances deposits and Prepayments477,636124,768352,868352,868 Other receivable64,66255,0319,6319,631 Taxation160,291160,291160,291 Short term investment864,223766,02298,20198,201 Cash and cash balances1,441,1481,651,068-209,920209,920 Non Current Liabilities Redeemable Capital2,575,0002,661,500-86,50086,500 Long term loan574,000-574,000574,000 Liability against assets subject to financed lased4,5154,5154,515 Deferred Taxation966,295848,722117,573117,573
Retirement and other service benefits68,514187,889-119,375119,375 Current Liabilities Current Portion of: Redeemable Capital1,086,500587,500499,000499,000 Long term loan594,500594,500594,500 Liability against assets subject to financed lased2,0852,0852,085 Other service benefits22,47123,421-950950 Short term borrowing322,635-322,635322,635 Trade and other Payable1,236,7901,247,570-10,78010,780 Taxation158,931-158,931158,931 Dividends42,80354,000-11,19711,197 Share Capital and Reserves Share Capital-Issued subscribed and paid1,529,4001,529,4000 Reserves-Revenue4,429,2404,129,240300,000300,000
Unappropriate Profit627,244540,18987,05587,055 Balance 2,024,8912,024,891 Statement of Cash Flows Cash flow from operating activities NAPT1,610,575 Non Cash Expenses572,105 Cash flow from operations2,182,680 changes in all current assets except cash-622,888 changes in all current liabilities 591,092 -31,796 Cash used by operating activities 2,150,884 Cash flow from investment activities Changes in grass fixed assets-495,844 Cash used by investment activities-495,844 Cash flow from financing activities Dividend paid-24,159 Changes in financing activities-657,787 Cash used by financing activities-681,946
Net Increase in cash 973,094 Cash balance at beginning of year1784008 Cash and Cash Equivalents 2,757,102 Interpretations ?Ratio Analysis 1. Liquidity Ratio The current ratio is also known as the working capital ratio and is normally presented as a real ratio. Current ratio tells us that how much current assets firm has to satisfy current liabilities. It tells how assets can be converted into cash in time and with ease. For Year 2004, current ratio is decreasing which means firm has less current assets to satisfy current liabilities in comparison with previous year.
Though firm have enough current assets to satisfy the current liabilities. Current liabilities are increasing more than current assets that mean the element of risk is increasing slightly but firm is utilizing less on current asset that impact positively against its profitability. Inventory which includes Stock-in-trade and Store and Spare are not easier to convert in to cash quickly. So in Quick ratio we eliminate the element of inventory to see how much we have left to pay current liabilities. In For Year 2004 quick ratio is again decreasing but firm has enough resources to satisfy current liabilities with out using its inventories.
There is less difference between current ratio and quick ratio that tells that firm’s stocks are not very large. From these two ratios the business looks in healthy condition. Net working capital has also decreased from 1,795,579 to 1,617,455 that show that asset. Cash and Cash Equivalent are highly liquid assets. Cash to current liabilities tell that against each current liability how much cash or cash equivalent firm holds. This ratio is also decreasing slightly. Cash to total asset ratio is also decreasing but very slightly. 2. Activity Ratios Theses ratios are related to asset utilization and management.
Firm’s inventory turn over is decreasing from21. 55 times to 19. 65 times that means average age of inventory is increasing. Though this figure looks good but it is declining value. That is not good and shows poor management of inventory. It looks that firm has excessive stocks of inventory. This means now firm has to hold its inventory for two more days averagely. So firm should properly manage its inventory. Fixed asset turnover ratio is increasing from 1. 656 to 1. 801. This is good sign as management is utilizing more productive assets to generate sales. Total assets turnover ratio is also increasing but very slightly.
This shows that less productive assets have decreased the efficiency. Sales are nearly two times of fixed asset but are nearly less than one time of total assets. Firm’s average collection period has decreased from 19 days in for year 2003 to 14 days in for year 2004 and this impact positively and for year 2004, firm’s efficiency is increased. Operating cycle from 2003 to 2004 has decreased by 3 days but more importantly cash conversion cycle that has increased by 16 days. In 2003 the CCC was just 1 day which increased to 16 days shows inefficiency n credit policy. 3. Solvency / Leverage Ratios
Now I will interpret capital structure and leverage. Debt ratio has decrease from 51. 81 to 50. 09. That means that creditor finance 51. 81 in year 2003 and 50. 09 in year 2004. Firm’s 50% assets are financed by investors. Position has improved slightly in favor of owner. Another ratio Debt Equity ratio has also improved from 107. 5 % to 100. 26 %. Outsiders’ claims against the owner wealth are reduced by a fair %age but still it looks riskier venture. Firm could have problem with financing as financiers sees it as fallacy management. Equity multiplier reduce from 2. 075 to 2. 002. In year 2003, if owner invest 1 RS, asset were 2. 75; 1. 075 financed by the investor. In year 2004 investor’s investment is 1. 002 against owner investment of 1. It shows healthy sign as owner’s investment is increasing. Time interest earned ratio measures the extent to which EBIT can decline before firm is unable to meet its annual interest costs. Firm’s time interest earned ratio has increased from 8. 2 to 9. 21 times. 4. Profitability Ratios First of all, I will interpret return on investment ratio and return on equity ratio. Return on assets is increasing (from 12. 10 to 12. 21) from year 2003 to 2004. It indicates that assets are productively used .
It shows healthy sign due to increase in net income. Return on equity is reducing from 25% to 24. 5% because SHE has decrease due to decrease in reserves. ROE is less than its competitor FFC but is satisfactory as compared to volume of business. Operating performance of the company is indicated by the three measures which are related to costing strategy of company too. These measures are gross profit margin, operating profit margin and net profit margin. All of these ratios are decreasing. Gross profit ratio is decreasing from 30% to 25. 5% due to increase in CGS (from year 2003 to 2004).
Operating Profit is decreasing from 13% to 12% due to CGS (even the operating expenses are decreasing in the same period). Net Profit margin is decreasing from 13% to 12. 6%. It means that sales increased but profit has not in proportion to sales. Now question arises that considering all these factors, why NPAT has increased? It increased because firm adopted good strategies to reduce operating expenses and taxes and increase its other income. 5. Marketability Ratios In marketability ratios, there is EPS, dividend yield, dividend payout ratio, price earning ratio and growth. Earning per share is 10. 53 (in 2004) which was 10. 8 (in 2003). Earning per share increased due to NPAT in relation to increase in other income and decrease in operating charges and taxes. This shows management efficiency. Price Earning Ratio has increased from 9 to 11. 68. It means that attraction of investors is increasing towards company and they are ready to get share at higher price. Price earning ratio can also be interpreted to measure the payback period that if Market Price and earning per share remains constant then 11. 68 years will be required to recover the initial investment. The market price of share is 123 which is certainly increase from 92.
Dividend yield has decrease slightly in 2004 because the market price of share has increased and also less dividend per share is paid as compared to 2003. Dividend yield is the rate of return on the investment which is decreased from 8. 87 to 6. 24 % in Year 2004. In 2004, firm paid dividend per share less than what it paid in 2003 (8. 23 to 8. 07). Dividend payout ratio has decreased from 81% to 77% in the same period which means that company is holding shareholders’ money as indicated by retention rate (increase from 19 to 23%). So you can expect more growth (from 4. 8 to 5. 7). Breakup value per share in 2004 is 43. 3 which is satisfying for shareholder as face value per share is 10. So share holder can achieve higher price on sale of share or on liquidation.. Market to book ratio is used to access the worth (value) created by management. Market to book value has increased in For Year 2004 from 2. 28 to 3. 002 which show that the market price of assets is 3 times more then its book value. ?Common base and Component Analysis Common base analysis shows that sales increased by 7. 69% but CGS increased by 14. 66% that show rising prices of raw material and element of inflation. Due to this factor Gross Profit decreased by 8. 3%. But firm was able to reduce its operating expenses, financial charges, taxes and to increase other income by considerable amount. This helped to fill gap created by CGS and as result NPAT increased by 3. 46%. While looking t balance sheet, fixed assets decreased by 1% but long term investments remained the same. Firm received most of its loans so they decreased by 31%. Investment in stock in trade increased by 25. 72%. Point to look that sales increased by 7. 7% but inventory more that means firm holding inventory for the year. Firm account receivable decreased that means firm was good to collect receivable.
Cash balance decreased by 12. 71%. Non current liabilities decreased that shows efficiency. But n the short term liabilities increased to 25%. It has been practice at Engro to convert Long Term Liabilities in to short term liabilities in the period they fall. Equity has increased by 6. 24%. In component analysis, CGS size has increased from previous year that is not good sign. Size of gross profit in proportion to sales has decreased and that is the case with operating profit as well. But taxes and other charges size has decreased in proportion to sales. But important thing to note is that NPAT has decreased by 0. 2% in proportion to sales. Investment in fixed assets look to decreased slightly but this factor is due to depreciation mainly and investment n fixed assets has increased but element of depreciation has reduced its value. Long term investments and long term loans and advances are decreasing slightly in comparison with previous year. Firm has more inventory than previous year. This is because of increase in sales. Trade debts have lesser weight in total assets than in 2003. Now interesting thing to note is that value of total current assets in total assets has increased by 2% in proportion to total assets.
SHE has increased from 48% to 50% that mean owner’s contribution is equal to that of creditor. Long term liabilities are decreasing from 33. 21% to 27. 41% that is good sign but current liabilities size has increased from 18. 61% to 22. 64%. Questions Q1. Would you like to invest as an equity investor in this company? To answer this question I must consider following things:- Measure20032004 E. P. S10. 1810. 53 Price Earning Ratio9. 1612. 27 Dividend Yield8. 87%6. 24% Dividend per share8. 238. 07 Book value per share40. 5343. 06 Dividend Payout Ratio80. 84%76. 64% ROE12. 10%12. 21% ROA25. 11%24. 45%
As we can see that EPs is increasing that means firm is earning more profit. It creates a healthy image in the mind of prospective investors and it suspects the future performance. Price earning ratio has also improved. This shows willingness of investor to invest in the equity of the firm. Dividend yield has decreased but same amount of money must be reinvested in firm and that is shown by growth rate on equity that has increased 4. 8% to 5. 7 %. Book value per share has increased that gives positive impact to investor. Return on investment has declined very slightly but return on equity has increased very slightly.
This shows stabilized condition of firm . So I would certainly like to invest in the equity of the company. Q 2. Would you like to extend a long term loan to this company? To answer this question I must consider following things:- Measure20032004 Coverage Ratio Debt Ratio51. 81%50. 05% Debt equity Ratio107. 50%100. 21% Generally long term creditor are interested in three factors 1. Rate of return on their investment 2. firm’s ability to pay interest 3. Firm’s ability to pay principle on maturity Interest coverage ratio is improving as it is 9. 20 now.
The debt ratio which describes the percentage of total assets financed by the creditors is decreasing from 51. 8 to 50. 05% which means shareholders have almost equal contribution. This fact is also supported by debt equity ratio which is decreasing. It is moving towards less riskier condition. So it is clear that Engro condition is going towards betterment. I will like to extend a long term loan to firm and charge interest rate slightly higher. Q3. Would you like to extend a short term Loan to this company? To answer this question I must consider following things:- Measure20032004 ACP19. 39414. 701 A/R turnover18. 6224. 488 Operating Cycle3633 APP35. 1716. 77 Net Working Capital1,795,5791,617,455 Current Ratio1. 751. 54 Quick Ratio1. 351. 18 Cash Flow from operating activities1,788,258998,594 Inventory turn over21. 55219. 656 AAI16. 70418. 315 Generally short term creditors are current position; the firm’s ability to generate fund to met current operating needs and fulfill current obligations. For Engro NWC has decreased by (178,124 Rs in thousands). It is worrying sign for creditors because spontaneous source if finance is used to finance more productive ones. Cash from operating activities has decline two times to that of 2003.
It is again worrying sign. A/R turnover has increased from 18 to 24 that is a healthy sign. It is supported by ACP which is reduced by 4. 7 days and is 14 days in 2004. But it depends upon company credit policy. If company is giving 30 days credit terms, then certainly it is positive sign. At this point company is able to offer credit terms of 15 days that is tremendously great. Inventory turnover has decreased slightly by 2times that means inventory is stuck up more time as compared to previous year. Firm need to improve inventory turnover rate to increase its gross profit.
Operating Cycle and cash conversion cycles are lengthened. .Current ratio has decreased but is still sufficient to meet short term obligations. Quick ratio is also declining but again it is still sufficient enough. Seeing overall condition I will extend shot term loan to firm but will charge risk premium. Conclusion Engro Chemicals Pakistan Ltd is premier fertilizer manufacturer that is showing good performance through better management. The issue of inflation is hurting the business but Engro management is able to reduce their expenses and charges and is able to increase revenues.
Engro is successful to safe the taxes. Management efficiently changed its fuel consumption to gas and save their expenditure and this benefit is passed to the consumer. Firm is diversifying its business as it is stepping in food business (Engro Foods). All that was important to mention because the current business give them much success. From the shareholder’s point of view, firm has taken positive measures to gain attraction of prospective investors. Rate of return on investment and rate of on equity are almost stable.
Earning per share and book value is increasing (and the end of month of November 2005 it share price is touching the value of 183 Rs). Collection period is reduced that means that fewer resources are struck up. But firm is needed to look at inventory management and should make it efficient. Firm is maintaining excessive inventory but if we analyze clearly that nature of business is such that it have to hold lager stocks of inventory and some of inventory is needed to be imported. Over all picture of profit is pretty OK. The devaluation of rupee, inflation rate and market structure are still question marks for the firm.