Introduction to Business Finance

Case 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.

Most importantly, we remain unflinchingly committed to all our stakeholders, including our
shareholders, employees, investors and suppliers. Our demonstrated transparency in all our
corporate engagements form the signature of our company performance. We will continue to
implement action consistent with our corporate motto "Enabling Excellence" in everything that
we think and do. This report is a manifestation of our uncompromising commitment to
excellence.

Company Profile
Engro Fertilizers Limited, a wholly owned Engro subsidiary, is a premier fertilizer manufacturing
and marketing company with products that focus on balanced crop nutrition and increased
yield. The company markets primary and secondary fertilizers like Engro Urea, Engro DAP,
Engro Zorawar, Engro Zarkhez and Zingro.
Engro Fertilizers has successfully developed a loyal customer base all across Pakistan, not only
by providing farmers with quality fertilizers, but also through extensive market development
activities. A premier brand and nationwide presence of the company ensures sellout
production. Additionally, the company sells phosphate fertilizers for balanced fertility and
improved farm yields. Engros share of Pakistans phosphates market mirrors or exceeds its
urea market share.
In 2010, the company achieved mechanical completion and started trial production of its urea
expansion project at Daharki which is the worlds largest single train urea-ammonia plant. It is
the largest private sector industrial investment in Pakistan

Operations:
Engro Fertilizers, a subsidiary of Engro Corp. is fertilizer manufacturing plant. On June 24, 2011,
Engro Fertilizers Limited announced the start of commercial operations at its new fertilizer
facility in Daharki today. Engros new plant, set up at a cost of USD 1.1 billion, is the worlds
largest single train urea production plant in the world, with a total capacity of 1.3 million tons
per annum. Plant evaluations carried out by licensors, as well as a lender appointed
independent engineers, have given the new plant a clean bill of health.

Engros new fertilizer facility is Pakistans 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.

BOILER PLATE
About Engro Corporation Limited: Engro Corporation Limited is one of Pakistans largest
conglomerates with businesses ranging from fertilizers to power generation.

Currently Engro

Corporations portfolio consists of seven businesses which include chemical fertilizers, PVC
resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and
commodity trade.
About Engro Fertilizers Limited: Engro Fertilizers Limited is a wholly owned subsidiary of Engro
Corporation and a renowned name in Pakistans fertilizer industry. Engro holds a vast,
nationwide production and marketing infrastructure and produces leading fertilizer brands
optimized for local cultivation needs and demand. Engro is also a leading importer and seller of
Phosphate products, which are marketed extensively across Pakistan as phospatic fertilizers.

PRODUCTS

Engro DAP

Engro Urea

Engro Zarkhez

Zingro

Zorawar

Engro Envy

Engro Fertilizers' Investors

Free Float:

Key Figures:

Engro at a Glance (Contribution of Engro Fertilizers)

Sales and Market Perspective

The fertilizer industry in Pakistan is of an oligopolistic nature, alongside the four main
contestants in the market - Engro, FFC, FFBL and Dawood Hercules. Thinking the urea
marketplace, FFC and FFBL have the highest allocate of urea creation i.e.FFC 48%, Engro 15%,

Market Share

FFC
ENGROFert
NFML
Dawood

Dawood Hercules 6% and 20% is imported and distributed across NFML. And pondering the
phosphorus marketplace, FFC and FFBL seized elevated allocate of 47%, Engro 28%, Agri tech
2%, RG 1% and concerning 22% is imported. But the Engro urea doesnt 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 in-house diversification includes,
NPK Fertilizer company, seed business, phosphate and micronutrient business The demand of
fertilizer was extremely badly altered due to dirt erosion and defeat of earth, that is because of
present deluge in Pakistan.. The demand of the urea in Pakistan stood 4.2MT compared to
4.6MT last year displaying a cut of 10%, as the demand of DAP stood 0.7MT compared to 1.2MT
signifying a cut of 40% contrasted to the alike era last year. Considering the presentation of
Engro Fertilizer, the sales of the Engro urea stayed 665kt compared to 688kt last year displaying
a cut of 3.4% contrasted to average industry drop of 10% in the alike period. 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 16.5%. The finished sales of the Engro Fertilizers in the

present 9-month era were concerning 12 billion contrasted to 20 billion of the alike era last
year, displaying a cut of 38%.
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.

Engro has commitment to sustainable development. Engro operates in exceedingly

safeguard marketplaces alongside stable

Demand being the forte of their company models, commercial prices corrode the
earnings

Substantially and cut worth supplement for the stake holder.

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, ECPL's marketing strategy has focused on farmers'
education on the effective use of fertilizers

Over the years, 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.

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.

These are stakeholders of engro, employees are 1664, customers are 68000, consumers
are 3,100,000, vendors are 3,500 , shareholders are 11365, dairy farmers are 51,000,
students are 4,300, patient are 32,500.so total lives touched engro is 3,275,334.

The Decline
Engro Fertilizers net sales shrunk 2.5% to Rs30.626 billion across the year contrasted to
Rs31.353 a year ago, generally due to the plummet in production. According to BMA Capital,
the companys urea creation dropped 22% to 977,000 tons in 2012. Though, the last quarter
saw substantial enhancement in creation, recording in at 270,000 tons, up 45%
quarter-on-quarter, it was no match to the defeats borne by the firm across the year.

Separately from enhanced creation, urea sales additionally enhanced across the quarter,
producing 76% to 345,000 tons, helped by bumper industry sales across the Rabi period.

6
5
4
FFC
3

EngroFert
NFML

2
1
0
2009

2010

2011

2012

.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, 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. Government fine for levying of urea selling prices up to 86% in most cases all the while
availing subsidies.
2. Internal management conflicts leading to loss of control and inefficiencies, conflicts
were made at the upper management level between CEOs of the umbrella corporations
of Engro Corp, even board members were involved.
3. External forces such as gas shortage leading to production losses and floods in areas of
Sindh and Punjab led to loss of demand.

Main cause behind the financial crises

The main problem that leads to the financial crises in Engro Fertilizers was the shortage of gas
supply. 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, textile factories
and households. When the agreement was signed with the government in 2006, we could not
imagine that the supply of our basic raw material will be stopped, said Khalid Mir, Vice
President Marketing at Engro. This is the first time in 50 years that government has turned
back on its commitment with us. Engro Fertilizers had an agreement with the government that
it will receive 100 cubic feet per day (MMCFD) of gas suppy.But sadly this contract was not
followed properly. The methane gas is the basic ingredient to produce ammonia and this is then
mixed with carbon dioxide in order to make urea. If there is no gas supply so no fertilizers can
be produced and sold.
Initially when the gas agreement was signed so Engro Fertilizers invested around 1.1 $ billion in
order to build the worlds largest Urea plant in Pakistan and the World Bank was the debt and
equity investor of this project. This plant has a production capacity of 1.3 million tons per
annum.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.This plant is unable to handle an abrupt reduction of gas supply.It is designed to run
continuously for three years.If this plant doesnt receives nonstop supply of gas so 50 of its
productivity decreases.

Impact on Profitability and liquidity of Engro Fertilizers

After receiving gas supply of only 45 days Engros New Fertilizer plant closed its operation and
was shut down. Hence the largest conglomerate of Pakistan faced a loss after its largest
subsidiary found it hard to function because of gas shortage. The Engro company huge
quarterly profit of Rs. 2.054 billion (Rs 200 Crore) translated into loss of Rs 649 million (Rs 65
Crore) losses in the first quarter of 2012, showing a grim financial situation for the business
conglomerate to maintain itself in the green zone going foward.The revenue of the company
stood at Rs. 22.9 billion for the first quarter 2012, as compared to Rs 21.8 billion in the same

period last year. This issue together with the increasing financial charges caused the company a
huge loss for the second consecutive quarter of 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. Engro
Fertilizers which was the highest profit making unit for several years faced a loss of Rs 2.935
billion in 2012 as compared to a profit of Rs 4.59 billion in 2011.Engro fertilizers sales decreased
from 2.5 % to Rs 30.262 billion in 2012 as compared to Rs 31.353 billion a year ago. In this Urea
sales have registered a decline of 12% to reach 5.2 million tons in the calendar year 2012, which
is the steepest annual decline in recent history. All this decline in sales revenue is attributed to
loss in production due to gas reduction. The companys urea production fell 22% to 977000
tons in 2012. Though, the last quarter saw considerable improvement in production, clocking in
at 270,000 tons, up 45% quarter-on-quarter, it was no match to the losses borne by the
company throughout the year.Excessive gas curtailment besides gas infrastructure
development cess (GIDC) also forced Engro Fertilizers margins to shrink to 32% for the year,
squeezing from 53% in 2011. The company managed to make a gross profit of Rs9.9 billion,
where the cost of sales incurred were Rs20.77 billion.
Though the GIDC has been declared illegal recently, the fertilizer producer paid the tax for the
full year, which is Rs197 per million British thermal unit (mmbtu)and Rs50 per mbtu on feed
and fuel gas on the fertilizer sector.
The overall consolidated revenue of the Engro Company was Rs 125 billion s compared to Rs
115 billion in 2011.The net profit after tax was Rs 1333million as compared to a net profit after
tax of Rs 8,06 million and this shows a decrease of 83 % in overall profitability. The company
announced an EPS of Rs. 2.61 for the year ended December 31, 2012 as opposed to the EPS of
Rs. 15.77 in 2011.These figures shows the damage done by the Engro Fertilizers unit.

In the year 2012 the companys short term borrowings increased by more than Rs 5.6 billion as
compared with the insignificant Rs4 million in 2011.The finance cost of the company increased
by 95 % to Rs8.6 billion due to the fertilizers new urea plant. Fertilizer business contributed 66%
to the financial charges but only 24% to revenue.The massive finance cost was the only reason
which has pushed the company into loss, said Summit Capital analyst Muhammad Sarfraz
Abbasi.
Engro Corporations Chief Financial Officer (CFO) Naz Khan said part of Pakistans largest
private-sector conglomerate Engro Corporation,

has to make principal repayments of Rs10

billion and interest payments of Rs8 billion in 2012.The reduction in gas supply has indeed
significantly the cash flows and liquidity of Engro Fertilizers.

Engro Corp has been

rescheduling its loan that it has taken from various financial institutions such as commercial and

state banks and private individuals because the company is going through a liquidity crisis in the
absence of cash flows from its fertilizer business. If Engro is unable to reschedule its payments
and loans other liabilities that defaults are bound to occur and companys share price and
reputation will decrease further more.
CFO, Mr. Khan said Were running short of cash because the original debt repayment schedule
was based on regular gas supplies of 100mmbtu from the SNGPL, she said, adding that Enven
received gas for only five and a half months last year. It has received gas for 44 days in 2012, of
which production could take place for 33 days only, as the firing up and shutting down the plant
takes considerable time.Engro Fertilizers has made principal repayments and interest payments
amounting to Rs26.5 billion in the last 18 months since Enven became operational.
Financial charges in fiscal year 2012 have been solely responsible for pushing the company into
red bottom-line. Recall that Engro Fertilizer has sought debt re-profiling and hasnt been
making principal retirements on local bank loans since June12. Thus, financial charges would
not ease off in near to medium term.
Engro has been increasing the price of fertilizer to make up for the production loss at its new
plant, Mir said. We cant help it. We have to pay off billions of rupees of loans and thats the
only way to keep the revenue stream running. In the last two years, fertilizer price has
increased to Rs1,700 per bag from just Rs800. The government subsidises gas which is used in
making fertilizer. Engro officials said that the corporations other projects also face problems
because of the governments failure to meet its commitments. International lenders who have
invested in the project wont take risk with other investments in the country. `
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.A total of Rs 3.14 billion
fine was imposed on Engro Fertilizers. The fine was imposed by a two-member bench after
almost a year and a halfs efforts in completing the investigation process. This fine further
reduced the profitability and had an adverse impact on the liquidity of Engro Fertilizers.

Expenses at Engro Fertilizers:

Out of the 30.62 Billion Rupee Sales in 2012, COGS have been 20.76 Billion Rupees which is
around 67.8% of the total, leaving Gross Profit of 9.9 Billion Rupees. Selling and distributing,
Admin Expenses, other operating expenses and Financial Costs have been around 14.20 Billion
Rupees leaving a net loss of 2.93 Billion Rupees after other income and tax benefit for the year
ended 2012. A major reason for this loss is the reduced sales as compared to previous year due
to shortage of Gas supply to Engros Enven plant. Availability of subsidized imported urea is
another key reason. Subsidized imported urea and gas shortage has dented sales of urea the
most widely used fertilizer by approximately 68 per cent, said an official of the company. Sui
Northern Gas Pipelines-based fertilizer plants, both Engro and Dawood Hercules Fertilizers
received gas for only 33 days of operations in the first six months of 2012, which is
approximately only 9% of annual operational capacity. This limited operation of the Enven plant
has severely put burden on the companys cash flows.
The companys urea sales fell 30% to 397,000 tons on a yearly basis due to gas supply issues,
said BMA Capital analyst Farid Aliani. However, due to higher prices, the companys revenue
rose by 5% to Rs12.8 billion.
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), it has been diverting gas
supplies to other sectors of the industry, which has led to recurring gas suspension for the
fertilizer plant.
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.

Steps Taken to Combat Crisis:

Engro Fertilizers set up its new fertilizer plant in 2011, the worlds largest single train
ammonia-urea plant, in Daharki with the huge investment of $1.1 billion (Pakistan Rs 99 Billion).

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.
The worsening gas supply to Enven plant has placed the company under severe financial
pressure, raising concerns about companys future. However, management cognizant of
deteriorating cash flow and financial situation took numbers of steps to augment the situation
as summarized below, which have already borne results:

Enven plant was successfully converted to run on Mari gas resulting in incremental 10%
to 15% production, enhancement of margins and significant increase in the operational
cash flows. The conversion helped the company coming into profits in 4 th Quarter of
2012. Such conversion has been approved by Ministry of Petroleum and Natural
Resources (MPNR) on Jan 2, 2013 for a further period of 8 weeks. Based on discussion
with MPNR the company is confident that this approval would be extended till has from
the alternative/ new gas reserves, as stated below comes on stream.

The Company, upon continual curtailment of gas supply after the decision of High Court
of Sindh (dated Oct 18, 2011 in which the High Court of Sindh has ordered the SNGPL
should supply 100 MMCFD of gas per day to the companys Enven Plant), has filed an
application in respect of Contempt of Court under article 199 & 204 of the Constitution
of Pakistan. The Company, in the aforementioned application has submitted that the
SNGPL and MPNR has failed to restore supply of gas to the companys plant despite the
order by High Court of Sindh. A show cause notice has also been issued to SNGPL and
MPNR. The application is pending for hearing and no orders have yet been passed in this
regard.

In 2nd Quarter of 2012, considering the liquidity situation, the company approached
majority of the lenders for re-profiling of various finance facilities by allowing 2 to 2.5
years of grace period in the existing repayment schedule. Lenders agreed to re -profile
finance facilities after formal gas allocation by ECC and in the interim deferred one
installment. Since the ECC has allocated gas therefore the Company has initiated

discussion on re-profiling with lenders subsequent to the year end. The management
expects to finalize it by 1st half of 2013.

Engro Corporation is going to list its fertilizer business on the stock market by the end of
2013 which, according to analysts, will provide the largest private-sector conglomerate
of the country with a substantial cash cushion.

Effectiveness of Steps taken:

Subsequent to the year end, 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. This includes allocation of
79 mmcfd gas to Enven Plant. 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.

Listing Engro Fertilizers at Stock market would provide cash aid of 6-12 Billion Rupees.
Assuming Engro Corporation divests a 10%-20% stake of its holding (in Engro
Fertilizers), this would provide a big cash relief of Rs6-12 billion, said a research note
issued by Foundation Securities on Thursday.

Enven plant ran successfully on Mari gas resulting in incremental 10% to 15%
production, enhancement of margins and significant increase in the cash flows. This
conversion has been approved till Dec 31, 2013 and the management is confident that
this approval would be extended till the gas from alternative/new gas reserves comes
on stream.

From a loss-after-tax of Rs1.4 billion in the first quarter of 2012, 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, mainly due to efficient operations of its Enven plant, which received major gas
supply from Mari (93 mmscfd) and small quantity from SNGPL (around 12-13 mmscfd),

according to a research note prepared by Elixir Securities, a brokerage house based in

Karachi.

Conclusion on Engro Fertilizers:

It is reported that the debts on Engro ferts will come down in the ending period of 2013. Rs 67 billion
debt was recorded in 2012. 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 162.6% to 129.5%.
Listing of the Engro ferts will provide further cash cushions to the company. Assuming Engro
Corporation divests a 10%-20% stake of its holding (in Engro Fertilizers), this would provide a big cash
relief of Rs6-12 billion. Clarity on gas supply and Engro Corporations plans to list its fertilizer arm by
year-end may serve to unlock the valuation and provide big cash relief.
The gas problem affected the sales of Engro fertilizers as it affected the sale of urea- the most commonly
used fertilizer. The companys urea sale fell 30%. 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),
it has been diverting gas supplies to other sectors of the industry, 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. And other inefficient
plants are operating. 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. 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.

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. This contract has already been made and will be operational in

2014.If government honors this contract so Engro Fertilizers profits will increase substantially
and its share price will increase.

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.

The company should start looking alternative supply of gases. For example there are plans to set
up factories in South Africa which has abundant supply of gas.

Appendix