Engro

ANALYSIS OF FINANCIAL
STATEMENTS
REPORT ON ENGRO
CHEMICALS
Acknowledgement
The compilation of this report could not have been realized without the blessings of Almighty Allah. I am
highly indebted to quite a few people who have been there from the beginning till the completion of my
research. Their undue support has been the source of inspiration for us to complete it efficiently within time.
I would deeply like to thank our teacher Mr. Maqbool – Ur - Rehman, Assistant Professor, Finance and
Accounting, at I.o.B.M for his guidance during the project. His excessive support has been the source of
motivation to perform our best, regarding the report.
Umair Yaseen
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Table of Contents
Acknowledgement........................................................................................................................... 2
Table of Contents............................................................................................................................ 3
ABOUT ENGRO................................................................................................................................ 7
Company Profile........................................................................................................................... 7
ENGRO AT A GLANCE...................................................................................................................... 8
FERTILIZER PORTFOLIO................................................................................................................9
EXPANSIONS..............................................................................................................................11
Fertilizer SECTORAL OUTLOOK......................................................................................................12
AGRICULTURE SECTOR............................................................................................................... 12
TYPES OF FERTILIZER.................................................................................................................12
GLOBAL SCENARIO..................................................................................................................... 13
PRICING...................................................................................................................................... 14
International versus Local.......................................................................................................... 15
DEMAND & SUPPLY....................................................................................................................17
TAXES........................................................................................................................................ 18
Future Outlook Sales & growth.................................................................................................. 18
VERTICAL ANALYSIS......................................................................................................................20
Income Statement...................................................................................................................... 20
Balance Sheet............................................................................................................................ 21
HORIZONTAL ANLYSIS................................................................................................................... 25
Balance Sheet ........................................................................................................................... 27
Component Percentage Analysis...................................................................................................32
BALANCE SHEET.........................................................................................................................33
Component Analysis according to Pakistani Rupees ....................................................................37
Balance Sheet............................................................................................................................ 37
LIQUIDITY RATIOS..........................................................................................................................39
CURRENT RATIO......................................................................................................................... 39
QUICK RATIO..............................................................................................................................40
CASH FLOW LIQUIDITY RATIO.....................................................................................................42
AVERAGE COLLECTION PERIOD..................................................................................................43
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AVERAGE INVENTORY DAYS.......................................................................................................43
AVERAGE PAYABLE DAYS...........................................................................................................44
TURNOVER / EFFICIENCY RATIOS..................................................................................................45
RECEIVABLE TURNOVER.............................................................................................................45
INVENTORY TURNOVER.............................................................................................................. 46
PAYABLE TURNOVER..................................................................................................................47
FIXED ASSET TURNOVER............................................................................................................ 48
TOTAL ASSET TURNOVER........................................................................................................... 49
SOLVENCY / LEVERAGE RATIOS.....................................................................................................50
DEBT RATIO................................................................................................................................50
LONG TERM DEBT TO CAPITALIZATION RATIO...........................................................................51
DEBT TO EQUITY RATIO.............................................................................................................. 52
COVERAGE RATIOS........................................................................................................................53
TIMES INTEREST EARNED...........................................................................................................53
CASH COVERAGE RATIO............................................................................................................. 54
CASH FLOW ADEQUACY RATIO...................................................................................................55
PROFITABILITY RATIOS.................................................................................................................. 56
GROSS PROFIT MARGIN..............................................................................................................56
OPERATING MARGIN...................................................................................................................57
NET POFIT MARGIN..................................................................................................................... 58
CASH FLOW MARGIN.................................................................................................................. 59
RETURN ON EQUITY...................................................................................................................60
RETURN ON ASSET.....................................................................................................................61
CASH RETURN ON ASSET...........................................................................................................62
MARKET RATIOS............................................................................................................................ 63
EARNING PER SHARE..................................................................................................................63
PRICE TO EARNING RATIO..........................................................................................................64
DIVIDEND PAYOUT..................................................................................................................... 65
DIVIDEND YIELD......................................................................................................................... 66
DUPONT ANALYSIS........................................................................................................................ 67
Insight for Investors......................................................................................................................68
Future Projections.........................................................................................................................69
Problems & their Solution.............................................................................................................. 71
ANNEXURE.................................................................................................................................... 72
Ratios.........................................................................................................................................72
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Balance Sheet............................................................................................................................ 75
References....................................................................................................................................78
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ABOUT ENGRO
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 known as Exxon Chemical Pakistan Limited
until 1991. Exxon decided to divest their fertilizer business on a global basis and sold off its
equity of 75% shares in the company to the employees of Engro. Post acquisition by the
employees the company was renamed as Engro Chemical Pakistan Limited.
Construction of Engro’s 100,000 tons per annum capacity NPK fertilizers plant at Port Qasim at a
cost of USD 10mn was completed in 2001. The plant is benefiting the country’s agricultural
sector 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 based company that provides process control industrial solutions in
the services sector. The joint venture has been named "Innovative Automation & Engineering
(Private) Limited (IAEL)".The acquisition was part of Engro’s diversification strategy.
Engro Seeds business 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’.
In March 2006 Engro set up a milk processing facility via ‘Engro Foods Ltd.’ to produce and
market branded UHT milk, cream and other dairy product. EFL operates two plants which are
located in Sukkur and Sahiwal with an annual capacity of 200mn liters.
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ENGRO AT A GLANCE
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FERTILIZER PORTFOLIO
NITROGENEOS FERTILIZERS
ENGRO UREA is a trusted high grade fertilizer containing 46% Nitrogen (N), with moderate
hydroscopicity. It has a pH value of 6.8 (organic molecule) and is suitable for all crops on all soils.
Engro Urea is an excellent source of Nitrogen for the vast majority of cultivated soils of Pakistan.
PHOSPHATIC FERTILIZERS
Engro DAP: contains 46% P2O5 and 18% N. More than 90% of Phosphate (P) is water soluble. It
has a pH value of 7.33 and is a good source of P fertilizer for all crops. It is an equally good
source on problem soils (saline sodic) with coarse texture. On an overall basis it suits to about
90% soils of the country.
Engro Zorawar: is one of the highest grade phosphatic fertilizers. It is acidic in reaction (pH >=
3.5) and contains 52% P2O5 of which more than 90% is water soluble, while the rest is citrate
soluble. In addition to P, it contains 12% N, 2% sulphur and 1% calcium. It is a beneficial fertilizer
for all crops on all soils of Pakistan and produces excellent results on alkaline soils, due to its
acidicy.
The acidic pH of Engro Zorawar also tends to slow down the rapid conversion of soluble P to
water insoluble compounds, keeping it plant available for a longer period of time.
Engro Phosphate: is brown colored mono ammonium phosphate with 11% nitrogen and 52%
phosphorus. It is being marketed as relatively cheaper alternate of DAP.
BLENDED FERTILIZERS
Engro Zarkhez: is homogenously granulated fertilizer which maximizes crop yield by providing
balanced nutrition for a wide variety of crops through the uniform availability of Nitrogen,
Phosphorous and Potassium. Engro Zarkhez grades are specially produced to suit the
requirements of individual crops and soils, and provide convenience to the farmer through ready
availability of precise quantities of primary nutrients.
Engro Zarkhez fertilizers have low moisture content, high crush strength; 2mm-4mm granule size
and free flowing nature - attributes which ensure excellent handling and application
characteristics.
Green 08:23:18 Potato, Maize, Sugarcane, Wheat, Cotton, Rice and Vegetables
Blue 17:17:17 Citrus, Mango, Banana and Other Fruits
Tobacco 12:15:20 Tobacco
Engro NP: it provides 22% nitrogen, and 20% phosphorus. ECPL entered into NP business in
2005 to cater the need of its customers for this established category. Primary focus area for ENP
marketing is South Zone (Sind).
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Micro Nutrients
Zingro: Zinc Sulphate, a highly effective and potent fertilizer which primarily targets Zinc
deficiency in crops like Rice, Potato, Maize, Sugar cane, Wheat, Cotton, vegetables and fruits.
Zingro increases crop yield and enhances crop appearance.
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EXPANSIONS
In order to take advantage of the current fertilizer shortage scenario, the company planned to
establish a 1.3mntpa urea plant, taking its aggregate capacity to 2.275mntpa by mid CY10. This
expansion will make the company the market leader in urea business in Pakistan, with an
estimated market share of 34%. The planned expansion will be the world’s largest single train
urea plant. The expansion along with benefiting the company will also result in meeting the
demand of the local market thus reducing the amount of invaluable foreign exchange spent by
the GoP on import. We do not foresee a supply glut with the commencement of commercial
operations of the new plant, however in case there is any excess supply, there are various
opportunities in the region where the fertilizer can be exported. We do not expect Engro to gain
additional advantage, in the event of exports, from the heavy differential between local and
international urea prices as the GoP subsidizes the gas (feedstock) heavily to local
manufacturers. Most likely scenario in this case would be GoP buying the excess production from
Engro at the prevailing domestic price and exporting at international prices while pocketing the
price differential.
The new plant along with being fuel-efficient (expected to consume 15% less gas than the
existing plant), will also bring in various other synergies, especially with regards to labor cost.
The expansion will require hiring of a further 300 employees at the plant complex of which 260
will be devoted to the plant while approximately 40 will be required for managerial positions,
translating into 38% increase in labor count (current workforce is 771). Marketing and
distribution is another area where the company will benefit as it already has a well laid out
distribution network and does not need any substantial investment in further building new
channels for sales.
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Fertilizer SECTORAL OUTLOOK
AGRICULTURE SECTOR
The undeniable importance of the agriculture sector to the economy of Pakistan is reflected in its
contribution to national output, employment and export earnings. This sector contributes 22% to
the country's Gross Domestic Product (GDP) and employs 43% of total labor force. Growth in this
area of Economy is vital for poverty alleviation, as about 66 percent of rural population is directly
or indirectly dependent on the agriculture sector for sustenance. Pakistan’s major source of
foreign exchange earnings is the textile sector which also relies on agricultural performance. The
major crops of Pakistan are wheat, cotton, rice and sugarcane, which make up 7% of the
country’s GDP.
Fertilizer has a significant contribution in increasing crop yields and productivity. Proper
application of nutrients helps in efficient utilization of limited natural resources such as land and
water. Fertilizers improve crop yield by removing the deficiency of chemical elements taken from
the soil by harvesting, grazing, leaching or erosion. Coupled with improved seeds, better
insecticides and more effective fungicides, chemical fertilizers play a vital role in boosting
agricultural output. With proper farmer education and increased awareness, the fertilizer off-take
can improve substantially. Nutrient application in suitable quantities can further improve farm
productivity, thereby helping in eradicating poverty.
TYPES OF FERTILIZER
Urea, which represents 65% of total fertilizer consumed and di-ammonium phosphate (DAP),
which accounts for 18%, are the main types of fertilizer used in Pakistan, but there is a total of
eight different fertilizer products which fall into three categories.
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Urea, along with calcium ammonium nitrate (CAN) and ammonium sulphate (AS) together make
up almost three fourths of total fertilizer consumption and come under the nitrogenous category.
Under the phosphatic category which makes up about 27%, is DAP, triple super phosphate (TSP),
single super phosphate (SSP) and nitro phosphate (NP). And under the last category, potassic is
sulphate of potash which makes up only 1%. Since the soil in Pakistan generally tends to be
deficient in nitrogen, urea is the most used fertilizer. DAP is used, as most phosphatic fertilizers
are to counter the effect of the acidic urea and maintain levels of fertility in the soil.
GLOBAL SCENARIO
The world grain consumption has outpaced production in six of the last seven years, with 2005
being the only exception, in which production superseded supply due to favorable weather in
almost all the major grain producing countries. With the growing demand of food and rapid
increase in demand for biofuels, the grain consumption growth has witnessed an increase of 2%
in 2007 from the historical average rate of 1.2% p.a. This has led to a widening gap between
consumption and production resulting in sharp increase in food prices in the global market.
During 2007, total global production of grains was recorded at 2.3bn tons, up 4% YoY. Despite,
the increase in production the global commodity prices have climbed significantly during the
past twelve months on the back of rising demand from emerging economies. Corn, wheat, and
rice account for about 85% of the global grain harvest (in terms of weight), while sorghum,
millet, barley, oats, and other less common grains make up the rest. China, India, and the United
States alone account for 46% of global grain production; Europe, including the former Soviet
states, grow another 21%.
In 2007, a 200mn ton jump in the global coarse grain harvest was responsible for nearly all of the
increase in the total grain harvest. Production of coarse grains a group that includes corn, barley,
sorghum, and other grains fed mainly to animals increased 10% from 985mn tons in 2006 to
1,080mn tons in 2007. During 2007, a significant amount of global corn production was used in
producing biofuels, the use of which is being promoted in developed countries (mainly EU and
USA). Governments in developed countries have been encouraging the use of biofuels primarily
due to (1) Increasing price of international crude oil and (2) Bio-fuels are environment friendly.
Out of a total of 784mn tons of corn harvested during 2007, about 255mn tons or 32.5% was
used in extracting biofuels which has resulted in sharp increase in price of the commodity.
Higher corn prices prompted many a farmers in various countries (China, Brazil and the United
States) to switch to corn harvesting. Another major consumer of grains is the livestock sector,
which accounted for approximately 627mn tons (27%) in the form of feed for the cattle. Demand
of grains from this sector has grown rapidly over the past few years on account of higher
consumption of dairy products and meat by the developing countries especially China, India and
Brazil.
The amount of grain stored by governments, a good measure of the global cushion against poor
harvests and rising prices continues to decline. Global cereal stocks were expected to stand at
318mn tons by the close of the 2007 season, equivalent to about 14 percent of annual
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consumption, lowest since many years. In comparison to the global scenario, Pakistan’s food
grain production has witnessed a rising trend over the years registering a 4-year CAGR (FY02-06)
of 5.7% on the back of good harvest of major crops (wheat & rice) which account for almost 84%
of the total grain production of the country.
PRICING
Local Arena
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Urea prices have shown a positive trend over the last few years on the back of step-wise
increase in feedstock gas prices, the primary raw-material for urea manufacturing. Government
heavily subsidizes feedstock prices in Pakistan, to keep the urea prices within affordable limits of
the farmers. A 50kg bag of urea is sold at PKR 558-565 (prices were revised upwards in Dec’07)
versus a price of approximately PKR 1000 per bag in the international market. DAP prices on the
other hand have undergone a radical increase during 2007, due to record high phosphoric acid
prices in the international market (a major raw material). Local prices of DAP are highly
correlated with their global rates since over 70% of the commodity used in the country is
imported. As a result, domestic DAP prices have surged during CY07, rising from PKR 800 per
bag at the start of the year to touch PKR 1,680 by Dec’07.
International versus Local
Urea Prices
International urea prices have escalated at a healthy 4-year CAGR (FY03-07) of 19.6%, driven by
its increased usage globally from 128mntpa in 2005 to 138mntpa in 2007. On the other hand
local urea prices have risen at a 4-year CAGR of 6.8% from FY03 to FY07. GOP heavily subsidizes
the feedstock gas prices in order to make available the fertilizer to the local farmers at an
affordable cost. Urea prices are primarily linked to the increase in feedstock gas prices, which
are expected to rise at a next 4-year CAGR of 11% going forward. Consequently we expect local
urea prices to increase at a 4-year CAGR of 5.5% for the period FY07-FY11.
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DAP Prices
International DAP prices have risen sharply during 2007 (+143% YoY) on the back of rising
demand for the phosphatic fertilizer for harvesting of crops used in production of biofuels. In the
local market, price of DAP fertilizer too has followed suit and has gone up from PKR 873 per 50kg
bag at the start of 2007 to around PKR 1,680 per bag at present. Despite the PKR 470 per bag
subsidy by the GOP, the hefty rise in DAP prices has caused its off-take to drop significantly
during the past few months with many farmers reverting to the use of urea. FFBL the only
producer of DAP and caters to only 31% of the DAP demand of Pakistan while the rest of the
demand is met through imports. Since the local prices are highly correlated to global prices we
estimate DAP prices to increase at a 4-year CAGR (CY07-11E) of 6.3%.
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DEMAND & SUPPLY
There are nine fertilizer plants in Pakistan with a total installed capacity of 4.35mn tons including
urea, Di-ammonium phosphate (DAP), single super phosphate (SSP), calcium ammonium nitrate
(CAN), nitro phosphate (NP) and ammonium sulfate (AS). Total demand of these fertilizers is
estimated to grow at an average of 4% per annum in the medium term. The shortfall of
approximately 1.1mntpa is met through import on which GOP provides subsidies. During FY08,
the GOP allocated a sum of PKR 13.5bn for import of various fertilizers.
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The graph above shows the demand trend of both major fertilizers, urea and DAP, which has
increased at a 4-year CAGR (CY02-06) of 4.6% and 7.7% respectively. Given the increase in crop
prices, low per acre usage of fertilizers, increasing awareness among the farming community and
vast cultivable land, we estimate demand growth of fertilizers to average over 4% per annum
over the next 4 years.
TAXES
The government has privatized and deregulated fertilizer imports and prices. In 1986, all
subsidies on nitrogenous fertilizers were abolished followed by phosphates in 1993 and potash in
1997. Provincial quotas were abolished, provincial supply organizations in the public sector
abandoned and import controls were lifted. All imports are affected by the private sector. In
2001, the government imposed a 15 percent general sales tax on all fertilizer products. Farmers
have to pay international prices for imported products, apart from urea.
The share of the private sector in fertilizer marketing is 89 percent, compared to 11 percent for
the public sector. The private sector handles about 90 percent of the urea and 100 percent of the
DAP, the two major fertilizer products consumed in the country. A dealer network of about 8 000
retailers exists in the country. Fertilizer companies select and train the dealers. There is no
government intervention. However, under ‘Fertilizer Acts’ promulgated by provinces, fertilizer
quality is monitored by the provincial governments.
Future Outlook Sales & growth
The future outlook of the fertilizer sector is very strong because of supportive government
policies, favorable climatic conditions and gas pricing. The Economic Coordination Committee
(ECC) has directed Sui Northern Gas Pipelines Limited (SNGPL) to market an additional 100
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million cubic feet a day of natural gas from the Qadirpur gas field, close to both Engro and the
FFC.
Short term outlook appears encouraging with significant projections for strong demand for our
fertilizers. In the long term, the Company is committed to achieve sustained levels of operations
at demonstrated operating efficiencies through focus on their fundamental strengths.
Customs duty of 5% was withdrawn from imported urea. A similar withdrawal was done on
imported DAP fertilizer last year this will not affect local manufacturers The medium to long term
projected demand supply gap situation together with commissioning of their BMR projects with
enhanced urea production capacities would further consolidate their market presence and allow
improved returns to the Company and its stakeholders.
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VERTICAL ANALYSIS
Income Statement
2001 2002 2003 2004 2005 2006 2007 2008
Net sales 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales 67% 67% 68% 74% 79% 76% 79% 73%
GROSS PROFIT 33% 33% 32% 26% 21% 24% 21% 27%
Selling & distribution
12% 11% 11% 8% 7% 8% 7% 7%
expenses
Other Operating Income 0%
Profit From Operations 21% 21% 21% 17% 14% 16% 14% 19%
Other income 2% 2% 3% 4% 6% 8% 8% 12%
24% 23% 24% 22% 21% 23% 22% 31%
Less : Finance Charges 8% 5% 3% 1% 2% 2% 2% 6%
Other charges 1% 1% 2% -2% -2% 2% 1% 2%
9% 7% 5% 4% -3% -4% -4% -9%
Profit Before Taxation 14% 17% 19% 18% 18% 20% 19% 22%
TAXATION 2% 6% 6% 6% 5% 5% 5% 4%
Profit after Taxation 13% 10% 13% 13% 13% 14% 14% 18%
 Cost of goods sold contribution has been increasing over the year which is not a
good sign for the company as it is unable to control its cost.
 Selling and administrative expenses contribution has decreased which is a positive

sign as the firm is able to control its expenses.
 An important development in 2008 is the amount spent on interest charges which

has increased by 4% due to high debt.
 Profit from expansion has increased due to contribution of income from other
sources.
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Balance Sheet
2001 2002 2003 2004 2005 2006 2007 2008
NON CURRENT ASSETS
Property, plant and 55% 50% 55% 54% 48% 41% 36% 55%
equipment
Intangible assets - - - 0% 0% 0% 0% 0%
Long term investments 11% 9% 11% 11% 15% 23% 20% 18%
Deferred employee - - - - - - - 0%
compensation expense
Deferred expenditure 0% 1% 0% - - - - -
Long term loans, advances 1% 1% 1% 0% 0% 0% 0% 0%

and other receivables
including derivatives
Foreign Exchange Risk 1%
Insurance Contract
TOTAL NON-CURRENT ASSETS 68% 62% 67% 65% 64% 64% 57% 75%
CURRENT ASSETS
Stores, spares and loose tools 5% 4% 4% 4% 5% 4% 2% 2%
Stock in trade 3% 5% 3% 4% 14% 6% 7% 8%
Leasehold land held for sale - 0% - - - - - -
Trade debts 3% 4% 5% 4% 4% 4% 4% 0%
Deferred employee 0% 0% 0% 0% 0% - - 0%
Loans, advances, deposits 1% 2% 1% 4% 3% 3% 2% 3%
and prepayments
Other receivables including 2% 1% 0% 0% 2% 6% 6% 8%
derivatives
Current Portion of Foreign - 1% - - - - - -
Exchange Risk Insurance
contract
Taxation 4% 1% 1% 1% 1%
Short term investments 6% 5% 6% 7% 1% 1% 16% 0%
Cash & bank balances 8% 15% 13% 11% 8% 11% 4% 3%
TOTAL CURRENT ASSETS 32% 38% 33% 35% 36% 36% 43% 25%
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TOTAL ASSETS 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
% % % % % % % %
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2001 2002 2003 2004 2005 2006 2007 2008
SHARE CAPITAL & RESERVES
SHARE CAPITAL
Authorized 16% 14% 16% 15% 14% 13% 8% 5%
Issued, subscribed & paid-up 11% 10% 12% 12% 11% 11% 5% 4%
Share Premium - - - - - 7% 10% 12%
Employee share option - - - - - 0% 0% 1%
compensation reserve
Reserves - capital - 1% - - - - - -
- revenue / general 31% 27% 32% 34% 31% 28% 12% 7%
- hedging 0% 0% 0% 0% 0% 0% 3% 4%
Unappropriated profit 0% 0% 0% 5% 10% 14% 11% 11%
TOTAL SHE 42% 37% 44% 50% 52% 59% 41% 38%
NON CURRENT LIABILIITES

Redeemable Capital & accrued 20% 20% 21% 20% 20% 11% - -
mark up
Long term loans 4% 4% 4% - - - 40% 46%
Derivatives - - - - - - - 2%
Employee Housing Subsidy - - - - - - - 0%
Liability against asset subject to - - - 0% 0% - - -
finance lease
Deferred Taxation 6% 6% 7% 7% 7% 7% 5% 4%
Retirement & Other service 1% 1% 1% 1% 0% 0% 0% 0%
benefits
TOTAL NON-CURRENT LIABILITIES 32% 30% 33% 27% 28% 19% 46% 52%
CURRENT LIABILITIES
Current portion of
- redeemable capital & accrued 3% 4% 5% 8% 5% 7% - -
mark-up
- long term loans 2% 2% - 5% - - 3% 0%
- liability against asset subject to - - - 0% 0% 0% 0% 0%
finance lease
- other service benefits 0% 0% 0% 0% 0% 0% 0%
Short term borrowings 5% 8% 3% 0% 0% 8% 3%
Creditors, accrued & other 13% 15% 10% 9% 14% 7% 10% 6%
liabilities
Unclaimed dividends - - - 0% 1%1% 1% 1%
Taxation - - 1% 0% 0%
0% - -
Proposed dividend 4% 3% 4% - - - - -
TOTAL CURRENT LIABILIITES 26% 32% 23% 23% 20% 23% 14% 10%
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TOTAL LIABILIITES 58% 63% 56% 50% 48% 41% 59% 62%
TOTAL SHAREHOLDER'S EQUITY & 100 100 100 100 100 100 100 100
LIABILITIES % % % % % % % %
Assets:
 During 2005 to 2007 there was a decrease in plant assets however it has increased
in 2008 to 55% of total assets. This is due to the impact of expansion which will come online
in 2010
 Long term investments of the firm have also shown an increasing during the last
three years.
 Another important feature is the decline in receivables. The company might have
tightened its credit policy as result there aren’t many receivables in 2008
 During the last two years cash balance have fallen tremendously. This shows that
the company does not want to hold excess cash.
Equity:
 The paid up capital contribution has declined over the last couple of years. This shows that
the firm is reluctant to issue more capital. Some possible reasons are payment of
dividends to shareholders.
 The share premium account of a company is the capital that a company raises upon
issuing shares that is in excess of the nominal value of the shares. In the last three years
Engro has benefitted greatly from share premium which is expanding the size of it balance
sheet.
 Unappropiated profit is another important dimension inequity section of the balance sheet.
Its contribution is increasing over the years. This is the retained earning balance which the
company is carrying for expansion and contingencies.
Liabilities:
 We seen an increasing trend in non-current liabilities. The major contributor is long term
loan.
 Redeemable capital means shares that are issued for urgent need of funds. The firm
retired its redeemable capital in 2007 and took long term loans which have the highest
portion in 2007 & 2008.
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
HORIZONTAL ANLYSIS
Income Statement
2001 2002 2003 2004 2005 2006 2007 2008
Net sales 100% 133% 148% 156% 222% 214% 282% 284%
Cost of sales 100% 134% 152% 174% 262% 244% 333% 313%
GROSS PROFIT 100% 129% 141% 119% 143% 155% 179% 226%
Selling & distribution 100% 123% 132% 103% 126% 147% 163% 165%
expenses
Other Operating - - - - - - - -
Income
Profit From 100% 134% 146% 129% 152% 159% 189% 261%
Operations
Other income 100% 117% 197% 281% 577% 674% 922% 1387
%
100% 132% 151% 144% 196% 212% 264% 377%
Less : Finance 100% 89% 58% 29% 44% 56% 83% 234%
Charges
Other charges 100% 151% 237% -293% -287% 295% 348% 594%
100% 97% 81% 64% -76% -87% -118% -281%
TAXATION 100% 552% 603% 554% 708% 705% 850% 758%
 Sales have increased over the years. One important trend that we have seen is the
increase in COGS & Sales is not showing the same trend i.e. cost of production has
increased over the years. The firm in 2008 insisted on controlling its COGS which is a
positive step as there isn’t any remarkable increase in sales but a drastic decline in COGS
 As a result of above mentioned steps we have seen an increase in profit from operations in
2008.
 Profit from operations has been increasing widely over the years. Analyzing its notes that
profits from workers participation fund and workers welfare fund are the major
contributor.
 The finance charges have increased in 2008 owing mostly to interest payments on short
term borrowing
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 Taxation grew five times in 2002 but then it grew steadily, however in 2008 it shoes a
decline in growth compared to 2007
 Net Income has been increasing throughout the eight years. In 2008 it showed a strong
growth due to better cost control strategies and higher profit from operations.
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Balance Sheet
2001 2002 2003 2004 2005 2006 2007 2008
NON CURRENT ASSETS
Property, plant and equipment 100% 105% 103% 103% 100% 96% 201% 487%
Intangible assets - - - - - - - -
Deferred employee
Long term loans, advances and 100% 71% 49% 34% 43% 42% 33% 170%
other receivables including
derivatives
Foreign Exchange Risk - - - - - - - -

Insurance Contract
CURRENT ASSETS
Stock in trade 100% 181% 91% 114% 453% 217% 633% 1102
%
Leasehold land held for sale - - - - - - - -
Trade debts 100% 124% 151% 123% 128% 147% 332% 62%
Deferred employee - - - - - - - -
Loans, advances, deposits and 100% 139% 89% 267% 201% 233% 497% 1060
prepayments %
Other receivables including 100% 41% 21% 25% 92% 385% 910% 1949
derivatives %
Current Portion of Foreign - - - - - - - -
contract
Taxation 100% 34% 32% 107% 124%
Short term investments 100% 108% 110% 124% 20% 33% 884% 10%
- - - - - - - -
TOTAL ASSETS 100% 115% 104% 106% 114% 129% 307% 485%
Page
27
Page
28
2001 2002 2003 2004 2005 2006 2007 2008
SHARE CAPITAL
Authorized 100% 100% 100% 100% 100% 100% 150% 150%
Share Premium - - - - - - - -
Employee share option - - - - - - - -
Reserves - capital - - - - - - - -
- revenue / general 100% 99% 107% 115% 115% 115% 115% 115%
- hedging
Unappropriated profit 100% 126% 93% 11873 26820 41457 77652 13081
% % % % 8%
TOTAL SHE 100% 102% 108% 126% 141% 179% 295% 441%

mark up
Long term loans 100% 96% 109% - - - 2916 5248%
%
Derivatives - - - - - - - -
Employee Housing Subsidy - - - - - - - -
Liability against asset subject to - - - - - - - -
finance lease
benefits
CURRENT LIABILITIES
Current portion of - - - - - - - -
mark-up
- long term loans 100% 129% - 301% - - 659% 39%
- liability against asset subject - - - - - - - -
to finance lease
- other service benefits - - - - - - - -
Short term borrowings 100% 193% 55% - - 223% - 294%
liabilities
Unclaimed dividends - - - - - - - -
Taxation - - - - - - - -
TOTAL CURRENT LIABILIITES 100 141 90% 92% 86% 112% 162% 184%
% %
- - - - - - - -
TOTAL LIABILIITES 100 125 100 92% 94% 92% 316% 518%
% % %
- - - - - - - -
Page
TOTAL SHAREHOLDER'S EQUITY & 100 115 104 106% 114% 129% 307% 485%
29
LIABILITIES % % %
Assets:
 Engro fixed assets have increased sharply in 2007 & 2008, depicting firm’s strategy to
acquire fixed assets for future growth. Also Engro had made significant investments in
long term investments in order to earn from long term projects.
 One important development is in the account of long term, loans, other receivables
including derivatives account. The rupee amount declined from 2002-07 but it showed an
increase in 2008.
 In the last two years we see a significant rise in Stock in Trade account. This is due to
larger inventory levels which the firm is carrying.
 Engro loans, advances and prepayments also have increased sharply due to early
payments of its expenses that will be realized later.
 The cash and bank balances have shown a fixed trend over the years. It seems that the
firm does not have a clear policy towards the level of cash.
 Fixed Assets have increased more compared to current assets in percentage amount
Equity:
 In shareholder’s equity there is one thing which catches our attention and that is the
unappropriated profit account. The firm retained earning balance has increased rapidly
over the years.
 The total value of equity has risen by four times in eight years. This is not a significant
increase considering the overall growth of Engro.
Liabilities:
 Analyzing non-current liabilities we see a policy shift from equity to debt as principle
source of financing. As the company retired its long term loans 2005-06. However to
finance its expansions the firm took large amount of long term loans.
 Non-current liabilities have increased eight times from 2001.
 During the last two years, creditors and accrued liabilities account has doubled.
Page
30
Component Percentage Analysis
Income Statement
2001 2002 2003 2004 2005 2006 2007 2008

Net sales 100% 133% 112% 105% 143% 96% 132% 101%
Cost of sales 100% 134% 113% 115% 151% 93% 137% 94%
GROSS PROFIT 100% 129% 109% 85% 120% 108% 116% 126%
Selling & distribution 100% 123% 108% 78% 123% 117% 111% 101%
expenses
Other Operating Income - - - - - - - -
Profit From Operations 100% 134% 109% 88% 118% 104% 119% 138%
Other income 100% 117% 169% 142% 205% 117% 137% 150%
100% 132% 114% 95% 136% 108% 125% 143%
Less : Finance Charges 100% 89% 65% 51% 151% 127% 147% 282%
Other charges 100% 151% 157% -123% 98% -103% 118% 171%
TAXATION 100% 552% 109% 92% 128% 100% 120% 89%
 The net sales of the company have increased just a percent in 2008, depicting the lack of
demand and the cut throat competition.
 The firm has controlled its cost of sales as well as selling & distribution expenses this year
 The finance charges have significantly increased this year due to heavy short term as well
as long term loans and the rising cost of raising debt in the country in 2008.
 The taxation cost on year on year basis in 2008 due to lower deferred tax in the year.
 As a result the bottom line of the firm has shown improvement over the preceding year.
Page
31
BALANCE SHEET
2001 2002 2003 2004 2005 2006 2007 2008

NON CURRENT ASSETS
Property, plant and equipment 100% 105% 99% 100% 96% 96% 211% 242%
Intangible assets - - - - 218% 84% 741% 92%
Deferred employee
Long term loans, advances and 100% 71% 70% 69% 126% 96% 78% 524%
other receivables including
derivatives
Foreign Exchange Risk - - - - - - - -
Insurance Contract
CURRENT ASSETS
Stock in trade 100% 181% 50% 126% 397% 48% 291% 174%
Leasehold land held for sale - - - - - - - -
Trade debts 100% 124% 122% 82% 104% 115% 226% 19%
Deferred employee
Loans, advances, deposits and 100% 139% 64% 299% 76% 115% 213% 213%
prepayments
Other receivables including 100% 41% 51% 118% 368% 420% 236% 214%
derivatives
Current Portion of Foreign - - - - - - - -
contract
Taxation 100% 34% - - - - - 116%
Short term investments 100% 108% 102% 113% 16% 166% 2693 1%
%
TOTAL ASSETS 100% 115% 90% 102% 107% 113% 239% 158%
Page
32
Page
33
2001 2002 2003 2004 2005 2006 2007 2008
SHARE CAPITAL
Authorized 100% 100% 100% 100% 100% 100% 150% 100%
Share Premium - - - - - - 371% 180%
Employee share option - - - - - - - -
Reserves - capital - - - - - - - -
- revenue / general 100% 99% 109% 107% 100% 100% 100% 100%
- hedging - - - - - - - 208%
Unappropriated profit 100% 126% 74% 12804 226% 155% 187% 168%
%
TOTAL SHE 100% 102% 106% 116% 112% 127% 165% 149%

mark up
Long term loans 100% 96% 114% - - - - 180%
Derivatives - - - - - - - -
Employee Housing Subsidy - - - - - - - -
Liability against asset subject to - - - - - - - -
finance lease
benefits
CURRENT LIABILITIES
Current portion of
mark-up
- long term loans 100% 129% - - - - - 6%
- liability against asset subject - - - - 107% 104% 0% -
to finance lease
- other service benefits - - 124% 96% 90% 81% 113% 99%
Short term borrowings 100% 193% 29% 0% - - - -
liabilities
Unclaimed dividends - - - - 182% 106% 234% 165%
Taxation - - - 0% - 167% - -
TOTAL CURRENT LIABILIITES 100% 141% 64% 102% 94% 130% 145% 114%
TOTAL LIABILIITES 100% 125% 80% 92% 102% 98% 343% 164%
TOTAL SHAREHOLDER'S EQUITY 100% 115% 90% 102% 107% 113% 239% 158%
& LIABILITIES
Page
34
Assets
 In the last two years Engro has invested heavily into plant & equipment as we see in 2007
& 2008 its amount has doubled.
 Firm has invested actively in long term investments. This shows the approach of the firm
to have an income stream from other sources on a growing basis.
 One notable aspect in the asset side is the low levels of receivables in the latest year
which signifies a change in collection structure of the firm as it might be discounts and
other items to lure creditors to convert receivables into cash quickly
 In recent years there has been a significant rise in advances, prepayments & deposits.
 In 2008 there is a drastic decline in Engro’s short term investments. This may by due to
lower return on them & a change in policy decision to invest in long term investments
 The firm is not maintaining high levels of cash balances and has enough cash to just meet
its operational requirements.
Equity
 During the last three years, company has issued share to raise equity but this is not
insignificant compared to the increase in debt in these years.
 Engro is retaining a large amount of its earning and not paying it out as dividends, this will
have an impact on dividend payout ratio. Also investors won’t be happy with this policy.
Liabilities
 After seeing a declining trend in long term liabilities from 2003 to 2006, Engro has again
resorted to debt to finance its expansions and meet its operational requirements.
 The level of current liabilities has increased during the last couple of year but less
compared to long term liabilities. It seems that company is contended with long term
borrowing than short term maybe because of the higher interest charges on long term
liabilities or the Engro might be unable to utilize short term liabilities.
Page
35
Component Analysis according to Pakistani Rupees
Income Statement
 The sales of Engro have increased over the years at a good pace however in 2008 we
don’t see any remarkable improvement.
 The cost of sales have shown a slide which shows that the company in 2008 focused on
controlling its cost structure and made many adjustments to it. Same is true for selling &
administrative expenses which has shown just a slight increase.
 Although Engro has benefitted greatly from Other income however the impact of this was
nullified due to rising finance charges
 Engro hasn’t been hurt much due to its taxes as its tax structure has remained somewhat
consistent around 25%
Balance Sheet
Assets:
 The amount spent on plant & machinery has increased dramatically over the last two
years as Engro has invested a lot in its expansions.
 Long term investments have been on the rise as Engro has invested in its subsidiaries.
 There has been a rise in inventory levels however the trade debt have declined
considerably
Equity:
 Engro is increasing its equity position by issuing more shares to the general public
 Engro retained earning value has been increasing as the firm is building its reserves
Liabilities
 We are seeing an enormous rise in the long term loans during the last couple of years.
Page
36
 Also a tremendous rise in creditors and accrued liabilities is seen
Page
37

LIQUIDITY RATIOS
CURRENT RATIO
 It is a Balance Sheet Ratio.
 It indicates the firm’s ability to cover its current Formula
liabilities with its current assets.
CURRENT ASSETS
Internal Analysis:
CURRENT LIABILITIES
Engro’s current ratio has shown a growth considering
the eight years. This persistent growth in the ratio has
been due to a gradual rise in the level of current assets
as Engro is keeping higher levels of inventory and there
are more advances, loans & prepayments. Year Engro Industry
2001 1.23 1.62
The decline in 2008 is attributed to a decrease in levels 2002 1.17 2.94
of trade debts. 2003 1.44 2.09
2004 1.54 2.15
2005 1.79 1.99
External Analysis: 2006 1.56 1.27
In external analysis we compare Engro with the other 2007 3.11 2.09
firms in the fertilizer sector. Last three years have 2008 2.55 1.91
witnessed an increase in the liquidity of Engro in
comparison to the industry. Engro has changed its
approach towards higher liquidity to meets its operating
requirements.
Findings:
Engro is well placed to meet its obligations
Page
38
LIQUIDITY RATIOS
QUICK RATIO
Vdvdvd
 It indicates the firm’s ability to meet its current
liabilities with its most liquid assets i.e. excluding
Inventory.
Formula
Internal Analysis:
CURRENT ASSETS -
Engro’s quick ratio has shown variability over the past
eight years and its difficult to analyze any trend. Since
INVENTORY
the firm is having sizable amount of inventory over the CURRENT LIABILITIES
last several years, its significant impact is seen in this
ratio. The ratio has decline in the year 2008 but its still
within the acceptable range.
Year Engro Industry

2001 0.92 1.45
In the first five years Engro, quick ratio was below the 2003 1.12 1.90
industrial average which posed a question on the firm’s 2004 1.18 2.01
ability to meet its current obligations with its liquid 2005 0.87 1.67
current assets. However the picture has change 2006 1.12 1.08
considerably from FY05 and the firm’s liquidity position 2007 2.46 1.81
has enhanced. 2008 1.61 1.59
3.50
3.00
Finding: 2.50
2.00
The firm is at par with the industry and quite capable of
meeting its current obligations. 1.50
1.00
0.50
0.00
2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Page 2001 2002 2003 2004 2005 2006 2007 2008
39
Engro Industry
Page
40
LIQUIDITY RATIOS
CASH FLOW LIQUIDITY RATIO

 This ratio measures how well a company can
handle its short-term debt with its cash and
other liquid assets
 It’s a balance sheet / Cash flow statement ratio
Formula
Internal Analysis:
This ratio touched its peak in 2007 as Engro witnessed CFO + CASH + MARKETABLE
high growth due to booming demand in both local & SECURITIES
export market. However in 2008 the ratio has declined CURRENT LIABILITIES
considerably in 2008 as Engro cash flow from operating
activities was negative. This was due to:
• Decline in cash generated from operations

Year Engro Industry
• Interest paid has increased almost five times in 2001 0.91 1.28
FY08 due to expansions 2002 1.01 2.67
• Payment of long term loans and advances 2003 1.46 1.71
2004 1.11 1.76
2005 0.95 1.50
2007 1.77 1.49
This ratio poses a significant question mark on the 2008 0.27 1.09
liquidity picture of the firm .As in the past eight years
Engro’s cash flow liquidity ratio has surpassed sector’s
ratio only six times which is a real cause of concern. This
2.00
shows that Engro may face problem in meeting its
1.80
current liabilities with cash and marketable securities.
1.60
1.40
1.20
Finding: 1.00
0.80
Liquidity of Engro posed a rosy picture based on accrual 0.60
basis i.e. cash basis & accrual basis 0.40
0.20
0.00
2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
Page
41
LIQUIDITY RATIOS
LIQUIDITY RATIOS
AVERAGE COLLECTION PERIOD
AVERAGE INVENTORY DAYS
 It is a Balance Sheet/Income Statement
 It is a Balance Sheet/Income Statement Ratio.
Ratio.
 It indicates the average number of days before
 It indicates the average number of days
inventory is turned into accounts receivable via
firm’s receivables are outstanding
sales.
Formula
Internal Analysis:
Internal Analysis:
The average collection period has declined in 2008 this
shows thatFY08
receivables were converted
NET RECEIVABLES
Excluding Engro average inventoryinto
days cash
on in
anjust
four days. This indicates that there has been
average is around sixty days, however this ratio has a AVERAGE SALES PER
significant change in
increased sharply in 2008
the firm collection
which policy
indicates thatduethe to
firm DAY
lesser amount of receivables as compared to
is not efficient in handling its inventory and a sound the
previous year. This
policy is needed decline isthe
to decrease primarily
number due to a sharp
of days. Engro
decline
must use the inventory efficiently to generate sales inits
in receivables as Engro might have tightened
collection policy.
order to gain profits in the end. The prime reason for this Year Engro Industry
increase is the high value of inventory which Engro is 2001 19 25
currently holding.
2002 17 26
External Analysis: 2003 19 22
Analyzing the industrial trend, it looks like from FY06 all 2004 15 40
the other firms in the industry have followed Engro’s
tight
A receivable
comparison policy.
with Although analysis
the industrial it looks like industry
reveals morehas 2006 13 14
become efficient in collecting receivables but a tight
shocking picture. The other firms in the fertilizer sector 2007 22 21
stance
are moremight be hurting
efficient their inventory;
in utilizing potential sales.
however this is a 2008 4 4
real cause of concern for Engro.
Finding: 45
Finding: 40
Receivables of the industry have declined enhancing
35
liquidity.
A high amount of inventory is causing the liquidity
30
position to deteriorate.
25
20
15
10
5
0
2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
Page
42
Formula
LIQUIDITY RATIOS
AVERAGE PAYABLE DAYS INVENTORY

 It is a Balance Sheet/Income Statement Ratio. AVERAGE DAILY COST OF
 This ratio shows how many days it takes to pay GOODS SOLD
accounts payable
Internal Analysis:
Over the course of eight years the numbers of days have Year Engro Industry
declined which shows the firm has enhanced its capacity 2001 67 39
to pay off its suppliers. In 2008 it just took eight days for 2002 67 36
Engro to pay its account payable. Engro may be gaining 2003 41 24
valuable creditor discounts by paying promptly. Engro’s 2004 41 18
payable have decline considerably 2005 65 33
2006 43 32
2007 68 54
Industry’s payable days are much more higher than

Engro’s . This shows that Engro is much more efficient in
paying off its suppliers which is a unique sign. This can 140
also have negative repercussions as the firm may be 120
wasting opportunities to earn interest by holding cash as
100
opposes by the industry.
80
60
Finding: 40
20
A really low payable days might be hurting Engro.
0
2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
Page
43
TURNOVER / EFFICIENCY RATIOS Formula
RECEIVABLE TURNOVER
 It is a Balance Sheet/Income Statement Ratio. PAYABLES
 It indicates the firm’s quality of receivables and AVERAGE DAILY COST OF
how successful the firm is in its collections. GOODS SOLD
Internal Analysis:
Year Engro Industry
The receivable turnover rate has shown a sharp increase
2001 27 65
in 2008. It shows that the firm is collecting its receivable
quickly and in 2008. The average receivable of the firm is 2002 26 58
collected 89 times during FY08 which is a positive sign. 2003 14 84
The reason for this increase is the decline in account 2004 11 89
receivable due to tightening of credit policy as discussed 2005 17 95
earlier. 2006 14 67
2007 9 83
2008 8 72
External Analysis:
Engro’s receivable turnover is moving in line with industry 100

average. In FY08 whole of the industry witnessed an 90
increase which shows that firms have tighten their 80
collection policy. Also firms have created good relations 70
with their borrowers. 60
50
40
30
Finding: 20
10
Engro has tightened its collection policy & receivable 0
turnover is moving in line with industry. 20012002 2003 2004 2005 2006 2007 2008
Engro Industry
Page
44
TURNOVER / EFFICIENCY RATIOS
Formula
INVENTORY TURNOVER
 It indicates the firm’s effectiveness of the inventory SALES
management practices. AVERAGE RECEIVABLES
Internal Analysis:
As denoted by the graph, Engro’s inventory turnover has

declined over the years and in FY08 in touched its lowest
Year Engro Industry
levels since FY01. A deeper analysis reveals the culprit of
2001 19 16
the crime which is inventory. In the last two years Engro’s
cost of goods sold has remained relatively steady 2002 21 23
however its inventory level accumulated in FY08. 2003 19 11
2004 24 18
2005 34 33
2006 28 39
External Analysis:
2007 16 24
Engro is lagging behind the industry in each and every 2008 89 89
year which is a real worry and must be looked upon. In
Fy08 industry’s inventory turnover has increased however
for Engro it has moved in the opposite direction. 100
90
It is expensive to maintain a large inventory and money
80
(that may be invested elsewhere) are tied up in 70
inventories that are not used. 60
50
40
30
Finding:
20
10
Engro is inefficient in utilizing its inventory.
0
20012002 2003 20042005 2006 2007 2008
Engro Industry
Formula
COST OF GOODS SOLD

Page AVERAGE INVENTORY
45
PAYABLE TURNOVER
 It’s a balance sheet/income statement ratio
 Shows how many times in one accounting period

the company turns over (repays) its accounts
payable to creditors
Internal Analysis:
Year Engro Industry
Engro’s payable days has been increasing gradually and 2001 5.4 10.2
consistently over the years however the ratio dipped in
2002 5.4 12.1
FY05 but it did recovered thereafter. An increasing
2003 8.7 16.2
number shows that the firm is paying off its suppliers
2004 8.9 29.7
quickly over the years and trying to have a lasting
2005 5.5 15.6
relationship with its suppliers.
2006 8.3 13.3
2007 5.3 14.4
2008 3.0 23.1
External Analysis:
External analysis shows that Engro is paying off its

suppliers at a greater pace than the industry. Although it 35.0
looks good but the point is why is Engro following this 30.0
approach when the industry is taking longer. Maybe Engro
25.0
wants to keep its suppliers happy or its financial
managers are missing an important aspect of utilizing 20.0
cash on short term securities. 15.0
10.0
5.0
Finding: 0.0
2001 2002 2003 2004 2005 2006 2007 2008
Engro is repays its creditors too quickly.
Engro Industry
Formula
COST OF GOODS SOLD

Page AVERAGE PAYABLES
46
FIXED ASSET TURNOVER

 Measures the capacity utilization and the quality of
fixed assets
Year Engro Industry
2001 13.3 7.4
2002 14.0 7.0
Internal Analysis 2003 25.5 9.1
Engro’s fixed asset turnover has declined in the last three 2004 32.1 10.7
years which shows that the firm is not utilizing its fixed 2005 21.0 7.5
assets effectively. Some of the possible reasons for this 2006 26.3 9.7
decline are as follows: 2007 39.9 12.5
2008 44.7 14.3
• Engro has been investing heavily into fixed
assets due to expansions.
• Engro might have idle capacity. 50.0

45.0
• Low sales 40.0
35.0
30.0
25.0
External Analysis:
20.0
Engro fixed asset utilization rate lags far behind the 15.0
10.0
industry which is a cause of concern. This shows that
5.0
Engro has the fixed assets but can’t utilize them. Engro
0.0
utilization rate has declined in FY08 as opposed to the
200120022003200420052006 20072008
industry’s ratio which has increased.
Engro Industry
Finding:
Engro lags far behind the industry.
Formula
SALES
FIXED ASSETS
Page
47
TOTAL ASSET TURNOVER

 It indicates overall effectiveness of the firm in
Year Engro Industry
utilizing its assets to generate sales.
2001 0.98 4.25
2002 1.23 3.18
Internal Analysis: 2003 1.41 2.84
2004 1.49 2.41
Engro’s internal analysis reveals a decline in total asset
2005 2.01 2.63
utilization rate. This shows that Engro effectiveness has
decline in utilizing its total assets to generate sales. 2006 1.71 2.17
Engro’s assets have increased tremendously over the past 2007 1.07 2.05
three years; however its impact on income statement is 2008 0.52 2.48
not seen yet.
4.50
External Analysis:
4.00
Engro’s turnover did falls behind the industry in FY08. On 3.50
a closer look there is something interesting by analyzing 3.00
fixed asset & total asset turnover i.e. the industry’s ratio 2.50
fell sharply in total asset turnover and that to an extent 2.00
that Engro had a higher total asset turnover than the 1.50
industry. This shows that other firms in the industry are 1.00
holding high level of current assets in relation to fixed 0.50

0.00
assets. On the other side Engro is keen on increasing its
capacity through expansions and investing in fixed assets. 2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
Finding:
Engro total asset turnover has declined due to high level

of fixed assets.
Formula
SALES
TOTAL ASSETS
Page
48
SOLVENCY / LEVERAGE RATIOS
DEBT RATIO
Year Engro Industry
2001 0.66 0.63
 It indicates the percentage of the firm’s assets that
2002 0.76 0.53
are financed through debt.
2003 0.95 0.58
2004 0.97 0.63
Internal Analysis: 2005 1.30 0.76
2006 1.10 0.74
Engro debt ratio has seen an increasing trend in the last 2007 0.61 0.54
couple of years. This increase means higher interest
2008 0.39 0.55
payment as we have evident from the income statement.
This leads to decreased profits and as a result fewer
amounts of dividends would be paid to share holders.
This increase is primarily due to increase in non-current

liabilities especially long term loans which the firm might 1.40
have taken to finance its expansions and support its 1.20
dropping sales.
1.00
0.80
0.60
External Analysis:
0.40
Engro’s debt ratio is almost at par with the industry which
0.20
shows that debt is the preferred mode of financing in the
industry recently. 0.00
200120022003200420052006 20072008
Engro Industry
Finding:
Engro debt ratio has increased but is at par with the

industry.
Formula
TOTAL DEBT
TOTAL ASSETS
Page
49
LONG TERM DEBT TO CAPITALIZATION

RATIO Year Engro Industry
 It is a Balance Sheet Ratio. 2001 58% 27%
 Shows the contribution of long term debt in 2002 63% 54%
permanent financing of the firm. 2003 56% 53%
2004 50% 52%
2005 48% 50%
Internal Analysis: 2006 41% 51%
2007 59% 55%
The ratio has increased considerably over the years, 2008 62% 58%
indicating the enhanced leverage position of Engro and in
FY08 the proportion of long term debt compared to
available capital reached fifty five percent and Engro has
became more riskier. 70%
60%
50%
External Analysis: 40%
The sector’s ratio is much lower than the Engro’s ratio. 30%
One possible reason for this drastic change might be that 20%
other firms in the sector are opting for equity or meeting 10%
their obligations through current assets.
0%
2001 2002 2003 2004 2005 2006 2007 2008
Finding: Engro Industry
Engro has high contribution of long term debt in

permanent financing of the firm.
Formula
LONG TERM DEBT

LONG TERM DEBT +
TOTAL EQUITY
Year Engro Industry
2001 36% 13%
2002 38% 30%
2003 36% 25%
2004 28% 25%
2005 28% 21%
Page 2006 16% 17%
50 2007 50% 33%
2008 55% 36%
DEBT TO EQUITY RATIO

 It indicates the extent to which the firm is financed
through debt.
Internal Analysis:
We see a particular trend regarding this ratio. The ratio

declined from FY02 to FY06 and then it started rising from 60%
FY07 to FY08. However for this aggressive approach to
finance its growth with debt Engro had to bear higher 50%
interest expenses. 40%
This shows that the preferred mode of financing is debt as 30%
it has increased especially due to long term loans
20%
10%
External Analysis:
0%
Although the sector’s debt to equity ratio has increased 2001 2002 2003 2004 2005 2006 2007 2008
but Engro ratio is way beyond normal limits and the
financial managers must be concerned about it as it is Engro Industry
hurting the earnings of the firm and too much reliance on
debt may drag the firm to bankruptcy.
Finding:
Engro is highly debt financed.
Formula
TOTAL DEBT
TOTAL EQUITY
Year Engro Industry

2001 137% 92%
2002 168% 136%
2003 127% 110%
2004 100% 91%
2005 91% 92%
Page 2006 71% 79%
51 2007 147% 122%
2008 161% 129%
COVERAGE RATIOS
TIMES INTEREST EARNED
 It is an Income Statement Ratio.
 It indicates the firm’s ability to cover the
interest charges.
180%
Internal Analysis: 160%
140%
Engro ratio has been on a declining trend over the past
120%
four years, which is hampering its ability to meet interest
100%
charges over the years. This can be attributed to a
80%
number of reasons:
60%
1. borrowing has increased many folds 40%
20%
2. increase in capital expenditures 0%
20012002 200320042005200620072008
3. decline in EBIT due to low sales growth
Engro Industry
External Analysis:
Industrial analysis also shows a decline showing all the

firms are facing problems in covering their interest
charges. However Engro is facing interest expense as
compared to others which can be a concern for creditors
Finding:
Engro’s ability to pay interest charges has declined.
Formula
OPERATING PROFIT
INTEREST EXPENSE
Year Engro Industry

2001 2.69 20.16
2002 4.04 5.93
2003 6.82 11.53
2004 11.73 15.58
2005 9.21 11.56
Page 2006 7.58 7.77
52 2007 6.13 6.22
2008 3.01 4.92
COVERAGE RATIOS
CASH COVERAGE RATIO

 It is a Cash flow Statement Ratio.
 Shows company’s ability of the firm to cover its
interest payment on taxes
25.00
Internal Analysis: 20.00
Engro had a stable cash coverage ratio till FY07. However 15.00
the ratio has declined significantly in FY08 . So the
efficiency of Engro to cover its interest payments on taxes 10.00
by cash has been hampered and the firm is at risk to pay

5.00
its interest & tax obligations. This decline is due to
negative cash flow in FY08 and high interest payments. 0.00
20012002 2003 200420052006 2007 2008
Engro Industry
External Analysis:
As compared to the industry average Engro is quiet

incompetent as industry average is much higher than
Engro.
Finding:
Engro cash coverage ratio is declining
Formula
CFO + INTEREST PAID +

TAXES PAID
INTEREST PAID
Year Engro Industry

2001 3.27 23.31
2002 4.22 8.30
2003 5.78 27.25
2004 7.71 13.43
2005 9.71 13.23
2006 6.86 4.96
Page
2007 9.64 8.29
53
2008 1.42 8.08
COVERAGE
COVERAGE
RATIOS
RATIOS
2.
CASHCASH
FLOWFLOW ADEQUACY RATIO
ADEQUACY RATIO
 It is a Balance sheet/Cash flow Statement Ratio.
 Shows Company’s ability of the firm to pay its
dividends, capital expenditure and debt repayment
from the cash generated from their operations. 30.00
25.00
15.00
Engro’s internal reveals a desperate picture as the ratio is
declining. And Engro is facing difficulties for the payment 10.00
of debt, capital expenditure and debt repayment. In 2008
5.00
Engro had a negative cash flow from operations. This is a
Year Engro Industry
significant problem and requires considerate attention. 0.00
2001 0.76 0.76
20012002 20032004200520062007 2008
2002 0.88 1.12
2003 Engro
0.83 Industry 0.76
2005 0.56 1.20
The industry has become efficient in meeting its dividends 2006 0.64 0.25
repayments, capital expenditure and debt repayment 2007 0.14 0.25
obligations. This also shows industry has a positive cash 2008 -0.01 1.22
flow from operations, however Engro doesn’t.
Finding:
Cash flow adequacy ratio varies significantly from the

industry.
Formula
CASH FLOW FROM OPERATIONS

DIVIDENDS PAID + CAPITAL EXPENDITURE +
DEBT REPAYMENT
Page
54
PROFITABILITY RATIOS
GROSS PROFIT MARGIN
 It is an Income Statement Ratio. 1.60
 It indicates the firm’s efficiency of operation and 1.40
its pricing policies. 1.20
1.00

0.60
Engro’s gross profit margin has shown a mixed trend over 0.40
the years. In Fy08 the ratio increased to 27%. The reasons
0.20
behind the increase are:
0.00
 A decline in COGS as the company has been -0.20 2001 2002 2003 2004 2005 200620072008
able to control costs Engro Industry
 The company has also raised prices of some of

its products.
External Analysis:
Engro falls short of industry average in the case of gross

profit margin. Engro’s ratio may have improved this year
but it still lags the sector. The company is trying to control
costs and raise its sales which are the right thing to do.
Finding:
Engro is not efficiently utilizing its operations. Formula
GROSS PROFIT
NET SALES
Year Engro Industry

2001 33% 30%
2002 33% 34%
2003 32% 31%
2004 26% 30%
2005 21% 32%
2006 24% 31%
2007 21% 33%
Page 2008 27% 35%
55
OPERATING MARGIN
 A ratio used to measure a company's pricing 40%
strategy and operating efficiency.
35%
30%
25%
Internal Analysis:
20%
As expected Engro’s operational efficiency has increased. 15%
However it has varied over the last eight years which 10%
shows that managers aren’t able to control expenses. 5%
Operating margin is a measurement of what proportion of 0%
a company's revenue is left over after paying for variable 2001 2002 2003 2004 2005 2006 2007 2008
costs of production such as wages, raw materials, etc.
Engro Industry
External Analysis:
Engro is way behind the industry which shows it only has

19% of its sales left to pay for interest & tax obligations
as compared to industry’s 28%. Also Engro’s is paying
more in operating expenses than the industry as ratio
falls from a GP margin of 27% to19% in operating margin
i.e. a decline of 9% whereas that of industry is 7%.
Finding:
Formula
Engro has higher operating expenses than the industry.
OPERATING PROFIT
NET SALES
Year Engro Industry

2001 21% 18%
2002 21% 24%
2003 21% 22%
2004 17% 26%
2005 14% 21%
2006 16% 22%
2007 14% 26%
2008 19% 28%
Page
56
NET POFIT MARGIN

30%
 It indicates the firm’s profitability after taking 25%
into account all the expenses and income taxes. 20%
15%
Internal Analysis:
10%
An internal analysis reveals a positive picture for Engro. 5%
This ratio has been on an increasing trend over the years
which are a positive sign for investors. The major reasons 0%
for an increase in 2008 are: 2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
• High levels of Other income
• A reduction in tax charges in 2008
External Analysis:
Engro has been significantly lagging behind the industry

in generating net profit out of sales. The prominent
reason for the decline is low operating margin. However
has increased its net profit margin this year and may be
at par nest year.
Formula
Finding:
NET PROFIT
Engro’s profitability has peaked in FY08 but still lags the NET SALES
industry.
Year Engro Industry

2001 13% 2%
2002 10% 21%
2003 13% 24%
70%
2004 13% 23%
2005
60% 13% 34%
2006
50% 14% 25%
2007
40% 14% 64%
2008 18% 23%
30%
20%
10%
0%
Page 2001 2002 2003 2004 2005 2006 2007 2008
57
Engro Industry
CASH FLOW MARGIN

 It is an Income Statement/cash flow statement
ratio.
 Measures of how efficiently a company converts
its sales dollars to cash
Internal Analysis:
Engro’s cash flow margin has shown a trend opposite to

its net profit margin. Since expenses and purchases of
assets are paid from cash, this is an extremely useful and
important profitability ratio. So Engro has less cash
available from sale. A negative ratio indicates that even
as Engro is generating sales revenue, it is losing money.
The company will have to borrow money or raise money
through investors in order to keep on operating. This is
real cause of concern. . This may be due to higher finance
charges that Engro has paid in 2008
External Analysis:
The external analysis shoes a mixed trend. In 2008 firms

Formula
ability to convert its cash into sales has declined sharply.
The picture looked good on accrual basis however it has
changed sharply o cash basis CASH FLOW FROM
OPERATIONS
NET SALES
Finding:
Engro is losing money in generating sales revenue.
Year Engro Industry

2001 16% 12%
2002 16% 16%
2003 15% 20%
2004
25% 8% 22%
2005 8% 20%
20%
2006 8% 7%
2007
15% 7% 14%
2008 -1% 3%
10%
5%
0%
Page 2001 2002 2003 2004 2005 2006 2007 2008

-5%
58
Engro Industry
RETURN ON EQUITY
 It is an Income Statement/balance sheet ratio.

 It indicates the firm’s profitability to the
shareholders of the firm after taking into account
all the expenses and taxes
Internal Analysis:
The return on equity has lowered in 2008. This is an

alarming situation for the firm and for the shareholders.
They are not getting higher return on their investments.
This can lead to loss of its shareholders loss of its market
share. Possible reason for this decline is the increase in
un-appropriated profit as these earnings are not paid out
as dividends but instead reinvested in the business.
External Analysis
Formula
Engro’s return on equity is below the industry which is a
real concern as industry is earning more on shareholders
wealth than the Engro. As the firm’s net income is not NET INCOME
growing in proportion to its increasing equity. We must
TOTAL EQUITY
keep in mind the expansion taking place at Engro, so it
might be building up its reserve instead of distributing it.
Finding:
Engro’s amount of net income returned as a percentage of shareholders

Year Engro Industry
equity is lower than the industry.
2001 20% 18%
2002 21% 24%
2003 27% 24%
2004 24% 25%
2005 31% 33%
2006 27% 28%
2007
40% 20% 37%
2008
35% 18% 29%
30%
25%
20%
15%
10%
5%
0%
Page 2001 2002 2003 2004 2005 2006 2007 2008
59
Engro Industry
RETURN ON ASSET
 It is a Balance sheet/Income statement ratio.
 It indicates the firm’s profitability on the total
assets of the firm
Internal Analysis:
Engro’s return on asset has been declining over the past

two years .The firm is not getting enough return on its
investments. It should utilize its assets in a better way in
order to get a higher return. Sales should be increased,
costs should be minimized and debt should be managed
well in order to get a higher return. The prime reason is
the increasing size of Engro due to its expansions as they
haven’t come online yet
External Analysis:
Formula
Industry is earning twice as more on its assets than Engro
which is a real cause of concern and is eroding value from
Engro’s share price. The financial managers have to take NET INCOME
it into consideration
TOTAL ASSETS
Finding:
Engro’s profitability is half as that of industry.
Year Engro Industry

2001 9% 10%
2002 8% 13%
2003 12% 12%
2004 12% 12%
2005 16% 15%
2006 16% 15%
2007 8% 12%
18%
2008 7% 14%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Page 2001 2002 2003 2004 2005 2006 2007 2008
60
Engro Industry
CASH RETURN ON ASSET

 It is a Balance sheet/cash flow statement ratio.
 It indicates the firm’s cash generated on it
assets
Internal Analysis:
Engro’s cash return on asset is declining. This can indicate

a that lower return is expected. This is because lower the
ratio, lower the cash available to Engro for reintegration
into the company, whether be it upgrades, replacements
or other areas.
The decline in ratio in 2008 is due to increase in interest
cost over the year.
External Analysis:
Formula
Except for 2007 Engro was better placed than the
industry. We see in 2008 an industrial average of negative
three percent. This shows that industry is not generating
CASH FLOW FROM
any cash from its core operation. OPERATIONS
TOTAL ASSETS
Finding:
Like the industry, Engro’s cash return on asset is

declining.
Year Engro Industry
2001 11% 9%
2002 12% 8%
2003 14% 11%
2004 8% 9%
2005 10% 8%
2006 9% 9%
2007 4% 7%
16%
2008 0% -3%
14%
12%
10%
8%
6%
4%
2%
0%
-2% 2001 2002 2003 2004 2005 2006 2007 2008
Page
-4%
61
Engro Industry
MARKET RATIOS
EARNING PER SHARE
 It’s a Balance Sheet/Income Statement ratio.
 The portion of a company's profit allocated to each

outstanding share of common stock
Internal Analysis:
The earnings per share of the company which is

considered as the most important ratio by an investor has
shown an increasing trend over the eight years. Engro’s
income has raised steadily over the years. As Engro has
preferred debt over equity, we see a rise in EPS.
Formula
External Analysis
NET INCOME
EPS of Engro lags behind industry average. This tells that NUMBER OF COMMON STOCK
they are not earnings on returned on the initial OUTSTANDING
investment amount.
Finding Year Engro Industry

2001 7.65 11.45
2002 8.15 14.87
2003 10.18 18.35
2004 10.53 17.35
2005 15.16 26.94
2006 15.47 24.67
2007 17.17 43.72
2008 20.5 31.58
50
45
40
35
30
25
20
15
10
5
0
Page 2001 2002 2003 2004 2005 2006 2007 2008
62
Engro Industry
MARKET RATIOS
PRICE TO EARNING RATIO

 It is a Balance sheet ratio.
 The P/E looks at the relationship between the stock
price and the company’s earnings.
Internal Analysis:
P/E ratio is a measure of how expensive a stock is. Over

the years Price to Earnings ratio of Engro has decline
which shows the market is not willing to pay more of
Engro’s share. This indicates that the market does not
have high hopes for the firms’ share. This declining P/E
ratio presents a problem which by the graph look those
financial managers have overlooked Formula
PRICE PER SHARE

External Analysis: EARNING PER SHARE
Industrial comparison represents a sharp contrast to

Engro P/E ratio over the years. During the last seven
years Engro’s P/E ratio is lower than the industry which is
not a good sign for the firm. This show s that investors are
willing to pay more for the stocks of other listed Fertilizer
Company. Year Engro Industry
2001 6.80 4.12
2002 6.38 7.00
2003 5.11 9.24
Finding:
2004 4.94 10.60
Engro P/E ratio is much lower than the industry. 2005 3.43 8.46
2006 3.36 8.69
2007 3.03 7.58
2008 2.54 4.86
12.00
10.00
8.00
6.00
4.00
2.00
0.00
20012002 2003 200420052006 2007 2008
Page
63 Engro Industry
MARKET RATIOS
DIVIDEND PAYOUT
 It’s a balance sheet ratio
 DPS shows how much the shareholders were Formula

actually paid by way of dividends
Internal Analysis: DIVIDEND PER SHARE

MARKET PRICE PER SHARE
The dividend payout for Engro is decreasing which is not a
good sign for investors as it will lower their confidence in
the firm’ shares. The shareholders might offload their
holding in Engro. The effect of this is evident in retained
earnings account which is increasing heavily over the last
couple of years. Year Engro Industry
2001 85% 82%
2002 86% 86%
External Analysis: 2003 79% 65%
2004 81% 64%
Over the course of many years firm has kept pace with 2005 73% 64%
industry average but lost way in 2008. Net profit in dollar
2006 58% 62%
amount is increasing over the years but Engro is not
2007 41% 45%
content with paying out dividends instead its happy to
2008 29% 43%
build up its reserve.
Finding:
100%
Engro dividend payout has decline in 2008 90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2001 2002 20032004 2005 2006 20072008
Engro Industry
Page
64
MARKET RATIOS
DIVIDEND YIELD
 Shows the relationship between dividends and
company’s earnings
Internal Analysis:
Formula
Dividend yield is a way to measure how much cash flow
you are getting for each rupee in an equity position. Over DIVIDEND PER SHARE
the years we have seen Engro’s dividend yield stream to EARNING PER SHARE
remain steady showing an average of around seven
percent. This is a positive sign for an investor who has
invested in Engro as it is a confidence building measure.
An investor will get a stable cash flow stream by investing
in Engro.
Year Engro Industry
2001 13% 13%
2002 8% 7%
External Analysis:
2003 9% 7%
The dividend yield of Engro has remained in par with 2004 7% 30%
industrial average excluding a couple of years. However 2005 7% 5%
we see a declining trend in the fertilizer sector. A reason 2006 5% 16%
for this may as these firms like Engro might be expanding. 2007 3% 2%
2008 6% 4%
Findings:
Engro dividend yield is at par with industry

35%
30%
25%
20%
15%
10%
5%
0%
2001 2002 2003 2004 2005 2006 2007 2008
Engro Industry
Page
65
DUPONT ANALYSIS
Five Component Disaggregation
Profitability Turnov Solvency ROE
er
Taxes Financi Operati
ng ons
Year Net EBT/EBIT EBIT/Sal Net Sales/To Net Total Net
Income/ es Income/S tal Income/T Assets/Com Income/
EBT ales Assets otal mon Equity Commo
Assets n
Equity
2001 1.43 0.38 24% 13% 0.66 9% 2.37 20%
2002 1.57 0.28 23% 10% 0.76 8% 2.68 21%
2003 2.58 0.21 24% 13% 0.95 12% 2.27 27%
2004 3.38 0.17 22% 13% 0.97 12% 2.00 24%
2005 4.09 0.15 21% 13% 1.30 16% 1.91 31%
2006 3.92 0.16 23% 14% 1.10 16% 1.71 27%
2007 3.61 0.17 22% 14% 0.61 8% 2.47 20%
2008 2.03 0.29 31% 18% 0.39 7% 2.61 18%
 Income tax burden has shown a mixed trend over the years. Taxes dont have a role in
declining the profitability of the firm. In Engro’s case its pretty high which shows its tax
structure is not affecting its profitability.
 The impact of financing option is on Engro profitability and company has maintained it
interest charges in respect of its earnings. However we are seeing a rising trend in its
operations which is a good trend as firm is controlling its operations.
 Engro asset turnover has decline over the year which shows its not utilizing its assets very
well. We are also a decline in return on asset. Sales should be increased, costs should be
minimized and debt should be managed well in order to get a higher return.
 We have seen that solvency has increased in the last two years this indicates use of debt
to finance operations.
 The return on equity (ROE) ratio is a measure of the rate of return to stockholders. As a
result the return on equity has declined. We now that the real cause of this decline is the
declining return on asset that causing the slide.
Page
66
Insight for Investors
Engro is currently undergoing huge expansions and is a giant diversified conglomerate. As its
expansions are to come online in 2010 we are witnessing a decline in its ratios particularly the
turnover ratios and the return on assets.
I would suggest investors not to lose faith in Engro and off load their holdings because of the
following reasons:
 Engro’s results are bound to improve in 2010 due to expansion effect.
 It’s a giant in its industry and will always look after its position in the industry
 Engro’s will to always stay ahead and give a tough time to its competitors
Page
67
Future Projections
Dominating Market Share

With current capacity of 975ktpa and a capacity utilization rate of over 100% achieved over the
last few years, Engro commands the 2nd largest market share in the domestic fertilizer market,
catering to 19% of the local urea market. The new plant is likely to bring in operational
efficiencies in the form of reduced fuel consumption and labor costs.
Shortage – Opportunity to capitalize!

Pakistan currently faces a fertilizer shortage of 1.1mntpa (CY07 demand of 6.8mntpa versus a
supply of 5.7mntpa), and we expect this deficiency to continue till 2010. Engro’s expansion will
ease the demand-supply gap, but is not likely to create a supply glut. Pakistan’s dependence on
its agricultural output can be judged from the fact that 20.1% of total GDP is contributed by this
sector alone. Secondly, almost 41% of total workforce in the country earns their livelihood from
agriculture related activity. With GDP assumed to grow at 6.5% in FY08 and over 6% in the
medium term (next 5 years) we believe the demand for fertilizers will remain strong going
forward. Pakistan also has one of the lowest consumption of fertilizer per acre resulting in low
crop yields. With rising awareness, increasing crop prices and improving per capita income we
believe fertilizer usage per acre is set to rise, which bodes well with the fertilizer manufacturers.
Urea - The next DAP!

During CY07 global DAP prices witnessed an unprecedented appreciation, with prices surging
from USD 288 per ton at the start of the year to reach an all time high level of over USD 700 per
ton by Dec’07 (+143% YoY). Despite the increase in subsidy from PKR400 per bag to PKR 470
per bag by the government (GoP) in FY08 budget, the hike in price resulted in a 46.8% YoY
decline in the offtake of the phosphatic fertilizer. The escalating international prices have also
been taken advantage of by the domestic dealers to manipulate the situation for their own gains.
According to MINFAL (Ministry of
Food, Agriculture and Livestock) majority of the dealers despite receiving the subsidy from the
State Bank of Pakistan (SBP) have been selling DAP at a price of around PKR 2,000 per 50kg bag
which is roughly the international price of DAP.
In the wake of high DAP prices; the consumer has started shifting to using urea, as is confirmed
by NFDC. Urea offtake has registered an increase of 0.7% YoY, while DAP has shown a decline of
36.4% YoY (Rabi 2007-08). We do not foresee DAP demand to rise over the next few years due to
its high price unless the GoP further enhances the subsidy. However, we believe, further increase
in subsidy allocation carries slim chance due to a widening budget deficit. Under this scenario
the most likely beneficiary will be Engro. We expect urea demand to grow robustly over the next
few years with YoY growth averaging 4%-4.5% as a number of farmers will revert to usage of
urea instead of the expensive DAP.
Investment in Subsidiaries
Engro has investments in a variety of businesses including chemical storage terminals, PVC resin
manufacturing, a power project and a dairy venture. We estimate payouts from subsidiaries to
Page
68
grow at a 5-year CAGR of 16% (CY07-12E) on the back of capacity expansions which are likely to
come online during CY09-11E.
 Enhancement of Engro Vopak’s storage capacity by 50% is likely to come online by CY09E.
Engro Polymer and Chemical Ltd’s capacity is being increased by 50% given the strong
demand of PVC pipes in Pakistan for irrigation, electrical insulation etc.
 Engro Foods Ltd (EFL) has increased its milk processing capacity by 300% during CY07.
Furthermore, the company plans to invest another PKR 3.4bn over the next 2 years in
establishing a dairy farm and launching an ice cream venture.
 Engro Energy has obtained Letter of Support (LoS) from PPIB for establishing a 220MW gas
fired IPP at a cost of USD 228mn which is likely to commence commercial operation in 2009.
IPP projects yield low-risk returns which will provide stable stream of revenues to the
company going forward.
Page
69
Problems & their Solution
Rising Inventory Levels
Engro has increased its inventory levels, most notably in the last couple of years. As a
result might be incurring carrying and handling cost. The inventory levels should be
reduced to control these costs.
Negative Cash Flow from Operations
For the first time in the last year Engro witnessed a negative cash flow. This shows that
Engro is loosing money on its operations. This is mainly due to higher interest charges which has
to be controlled
Utilization of Assets
Engro is inefficient in utilizing in assets. Part of this reason is the expansions which are
underway at Engro. However it lags the industry average. As in 2008 there was just a marginal
increase in sales compared to its increase in assets. This has to be taken into account.
Rising Debt
Rising debt post another problem for Engro. The effect of this was evident in 2008 as
Engro paid an great interest charges. Issue equity
Declining Margins
Engro’s profit margins have also declined. It although has improved its operational
efficiency but the impact is not seen due to a small rise in assets
Declining Market Value
Market ratios indicate that Engro’s investors are losing their trust on the stock. However in
must also be kept in mind of the harsh economic enviourment in the last two years. But
this is not alone the reason. Engro is not paying its shareholders less dividends. It has to
pay more dividends
Page
70
ANNEXURE
Ratios
2001 2002 2003 2004 2005 2006 2007 2008

LIQUIDITY
Current Ratio 1.23 1.17 1.44 1.54 1.79 1.56 3.11 2.55
Quick Ratio 0.92 0.88 1.12 1.18 0.87 1.12 2.46 1.61
Cash Flow Liquidity Ratio 0.91 1.01 1.46 1.11 0.95 0.94 1.77 0.27
Average Collection Period 18.57 17.39 18.93 14.70 10.70 12.75 21.88 4.04
Average Inventory Days 66.70 67.11 41.26 40.50 64.88 43.42 67.63 118.5
5
Average Payable Days 27.12 25.69 14.10 11.22 17.13 13.71 9.03 8.06
TURNOVER/EFFICIENCY
Receivable Turnover 19.39 20.70 19.01 24.49 33.64 28.24 16.46 89.16
Inventory Turnover 5.40 5.36 8.72 8.89 5.55 8.29 5.32 3.04
Payable Turnover 13.28 14.01 25.54 32.09 21.02 26.26 39.87 44.68
Fixed Asset Turnover 0.98 1.23 1.41 1.49 2.01 1.71 1.07 0.52
Total Asset Turnover 0.66 0.76 0.95 0.97 1.30 1.10 0.61 0.39
SOLVENCY/LEVERAGE
Debt Ratio 58% 63% 56% 50% 48% 41% 59% 62%
Long Term Debt To 36% 38% 36% 28% 28% 16% 50% 55%
Capitalization Ratio
Debt To Equity Ratio 137% 168% 127% 100% 91% 71% 147% 161%
COVERAGE
Times Interest Earned 2.69 4.04 6.82 11.73 9.21 7.58 6.13 3.01
Cash Coverage Ratio 3.27 4.22 5.78 7.71 9.71 6.86 9.64 1.42
Fixed Charge Coverage
Ratio
Cash Flow Adequacy Ratio 0.76 0.88 0.83 0.57 0.56 0.64 0.14 -0.01
PROFTABILITY
Gross Profit Margin 33% 33% 32% 26% 21% 24% 21% 27%
Operating Margin 21% 21% 21% 17% 14% 16% 14% 19%
Net Profit Margin 13% 10% 13% 13% 13% 14% 14% 18%
Cash Flow Margin 16% 16% 15% 8% 8% 8% 7% -1%
Return On Asset 9% 8% 12% 12% 16% 16% 8% 7%
Return On Equity 20% 21% 27% 24% 31% 27% 20% 18%
Cash Return On Asset 11% 12% 14% 8% 10% 9% 4% 0%
MARKET
Earning Per Share 7.65 8.15 10.18 10.53 15.16 15.47 17.17 20.5
Price to Earning 6.80 6.38 5.11 4.94 3.43 3.36 3.03 2.54
Page
71
Dividend Payout 85% 86% 79% 81% 73% 58% 41% 29%
Dividend Yield 13% 8% 9% 7% 7% 5% 3% 6%
Page
72
Income Statement
2001 2002 2003 2004 2005 2006 2007 2008

Net sales 8,220, 10,893, 12,173, 12,797,6 18,276,2 17,601, 23,183, 23,317,
158 319 006 62 77 783 222 198
Cost of sales 5,478, 7,343, 8,309, 9,528,2 14,364,2 13,364, 18,262, 17,120,
193 132 937 15 88 524 793 635
GROSS PROFIT 2,741, 3,550, 3,863, 3,269,4 3,911,9 4,237, 4,920, 6,196,
965 187 069 47 89 259 429 563
Selling & 1,005, 1,233, 1,328, 1,036,5 1,270,7 1,481, 1,641, 1,657,
distribution exp 997 089 731 09 03 730 724 815
Other Operating - 10 - - -
Income ,000
Profit From 1,735, 2,327, 2,534, 2,232,9 2,641,2 2,755, 3,278, 4,538,
Operations 968 098 338 38 86 529 705 748
Other income 198, 231 392 558,1 1,144,9 1,338, 1,831, 2,754,
588 ,398 ,093 54 87 854 260 330
1,934, 2,558, 2,926, 2,791, 3,786, 4,094, 5,109, 7,293,
556 496 431 092 273 383 965 078
Less : Finance 645, 575 371 190,3 286,6 363 535 1,508,
Charges 795 ,510 ,810 28 52 ,551 ,023 948
Other 97, 147 231 (285, (280, 287 339 579,
charges 500 ,261 ,370 711) 070) ,176 ,430 556
Profit Before 1,191, 1,835, 2,323, 2,315,0 3,219,5 3,444, 4,235, 5,204,
Taxation 261 725 251 53 51 656 512 574
TAXATION 127, 702 766 704,4 900,4 897 1,080, 964,
201 ,562 ,468 78 69 ,330 929 144
Profit after Taxation 1,064, 1,133, 1,556, 1,610,5 2,319,0 2,547, 3,154, 4,249,
060 163 783 75 82 326 583 430
EPS - basic & diluted 8 8 10 11 15 15 17 21
Page
73
2001 2002 2003 2004 2005 2006 2007 2008
NON CURRENT ASSETS
Property, plant and 6,861, 7,195, 7,095, 7,096, 6,840, 6,557, 13,811, 33,395,
equipment 576 577 720 330 058 603 683 762
Intangible assets - - - 9 21 18 133 122
,938 ,618 ,062 ,867 ,858
Long term investments 1,340, 1,340, 1,424, 1,424, 2,172, 3,657, 7,764, 11,091,
000 000 557 557 757 596 482 857
Deferred employee - - - - - - - 96
compensation exp ,078
Deferred expenditure 59 79 44 - - - - -
,689 ,861 ,808
Long term loans, 151 107 75 51 65 63 49 258
advances and other ,988 ,308 ,223 ,928 ,642 ,109 ,421 ,813
receivables including
derivatives
Foreign Exchange Risk - 153 - - - - - -
Insurance Contract ,660
TOTAL NON-CURRENT 8,413, 8,876, 8,640, 8,582, 9,100, 10,296, 21,759, 44,965,
ASSETS 253 406 308 753 075 370 453 368
CURRENT ASSETS
Stores, spares and loose 590 597 566 587 665 688 740 957
tools ,079 ,806 ,922 ,288 ,902 ,568 ,873 ,241
Stock in trade 424 771 385 484 1,922, 923 2,690, 4,680,
,870 ,055 ,582 ,748 982 ,448 153 896
Leasehold land held for - 4 - - - - - -
sale ,608
Trade debts 424 526 640 522 543 623 1,408, 261
,045 ,124 ,243 ,608 ,316 ,349 885 ,508
Deferred employee - - 93
compensation exp ,213
Loans, advances, 179 248 159 477 360 416 889 1,899,
deposits and ,121 ,278 ,821 ,636 ,923 ,758 ,621 124
prepayments
Other receivables 259 106 55 64 237 998 2,360, 5,057,
including derivatives ,532 ,948 ,031 ,662 ,931 ,565 495 581
Current Portion of - 77 - - - - - -
Foreign Exchange Risk ,915
Insurance contract
Taxation 499 170 - 160 - - 535 618
,460 ,234 ,291 ,699 ,746
Short term investments 695 748 766 864 138 228 6,153, 67
,940 ,797 ,022 ,223 ,016 ,518 948 ,811
Cash & bank balances 937 2,156, 1,651, 1,441, 1,142, 1,805, 1,617, 1,687,
,412 541 068 148 485 240 524 038
TOTAL CURRENT ASSETS 4,010, 5,408, 4,224, 4,602, 5,011, 5,684, 16,397, 15,323,
459 306 689 604 555 446 198 158
TOTAL ASSETS 12,423, 14,284, 12,864, 13,185, 14,111, 15,980, 38,156, 60,288,
712 712 997 357 630 816 651 526
Balance Sheet
Page
74
2001 2002 2003 2004 2005 2006 2007 2008
SHARE CAPITAL &
RESERVES
SHARE CAPITAL
Authorized 2,000, 2,000, 2,000, 2,000, 2,000, 2,000, 3,000, 3,000,
000 000 000 000 000 000 000 000
Issued, subscribed & 1,390, 1,390, 1,529, 1,529, 1,529, 1,682, 1,934, 2,128,
paid-up 364 364 400 400 400 340 692 161
Share Premium - - - - - 1,068, 3,963, 7,152,
369 977 722
Employee share option - - - - - 305
compensation reserve ,052
Reserves - capital - 139 - - - - - -
,036
- revenue / 3,844, 3,794, 4,129, 4,429, 4,429, 4,429, 4,429, 4,429,
general 240 240 240 240 240 240 240 240
- hedging - - - - - - 1,037, 2,157,
386 769
Unappropriated profit - - - - - 2,190, 4,102, 6,911,
148 366 124
TOTAL SHE 5,239 5,330 5,663 6,585 7,375 9,370 15,467 23,084
,887 ,276 ,539 ,884 ,566 ,097 ,661 ,068
NON CURRENT
LIABILIITES
Redeemable Capital & 2,463, 2,816, 2,661, 2,575, 2,887, 1,800, - -
accrued mark up 173 667 500 000 500 000
Long term loans 528 505 574 - - - 15,422, 27,756,
,925 ,607 ,000 520 714
Derivatives - - - - - - - 918
,050
Employee Housing - - - - - - - 73
Subsidy ,319
Liability against asset - - - 4 2 - - -
subject to finance lease ,515 ,289
Deferred Taxation 776 861 848 966 1,003, 1,127, 1,948, 2,412,
,955 ,659 ,722 ,295 177 139 980 757
Retirement & Other 155 165 187 68 43 41 38 44
service benefits ,981 ,453 ,889 ,514 ,004 ,165 ,560 ,264
TOTAL NON-CURRENT 3,925 4,349 4,272 3,614 3,935 2,968 17,410 31,205
LIABILITIES ,034 ,386 ,111 ,324 ,970 ,304 ,060 ,104
CURRENT LIABILITIES
Current portion of
- redeemable capital & 341 626 587 1,086, 687 1,087, - -
accrued mark-up ,905 ,282 ,500 500 ,500 500
- long term loans 197 254 - 594 - - 1,300, 76
,395 ,893 ,500 000 ,600
- liability against asset - - - 2 2 2
subject to finance lease ,085 ,226 ,321
Page
75
- other service benefits - 18 23 22 20 16 18 18
,954 ,421 ,471 ,320 ,477 ,552 ,334
Short term borrowings 582 1,121, 322 - - 1,299, - 1,711,
,270 330 ,635 961 275
Creditors, accrued & 1,650, 2,095, 1,301, 1,236, 1,969, 1,081, 3,752, 3,874,
other liabilities 593 963 570 790 001 745 945 824
Unclaimed dividends - - - 42 77 82 193 318
,803 ,870 ,360 ,067 ,320
Taxation - - 158 43 72 - -
,931 ,267 ,051
Proposed dividend 486 486 535 - - - - -
,628 ,628 ,290
TOTAL CURRENT 3,258 4,604 2,929 2,985 2,800 3,642 5,264 5,999
LIABILIITES ,791 ,050 ,347 ,149 ,184 ,415 ,564 ,353
TOTAL LIABILIITES 7,183 8,953 7,201 6,599 6,736 6,610 22,674 37,204
,825 ,436 ,458 ,473 ,154 ,719 ,624 ,457
TOTAL SHE & LIABILITIES 12,423 14,283 12,864 13,185 14,111 15,980 38,142 60,288
,712 ,712 ,997 ,357 ,720 ,816 ,285 ,525
Page
76
References
Engro Chemical site
Engro’s Annual reports
Research report by Fortune Securities Limited
Page
77

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ANALYSIS OF FINANCIAL

International versus Local

Future Outlook Sales & growth

2001 2002 2003 2004 2005 2006 2007 2008

Other income 2% 2% 3% 4% 6% 8% 8% 12%

24% 23% 24% 22% 21% 23% 22% 31%

Less : Finance Charges 8% 5% 3% 1% 2% 2% 2% 6%

Other charges 1% 1% 2% -2% -2% 2% 1% 2%

9% 7% 5% 4% -3% -4% -4% -9%

 Selling and administrative expenses contribution has decreased which is a positive

 An important development in 2008 is the amount spent on interest charges which

2001 2002 2003 2004 2005 2006 2007 2008

NON CURRENT ASSETS

Long term loans, advances 1% 1% 1% 0% 0% 0% 0% 0%

Stores, spares and loose tools 5% 4% 4% 4% 5% 4% 2% 2%

Stock in trade 3% 5% 3% 4% 14% 6% 7% 8%

Leasehold land held for sale - 0% - - - - - -

Short term investments 6% 5% 6% 7% 1% 1% 16% 0%

Cash & bank balances 8% 15% 13% 11% 8% 11% 4% 3%

NON CURRENT LIABILIITES

2001 2002 2003 2004 2005 2006 2007 2008

100% 97% 81% 64% -76% -87% -118% -281%

TAXATION 100% 552% 603% 554% 708% 705% 850% 758%

2001 2002 2003 2004 2005 2006 2007 2008

NON CURRENT ASSETS

Foreign Exchange Risk - - - - - - - -

Taxation 100% 34% 32% 107% 124%

NON CURRENT LIABILIITES

 Non-current liabilities have increased eight times from 2001.

2001 2002 2003 2004 2005 2006 2007 2008

2001 2002 2003 2004 2005 2006 2007 2008

NON CURRENT LIABILIITES

Engro is well placed to meet its obligations

Year Engro Industry

CASH FLOW LIQUIDITY RATIO

 It’s a balance sheet / Cash flow statement ratio

• Decline in cash generated from operations

AVERAGE PAYABLE DAYS INVENTORY

Industry’s payable days are much more higher than

Engro’s receivable turnover is moving in line with industry 100

As denoted by the graph, Engro’s inventory turnover has

COST OF GOODS SOLD

 Shows how many times in one accounting period

External analysis shows that Engro is paying off its

cash on short term securities. 15.0

COST OF GOODS SOLD

FIXED ASSET TURNOVER

• Engro might have idle capacity. 50.0

Engro lags far behind the industry.

TOTAL ASSET TURNOVER

Engro’s turnover did falls behind the industry in FY08. On 3.50

a closer look there is something interesting by analyzing 3.00

fell sharply in total asset turnover and that to an extent 2.00

holding high level of current assets in relation to fixed 0.50

Engro total asset turnover has declined due to high level

This increase is primarily due to increase in non-current

Engro debt ratio has increased but is at par with the

LONG TERM DEBT TO CAPITALIZATION

Finding: Engro Industry

Engro has high contribution of long term debt in

LONG TERM DEBT

DEBT TO EQUITY RATIO

We see a particular trend regarding this ratio. The ratio