A CASE STUDY ON ENGRO FERTILIZERS: DECLINED

SALES, PROFITS & SOLUTIONS

Manisha, Sarmad, Sajid, Anmol, Haneef, & Somaan

SUKKUR INSTITUTE OF BUSINESS ADMINISTRATION

ABSTRACT
This case study aims to describe how Engro Fertilizers Limited had lost its competitiveness,
under what situation Engro production went down, and the reasons behind the relative declined
sales of Engro Fertilizers Limited Company and the rapid decline of profits in its FY12. The
Agriculture industry is very much in demand, therefore, making a great importance of fertilizers
in Pakistan. The findings also revealed the marketing mix problems of Engro Fertilizers, more
specifically placement which is considered important factors by consumers.

INTRODUCTION
A.

Introduction to Fertilizer Industry

1. An Economy Deriving 20% of Its Output from Agriculture
Pakistan has moved from an economy, which was heavily dependent on agriculture,
to a relatively balanced economy based on services, industry and agriculture. As of
FY14, agriculture contributed 25.1% to the overall GDP. The governments policies
are directed towards improvement of agricultural output through increased credit
disbursements to the agricultural sector and improvement in irrigation.

2. Low Penetration of Fertilizers Expected to Improve

Fertilizer usage in Pakistan is low and the current fertilizer consumption stands at
162.5kg per hectare. This is in large part responsible for the low yield per hectare of
cultivated land which stands at 1.44tn per hectare. Fertilizer consumption closely
follows economic growth of the country as exhibited by the strong positive
correlation (R2=0.9841) between fertilizer consumption per hectare and nominal
GDP. As the economy is expected to perform well in the future with an estimated
nominal GDP growth of 14%, we expect fertilizer penetration to increase to 187kg
per hectare. This greater demand is expected to continue in the future as economic
growth continues.

3. Excess Demand Situation

The industry capacity currently stands at 5.8mntpa whereas local demand is
6.8mntpa. This excessive demand ensures sales of total production.

4. Low Resource Costs Result in High Profitability

Pakistans fertilizer manufacturers have low resource costs due to feedstock gas
subsidy advanced by the government. Through this subsidy manufacturers are able
to get feed stock gas at significantly lower rates than the market which improves
their profitability. This subsidy is expected to remain in place at least for the next
three to four years i.e. until the industry faces an excess supply situation. Later on
the subsidy may be withdrawn from that portion of production which is exported.
Production directed towards local sales is expected to continue receiving the subsidy.

5. Expansions May Open Up Attractive Export Avenues

The current excess demand situation has prompted capacity expansions which are
likely to open up profitable export avenues. Industry supply is expected to reach
7.5mntpa which will be higher than local demand. This surplus is likely to be
exported to the neighboring countries.

6. Expansions May Open Up Attractive Export Avenues

The current excess demand situation has prompted capacity expansions which are
likely to open up profitable export avenues post 2010. Industry supply is expected to
reach 7.5mntpa by 2010 which will be higher than local demand. This surplus is
likely to be exported to the neighboring countries.

B.

Introduction to Engro Fertilizers Public Limited

It was the time of 1957 when the Pak Stanvac, an ESSO/MOBIL joint venture led to the
discovery of Mari Gas reserves near Daharki. Thus, ESSO proposed the establishment of
urea Plant and this lead to the signed Fertilizer Plant agreement in 1964. In the
subsequent year the ESSO Pakistan chemical industry was incorporated. Later, as part of
an international name change program, Esso became Exxon in 1978 and the Company
was renamed Exxon Chemical Pakistan Limited.
In 1991, Exxon decided to divest its fertilizer business on a global basis. The employees
of, those times, Exxon Chemical Pakistan Limited partnered with international and local
financial institutions bought out almost Exxons 75% equity. It was the time when the
most successful employee buy- out in the corporate history of Pakistan recorded. Later on
the Exxon Chemical Pakistan Limited was renamed as Engro Chemical Pakistan Limited,
the company had faced many hardships but due to its consistent and enviable financial
performance it has grown of the core fertilizer business and successful business
diversification into our fields. Its performance & outlook is following the declared vision,
To be the premier Pakistani enterprise with a global reach, passionately pursuing value
creation for all stake holders.
Engro Fertilizers Limited produce a large quantity of fertilizers, few of them are as
follows:
o Engro Urea,
o Engro DAP,
o Engro Zingro, and
o Engro Zarkhez.
The principal activities of Engro Fertilizers Limited are the manufacturing, and marketing
of fertilizers. The Company's fertilizer brand, Engro', is the second highest selling urea

brand in Pakistan. The Company's financial and management strength is denoted by its
AA- rating by the Pakistan Credit Rating Agency.

C.

Introduction to Daharki
Daharki is a city of Ghotki District in the Sindh province of Pakistan. It is the capital
of Daharki Taluka - an administrative subdivision of the district. It is situate about
100 km from Sukkur, and between Mirpur Mathelo and Ubaro.
This is a small city like town in province of Sindh in Pakistan. Daharki is a business
centre with numerous industries particularly cotton factories, a fertilizer plant Engro
Fertilizer Ltd, oil and gas exploration companies Mari Gas Co. and Tullo Oil Pakistan
Ltd, Power Plants Star power co, Fauji Power Plant and Liberty power Plant.

PLANTS OF ENGRO FERTILIZERS DAHARKI

Plant-A
Plant-A was established in 1964 by an American Company. The annual capacity of
Plant-1 is 173,000 tons per day.

Plant-B
Plant-B is made of Japan technology. It has the annual capacity of 802,000 tons per day.

Plant-C
Plant-C was made in 2010. It has the annual capacity of 1,300,000 tons per day.

INDUSTRY TREND
Fertilizer industry in Pakistan faced over a 2.7 million tons urea production loss in 2012
mainly due to gas curtailment. The industry could only produce 4.2 million tons of urea
having the maximum capacity of about 6.9 million tons per annum.
The sources from the interview told our group that during the last few years of fertilizer
industry, it has invested $2.3 billion, which is equal to approximately Rs. 230 arab, in
Pakistan based on the government approved agreement designed to encourage investment
in fertilizer sector. However, groundbreaking gas curtailment to fertilizer plants, in
violation of the government existing supply contract of 12 month a year, has caused
significant loss to the fertilizer industry and thus a big player of industry as well during
the year of 2012.
The interviewee also informed us that so far the industry has suffered a production loss of
over 2.7 million tons in 2012. The domestic fertilizer plants produced only 4.2 million
tons of urea against a total production capacity of over 6.9 million tons per annum.
This declination in domestic production of urea also has compelled the government to
import huge quantity of urea fertilizer to meet the farmers demand. The interviewee
further added because of this loss of production the government has imported over 1.23
million tons of urea therefore; the spending on this import is $566 million dollars and
also paid over Rs.24 billion rupees subsidy to keep the imported ureas prices same as
with locally produced urea.
On the contrary the person also added that the cash strapped Ministry of Finance is not
very happy over this situation. They are not happy because Pakistan has all the required
production facility to meet the domestic demand and even Pakistan can export over one

million ton of urea to earn hundreds of millions of dollars every year if domestic fertilizer
plants are provided with uninterrupted gas.
The countrys overall urea production capacity is about 6.9 million tons annually, as
against the demand of some 5.8 million tons. This extra production of Urea than demand,
if produced, can provide an opportunity to export some one million ton of urea annually.
The sources said that despite all the pressing problems, domestic urea price is still
Rs.1840 per bag that is below international urea price which is 2200, which is almost five
times larger than feed gas subsidy of Rs.400 per bag.
The current domestic urea price is Rs 1,840 per bag, including company price Rs 1,564
per bag and Rs.276 per bag General Sales Tax and advanced tax, as against average
international urea price of Rs 2,990 per bag inclusive of GST during 2012, we inquired.
The uplift of fertilizer industry by Pakistani government was actually meant to pass on
the benefit of domestic manufacturing to the farmer. This is evident from the fact that
during 2012 domestic urea sold at $311 per ton while it received gas at $3.8 per MMBTU
(Million Metric British Thermal Units). In comparison Middle Eastern producers sold
urea at $470 per ton while paying approximately $0.7 per MMBTU for gas.
They further said that over the last five years the farmers have received benefit of Rs 500
billion, of this Rs 140 billion was contributed by the government in form of feed gas
subsidy and Rs 360 billion was contributed by the fertilizer manufactures by keeping urea
prices significantly lower than the international prices.
The concerned person claimed that SNGPL-based plants are facing the worst crisis of
their history as such gas curtailment was never witnessed before 2012. He further added
that the fertilizer sector despite making a large investment of $2.3 billion in last 4-5 years

on new production capacity, which is making Pakistan worlds 7th largest urea
production country, is sitting on an idle urea capacity of over 2.5 million tons.
The person also claimed and curious about the gas curtailment and said that if the same
gas curtailment continues during 2013, the SNGPL-based fertilizer plants may force to
shut down permanently resulting in lay off of highly skilled manpower, increase in bad
debts and huge burden on national exchequer as well as increasing the number of
unemployed person in Pakistan, to import urea to meet the urea shortfall.
Concluding the industry trends, its not just fertilizer plants that would face the burnt, the
whole farmers community, as well as the government would be the ultimate losers and
the economy downfall if fertilizer plants with over 2 million tons of capacity were
shutdown due to unavailability of gas. The government needs to support fertilizer
industry to ensure inexpensive local urea to farmers and import fuel for the power sector
and the industry which is more cost effective.

Stakeholders Perspectives on Engro Fertilizers

Engro Fertilizers is skating on thin ice because customers are unhappy because of the
high prices. Strategic decisions and sustainability development must be made to help
the organization to help the organization to get back on the track. Special attention
must be given to find the new gas reserves for the production of Urea. The company
is expecting to invite public to invest in business, in other words IPO.

FINANCIAL PERFORMANCE OF ENGRO FERTILIZERS

The company shows a good financial performance in every field, the sales of the year
2007 were Rs.23.2 billion which is higher than 2006 by 32%. The profit after tax was
3.15 billion which is a new

35

record of the company and

higher by 24% over the 2006

30

profit of Rs. 2.55 billion.

However, as the graph depicts,

25

Sales in 2009 were Rs. 30.1

billion and profits were Rs. 3.9

20

billion. Sales in 2010 were Rs.

19 billion and Profits Rs. 3.7

Sales

15

Profits

billion. Sales in 2011 were Rs.

31.3 billion and profits were

10

Rs. 4.5 billion. Sales in 2012

were Rs. 30.6 billion and lose

were (Rs. 2.9 billion).

There are few reasons for

0
2009

which this graph of Profit is

declined. This paper further
discusses the situation of the
company
behind
decline.

and
the

the
sudden

reasons
profit

2010

2011

2012

-5

Figure 1.1

THE SITUATION
Issue and Opportunity Identification
Engro Fertilizers Limited possesses a 24 year old fertilizers experience and possesses
1,769 employees. Three plants for fertilizers in Daharki can produce up to 2,275,000
per day, 975,000 from old Plants at Daharki and 1,300,000. The company is facing
few challenges because of Government back off from the agreement, fewer gas
reserves, inconsistent production of fertilizers, all together resulting in lower
production which leads to lower sales and finally lower profits. Customers demands
are not fulfilled due to the low production and consequently it gives space to the new
entrants and competitors to fill in the space and snatch the market share of Engro
Fertilizers. A manager at Engro Fertilizers claims, The biggest challenge for Engro
is to find the new the gas supply reserves. The company will have to figure out
strategies to overcome the challenges.

Problems
1. Declined Sales:
The sales of Engro fertilizers declined with a rate of approximately 3%.

2. Declined Profits:
The profits of Engro fertilizers declined with a rate of 164%, this shows a negative
profit or net loss.

3. Hefty Financial Charge:

Hefty Financial charges on its finances are also a major problem for Engro fertilizer

to overcome. Otherwise, it will have to face a lot of serious financial losses.

4. Placement Issue:
In our interview, we come across another problem of Engro that is placement. The
interviewee told us that there are two phases of Short Supply and Long Supply. In
Short Supply demand of fertilizers is greater than the supply of fertilizers. In Long
Supply demand of fertilizers is less than the supply of fertilizers. In short supply
dealers have the chance to charge higher prices because of demand supply gap, but
Engro company push the dealers not to charge higher prices, on the contrary in long
supply when there is less demand and more supply then Engro push the dealers to
place Engro whether it is being sold or not. This doesnt create a win-win situation
and therefore the dealers dont want to help the company in its bad time, because
company doesnt allow them to charge higher prices when there is short supply. This
creates a problem for Engro in placement in long supply and also incurs cost of
warehousing the urea in long supply.

Root Causes of Problems

Declined Sales:
The 3% sales decline in FY12 is actually caused by the floods at Badin-the main
city and capital of Badin District in Sindh, Pakistan. It lies east of the Indus River.
The region is swampy, fertile, and suitable for growing rice. Some oil fields are
located near the town in the seasonally inundated Rann of Kutch region. It is the
main town of Badin District, in 2011. A flood caused in Badin became the reason
for the downfall of sales in the beginning of the new FY12 of Engro Fertilizers.
Not only this, the flood at the end of the Fiscal Year 2012 (FY12) in the Khyber
Pakhtunkhwa, Upper Sindh, Southern Punjab and Balochistan regions of Pakistan

further aids in the declination of Sales in FY12. Therefore, the demands of

fertilizers in the affected areas were no more and the same was the case with other
players of fertilizer industry. They were also affected by these floods and they
moved their inventories to other parts of country which creates competition to
Engro to encourage its sales. Thus, this all scenario affected the sales of Engro in
the FY12.

Declined Profits and Hefty Financial Charges

The reasons for the declined sales and hefty financial charges are because of
various reasons. Actually, the first reason is the agreement between Engro and
Government and then government back off from the agreement.
Engro Fertilizers and Government had a contract to receive uninterrupted gas for
20 years and at concessionary prices for 10 years as per the Gas Sales Agreement
(GSA). After the agreement Engro was up to setting up the worlds largest urea
train plant.
Therefore, in December 2006 under the umbrella of Fertilizer policy 2001 the
Government invited bids for allocation of 100mmscfd gas to enhance local urea
production and to reduce reliance on imports. This was the first time that gas was
allocated through an international competitive bid and Engro Fertilizers was
awarded this gas in a transparent and competitive bidding process involving four
local and international parties.
Engro Fertilizers, then, invested $1.1 billion dollars one of the largest private
investment ever in the history of Pakistan on the commitment of the Government
of Pakistan for guaranteed gas on an uninterrupted basis for Engro Fertilizers. The
plant which was established in 2010 is the worlds largest single train urea plant.

The terms of GSA were agreed upon prior to the bidding process and have not
been changed in any way since.
Later on, in April 2010 Pakistan started facing gas shortages which in result lead to
gas curtailment to the fertilizer industry. Due to low priority given to the fertilizer
sector in this gas deficit scenario, Engro Enven only received gas for 189 days in
2011 and 45 days in 2012 (Noted as Important). Engro Fertilizers suffered
severely with a combined margin loss of Rs.45 billion in 2011-12 and also
reported a pre-tax loss of Rs. 3.9 billion during 2012 and a after tax loss of Rs. 2.9
billion.
This agreement was a major reason and can be said as the root cause of all
problems, whether it is declined in sales, declined in profits, or hefty financial
charges.
Gas shortage in Pakistan became the reason for the breach in this agreement. It is
because of gas shortage that the production from the new plant was not as per to
expectation but it also affected the production of other two plants of Engro as well,
which became the reasons for low production and ultimately lower sales for FY12.
It is because of this agreement for which Engro went into the decision of setting up
the worlds largest urea train plant. This agreement leads to the financing of $1.1
billion. Therefore, Engro took long-term loan and equity financing, to finance the
worlds largest urea train plant, from creditors and investors and also took loan of
$30 million from World Bank, to help itself with an expansion plan that will
double production and create job opportunities.
After the acquired finances and successful completion of project, of new plant in
Daharki, the company was ready to touch new heights of production, sales, and

profits but it did not go as planned and they got stuck up with gas curtailment,
production losses, sales decline, and hefty charges.
Payment of loan was not possible in this state. Therefore, the company was forced
to approach its creditors to re-profile and re-schedule its long term obligations, as
the company was in danger of facing bankruptcy due to the gas curtailment. After
bearing this loss Engro fertilizers has filed a claim of Rs. 53.63 billion against Sui
Northern Gas Pipelines Limited (SNGPL) due to losses from gas curtailment, and
this claim increases by Rs2.5-3.0 billion for each month till gas is restored.
In October 2011, the Sindh High Court ordered the immediate restoration of gas to
Engro Fertilizers under the contract upholding the sovereign guarantee and the
GSA but this decision was not implemented.
In simple, because of the agreement of Gas supply, Engro and Government came
into an agreement of making a new plant at Daharki. In result, Engro took loan and
used its equity finances to finance this new project of new plant but because of gas
curtailment government was unable to fulfill its promise of providing the required
gas to run the new plant. This, in result, decrease the sales, rapidly decreased the
profits and it was about to put Engro in bankruptcy, but Engro rescheduled and reprofile its long term obligation by paying them Hefty Financial Charges-finance
charge is often an aggregated cost, including the cost of the carrying the debt itself
along with any related transaction fees.

PROPOSED SOLUTIONS
1. Identify the Alternatives
The primary purpose of any business, including Engro Fertilizers, is to meet the needs
of the customers with the companys product. Without a customer to sell to, the
business would not exist. As, Engro Fertilizers recently experienced a decline in the
sales due to various reasons mentioned above this ultimately has resulted in decreased
revenue and company profit. Therefore, the company should identify some other
alternatives in order to fulfill the demand, to produce the expected production of 2.27
million tons.
An alternative can be, as mentioned by the interviewee as well, to take the supply of
Gas from Guddu Gas reserves. Though the Gas supply in Guddu is low but Engro can
use power compressors to supply the gas to its Plant for urea production.

2. Evaluation of Alternatives
In order for Engro Fertilizers to succeed, the company must consider the risks and
challenges associated with the alternatives. When seeking the optimal solution in
form of an alternative, management must consider the challenges associated with the
alternative.
In the proposed solution, Engro must consider the risks and challenges associated
with the alternatives. In this situation, Engro must consider that whether they can use
that Gas reserves in Guddu to have its supply. Can the Gas reserves is sufficient to
supply the gas to its plants? And, will there be any problems face by this alternative?

3. Making the Decision

When deciding the proposed solution, Engro Fertilizers must understand what their
goals are, and also what challenges they have faced. These factors will help the
company decide how to move forward and become the leading company by
overcoming the problems. The Engro Company after identify and evaluate the
alternatives must make decision accordingly, by looking at the pros and cons of the
alternative and then make the decision.
In the proposed solution Engro must look that whether the company can afford the
new gas supply of Guddu and use it effectively and then make the decision whether to
go or not to go with this decision.

4. Developing and Implementing the Solution

In order for the plan to succeed, it must be implemented correctly. The
implementation part of a plan is difficult because of negotiations, internal resistance
to change, and meeting difficult timelines. Communication between management and
employees must become the norm during the implementation process. In successful
projects, preparation for implementation is done in advance. It is addressed in the
initial plan and throughout the project.
In the proposed solution the Engro fertilizers should implement the idea of getting
supply from Guddu and implement it using different tools, like contracts, agreement,
negotiations, etc.

5. Evaluating the Results

In this step company should evaluate the expected benefits of the alternatives after a
time period to ensure that the proposed alternative is going as planned.
In the proposed solutions, the Engro Fertilizers must focus on the aftermath of
implementing the alternative.

The company should also provide some benefits to the dealers in Short supply in
order to overcome placement issue she is facing.

CONCLUSION
The case study research has proven that the there is decline in Sales and profits of the
company and it has badly influence the overall performance of Engro, which lead the
company to lose its competitiveness. It also has proven that the company is facing the
placement issue.
Therefore, Engro Fertilizer must focus on identifying the new supply of Gas by
spending on R&D and should provide win-win situation to overcome placement issue.

A PICTURE WITH MR. SYED MUHAMMAD SHERIYAR, DISTRBUTOR OFFICER