Fauji vs Engro

Financial Risk Analysis of Fauji Fertilizer Co. Ltd.

2009

Acknowledgement

The compilation of this report could not have been realized without the blessings of Almighty

Allah. We are highly indebted to quite a few people who have been there from the beginning till

the completion of our research. Their undue support has been the source of inspiration for us to

complete it efficiently within time.

We would deeply like to thank our teacher for his guidance during the project. His excessive

support has been the source of motivation to perform our best, regarding the report.

We would also like to thank Mr. Mian Amin Rasool, Leasing Officer, Saudi Pak Leasing

Company and Mr. Adnan Ali Fateh, Senior Accountant, FFBL who provided us the supporting

material and all kinds of information required for the research.

ContentsAcknowledgement.......................................................................................................................................b

Introduction.................................................................................................................................................1

Fertilizer Sector in Pakistan.....................................................................................................................1

Urea Industry in Pakistan: an Overview..................................................................................................2

Fauji Fertilizer Company Ltd..................................................................................................................3

Vision..................................................................................................................................................3

Engro Chemicals Ltd...............................................................................................................................5

Vision..................................................................................................................................................5

Internal Analysis of Financial Ratios...........................................................................................................6

Short Term Liquidity Ratios and their Risk Analysis..............................................................................7

Operating Cycle and their Risk Analysis.................................................................................................7

Long Term Solvency Ratios and their Risk Analysis..............................................................................8

Performance Ratios and their Risk Analysis............................................................................................8

The Efficiency of Leverage and their Risk Analysis...............................................................................9

External Analysis of Financial Ratios........................................................................................................11

Short Term Liquidity Ratios and their Risk Analysis............................................................................12

Operating Cycle and their Risk Analysis...............................................................................................13

Long Term Solvency Ratios and their Risk Analysis............................................................................15

Performance Ratios and their Risk Analysis..........................................................................................17

The Efficiency of Leverage and their Risk Analysis.............................................................................18

Conclusion.................................................................................................................................................23

Recommendation.......................................................................................................................................24

References.................................................................................................................................................25

Appendix...................................................................................................................................................26

Balance Sheet of Fauji Fertilizers..........................................................................................................26

Income Statement of Fauji Fertilizers....................................................................................................27

Balance Sheet of Engro.........................................................................................................................28

Income Statement of Engro Fertilizers..................................................................................................29

Introduction

Fertilizer Sector in Pakistan

Pakistan’s economy is agro-based; however our cultivable land is deficient in nutrient

contents. This deficiency can only be overcome through the balanced use of fertilizer.

Presently, there are ten manufacturing units in Pakistan. Out of these, four units are

located in the public sector and six are operating in the private sector. The province wise

distribution of units confirms that five units are located in Punjab, three in Sindh and two

in the province of NWFP. The four major listed players in fertilizer sector in the country

are Fauji Fertilizer Company Ltd., Engro Chemical Pakistan Ltd., Fuji Fertilizer Bin

Qasim Ltd., and Dawood Hercules Ltd.

Fertilizer production is concentrated in nitrogenous fertilizers, which comprises 85% of

all fertilizers produced in the country. Although other types of fertilizers are also

produced in Pakistan, the bulk of which is imported. The main reason for this

concentration on nitrogenous fertilizers is that its main raw material i.e. natural gas is

available at lower cost in the country. The raw material for other fertilizers such as

potassium and phosphate has to be imported.

Financial Risk Analysis of Fauji Fertilizer Page 1

Urea Industry in Pakistan: an Overview

Manufacturer Urea Capacity Capacity

Utilization*

Share in Local

Production

Tons/year

FFC 1,904,000 118% 45%

Engro 850,000 107% 20%

FFBL 551,100 105% 13%

Dawood

Hercules

445,500 91% 11%

Pak

American

350,000 100% 8%

Pak Arab 92,400 124% 2%

Total 4,193,000 110% 100%

Fauji Fertilizer Company Ltd.

Vision

“Harmonizing the Company with fresh challenges and encompasses diversification and

embarking on ventures within and beyond the territorial limits of the Country in

collaboration with leading business partners.”

FFC was incorporated in 1978 as a private limited company. This was a joint venture

between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of

Denmark.

The initial authorized capital of the company was 813.9 Million Rupees. Additionally, FFC

has Rs. 1.0 Billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly

FFC-Jordan Fertilizer Company Limited). FFC commenced commercial production of urea

in 1982 with annual capacity of 570,000 metric tons.

Through De-Bottle Necking (DBN) program, the production capacity of the existing plant

increased to 695,000 metric tons per year.

Production capacity was enhanced by establishing a second plant in 1993 with annual

capacity of 635,000 metric tons of urea.

FFC participated as major shareholders in a new DAP/Urea manufacturing complex with

participation of major international/national institutions. The new company Fauji Fertilizer

Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited) commenced

commercial production with effect from January 01, 2000. The facility is designed to

produce 551,000 metric tons of urea and 445,500 metric tons of DAP.

In the year 2002, FFC acquired ex Pak Saudi Fertilizers Limited (PSFL) Urea Plant situated

at Mirpur Mathelo. This acquisition at Rs. 8,151 million represents one of the largest

industrial sector transactions in Pakistan

The overall financial position of the company is stable, over the year which is one of the

reason of high efficiency and profitability of FFC. All the profitability ratios are also

showing increasing trend on the back of increasing Sales as well as Gross profit which is

because of good investments by the company in high yielding projects. Leverage and

Liquidity ratios related to FFC are also improving from past to present. If the company would

be able to continue its current stability and investments in profitable projects then the

company would be able to increase its market share as well as Profitability.

Engro Chemicals Ltd.

Vision

"To be the premier Pakistani enterprise with a global reach, passionately pursuing value

creation for all stakeholders.”

The Company’s current manufacturing base includes urea name plate capacity of 975,000

tons per annum and blended fertilizer (NPK) capacity of 160,000 tons per year. A premier

brand and nationwide presence ensure sellout production. Additionally, the company imports

and sells phosphatic fertilizers for balanced fertility and improved farm yields. Engro’s share

of Pakistan’s phosphates market mirrors or exceeds its urea market share.

Expansion plans include a new urea plant of 1.3 million tons annual capacity, also at

Daharki. The US$ 1 billion project is well underway and on track for commercial production

in mid 2010. This addition will increase Engro’s urea market share to 35% from 19% at

present.

Internal Analysis of Financial Ratios2007 2008

Short Term Liquidity RatiosCurrent Ratio (Times) Current Assets/Current

Liabilities0.942 0.821

Quick Ratio (Times) Current Assets-Inventory/Current

Liability

0.886 0.799

Operating CycleReceivable Turnover (Times) Sales/Average Accounts

Receivable21.789 27.579

Receivable Turnover in Days 365/Receivable Turnover 16.752 13.235Inventory Turnover (Times) COGS/Average

Inventory22.950 40.480

Inventory Turnover in Days 365/Inventory Turnover 15.904 9.017Operating Cycle RTD + ITD 32.655 22.251

Long Term Solvency RatiosTotal Debt to Total Assets (Times) Total Debt/Total Assets 0.565 0.615Debt to Equity Ratio (Times) Total Debt/Total Equity 0.21 0.44Interest Coverage Ratio (Times) EBIT/Interest Expense 10.942 13.934

Performance RatiosReturn on Assets(Times) Net Income/Total Assets 0.183 0.204Return on Equity(Times) Net Income/Total Equity 0.421 0.531

The Efficiency of LeverageDegree of Operating Leverage(Times)

Sales-VC/Sales-VC-FC 1.62 1.76

Degree of Financial Leverage(Times)

Sales-VC-FC/Sales-VC-FC-Finance Cost

1.10 1.08

Degree of Combined Leverage(Times)

DOL*DFL 1.782 1.901

Break Even in Rs. FC/CM Ratio 12465410 14430166Beta 0.68Ke 14.07% 18.58%Kd 7.82% 8.32%Ki 11.40% 12.80%Effective Tax Rate 31.40% 35.02%WACC-% 13.80% 16.97%Stock Prices Rs. at year end 118.75 58.73

Short Term Liquidity Ratios and their Risk Analysis2007 2008

Current Ratio (Times) Current Assets/Current Liabilities

0.942 0.821

2007 2008

Quick Ratio (Times) Current Assets-Inventory/Current

Liability

0.886 0.799

Operating Cycle and their Risk Analysis2007 2008

Receivable Turnover (Times) Sales/Average Accounts Receivable

21.789 27.579

2007 2008

Receivable Turnover in Days 365/Receivable Turnover 16.752 13.235

2007 2008

Inventory Turnover (Times) COGS/Average Inventory 22.950 40.480

2007 2008

Inventory Turnover in Days 365/Inventory Turnover 15.904 9.017

2007 2008

Operating Cycle RTD + ITD 32.655 22.251

Long Term Solvency Ratios and their Risk Analysis

2007 2008

Total Debt to Total Assets (Times) Total Debt/Total Assets 0.565 0.615

2007 2008

Debt to Equity Ratio (Times) Total Debt/Total Equity 0.21 0.44

2007 2008

Interest Coverage Ratio (Times) EBIT/Interest Expense 10.942 13.934

Performance Ratios and their Risk Analysis2007 2008

Return on Assets(Times) Net Income/Total Assets 0.183 0.204

2007 2008

Return on Equity(Times) Net Income/Total Equity 0.421 0.531

The Efficiency of Leverage and their Risk Analysis2007 2008

Degree of Operating Leverage(Times) Sales-VC/Sales-VC-FC 1.62 1.76

2007 2008

Degree of Financial Leverage(Times) Sales-VC-FC/Sales-VC-FC-Finance Cost

1.10 1.08

2007 2008

Degree of Combined Leverage(Times) DOL*DFL 1.782 1.901

2007 2008

Break Even in Rs. FC/CM Ratio 12465410 14430166

2007 2008

Beta 0.68 0.68

2007 2008

Ke 14.07% 18.58%

2007 2008

Kd 7.82% 8.32%

2007 2008

Ki 11.40% 12.80%

2007 2008

Effective Tax Rate 31.40% 35.02%

2007 2008

WACC-% 13.80% 16.97%

2007 2008

Stock Prices Rs. at year end 118.75 58.73

External Analysis of Financial Ratios

Fauji Fertilizer Engro2007 2008 2007 2008

Short Term Liquidity RatiosCurrent Ratio(Times) 0.942 0.821 2.979 2.554Quick Ratio(Times) 0.886 0.799 2.468 1.774

Operating CycleReceivable Turnover(Times) 21.789 27.579 22.816 27.918Receivable Turnover in Days 16.752 13.235 15.998 13.074Inventory Turnover(Times) 22.950 40.480 10.108 4.645Inventory Turnover in Days 15.904 9.017 36.111 78.573Operating Cycle 32.655 22.251 52.109 91.647

Long Term Solvency RatiosTotal Debt to Total Assets 0.565 0.615 0.590 0.617Debt to Equity Ratio 0.21 0.44 0.98 1.25Interest Coverage Ratio 10.942 13.934 6.128 3.008

Performance RatiosReturn on Assets(Times) 0.183 0.204 0.082 0.070Return on Equity(Times) 0.421 0.531 0.200 0.184

The Efficiency of LeverageDegree of Operating Leverage(Times)

1.910 1.77 1.76 1.77


1.120 1.086 1.50 1.20


2.139 1.923 2.64 2.12

Break Even in Rs. 12465410 14430166 12207691 14495032Beta 0.68 1.036Ke 14.07% 18.58% 16.22% 20.72%Kd 7.82% 8.32% 6.29% 7.97%Ki 11.40% 12.80% 8.45% 9.78%Effective Tax Rate 31.40% 35.02% 25.52% 18.52%WACC -% 13.80 % 16.97 % 13.93 % 13.12 %Stock Prices in Rs. at the year end

118.75 58.73 265.75 96.46

Short Term Liquidity Ratios and their Risk AnalysisFauji Fertilizer Engro

2007 2008 2007 2008Current Ratio(Times) 0.942 0.821 2.979 2.554

Fauji Fertilizer Engro

2007 2008 2007 2008Quick Ratio(Times) 0.886 0.799 2.468 1.774

Operating Cycle and their Risk Analysis


Receivable Turnover(Times) 21.789 27.579 22.816 27.918


2007 2008 2007 2008Receivable Turnover in Days 16.752 13.235 15.998 13.074


Inventory Turnover(Times) 22.950 40.480 10.108 4.645


Inventory Turnover in Days 15.904 9.017 36.111 78.573


2007 2008 2007 2008Operating Cycle 32.655 22.251 52.109 91.647

Long Term Solvency Ratios and their Risk Analysis


Total Debt to Total Assets 0.565 0.615 0.590 0.617


Debt to Equity Ratio 0.21 0.44 0.98 1.25


Interest Coverage Ratio 10.942 13.934 6.128 3.008

Performance Ratios and their Risk Analysis


2007 2008 2007 2008Return on Assets(Times) 0.183 0.204 0.082 0.070


2007 2008 2007 2008Return on Equity(Times) 0.421 0.531 0.200 0.184

The Efficiency of Leverage and their Risk Analysis


2007 2008 2007 2008Degree of Operating Leverage(Times)

1.910 1.77 1.76 1.77



1.120 1.086 1.50 1.20



2.139 1.923 2.64 2.12


2007 2008 2007 2008Break Even in Rs. 12465410 14430166 12207691 14495032


Beta 0.68 1.036


2007 2008 2007 2008Ke 14.07% 18.58% 16.22% 20.72%


Kd 7.82% 8.32% 6.29% 7.97%


Ki 11.40% 12.80% 8.45% 9.78%


2007 2008 2007 2008Effective Tax Rate 31.40% 35.02% 25.52% 18.52%


WACC -% 13.80 % 16.97 % 13.93 % 13.12 %


Stock Prices in Rs. at the year end

118.75 58.73 265.75 96.46

Conclusion

Recommendation

References

http://www.ffc.com.pk/contents/annualrep.htm

http://www.engro.com/

http://www.igisecurities.com.pk/pdf/Pakistan_Fertilizer_Sector_Review.pdf

http://www.kse.com.pk

Principles of Corporate Finance, 8th edition by Brealey & Myers.

http://www.kse.com.pk/

http://www.igisecurities.com.pk/pdf/Pakistan_Fertilizer_Sector_Review.pdf

http://www.engro.com/

http://www.ffc.com.pk/contents/annualrep.htm

Appendix

Balance Sheet of Fauji FertilizersBalance Sheet as at December 31, 2008

2008 2007(Rupees '000) (Rupees '000)

SHARE CAPITAL AND RESERVESShare capital 4,934,742 4,934,742Capital reserve 160,000 160,000Revenue reserves 7,190,471 7,635,303

12,285,213 12,730,045NON CURRENT LIABILITIES 5,378,214 2,671,250DEFERRED TAXATION 2,431,895 2,363,526CURRENT LIABILITIESTrade and other payables 5,993,674 5,815,276Interest and mark - up accrued 194,570 184,430Short term borrowings 3,114,000 3,141,081Current portion of long term financing 743,036 1,022,500Taxation 1,778,361 1,313,106

11,823,641 11,476,393Total Liabilities and Shareholder's Equity 31,918,963 29,241,214

Balance Sheet as at December 31, 20082008 2007

(Rupees '000)

(Rupees '000)

PROPERTY, PLANT AND EQUIPMENT 12,730,813 10,390,490GOODWILL 1,569,234 1,569,234LONG TERM INVESTMENTS 7,744,779 6,325,129LONG TERM LOANS AND ADVANCES 163,102 142,782LONG TERM DEPOSITS AND PREPAYMENTS 1,524 2,144CURRENT ASSETSStores, spares and loose tools 3,034,268 2,407,988Stock in trade 258,094 642,836Trade debts 495,929 1,722,602Loans and advances 136,944 83,917Deposits and prepayments 107,369 33,665Other receivables 1,233,479 1,542,763Short term investments 3,511,563 3,027,664Cash and bank balances 931,865 1,350,000

9,709,511 10,811,435Total Assets 31,918,963 29,241,214

Income Statement of Fauji Fertilizers

Income Statement for the year ended December 31, 2008

2008 2007(Rupees

'000)(Rupees

'000)Sales 30,592,806 28,429,005Cost of sales 18,234,692 18,311,525GROSS PROFIT 12,358,114 10,117,480Distribution cost 2,668,571 2,418,793

9,689,543 7,698,687Finance cost 695,371 703,612Other expenses 895,647 845,327

8,098,525 6,149,748Other income 1,942,558 1,665,205NET PROFIT BEFORE TAXATION 10,041,083 7,814,953Provision for taxation 3,516,000 2,454,000NET PROFIT AFTER TAXATION 6,525,083 5,360,953Earnings per share - basic and diluted 13.22 10.86

Balance Sheet of EngroBalance Sheet as at December 31, 2008

2008 2007(Rupees

'000)(Rupees

'000)SHARE CAPITAL AND RESERVESShare capital 4,934,742 4,934,742Capital reserve 160,000 160,000Revenue reserves 7,190,471 7,635,303

12,285,213 12,730,045NON CURRENT LIABILITIES 5,378,214 2,671,250DEFERRED TAXATION 2,431,895 2,363,526CURRENT LIABILITIESTrade and other payables 5,993,674 5,815,276Interest and mark - up accrued 194,570 184,430Short term borrowings 3,114,000 3,141,081Current portion of long term financing 743,036 1,022,500Taxation 1,778,361 1,313,106

11,823,641 11,476,393Total Liabilities and Shareholder Equity 31,918,963 29,241,214

Balance Sheet as at December 31, 20082008 2007

(Rupees '000)

(Rupees '000)

PROPERTY, PLANT AND EQUIPMENT 12,730,813 10,390,490GOODWILL 1,569,234 1,569,234LONG TERM INVESTMENTS 7,744,779 6,325,129LONG TERM LOANS AND ADVANCES 163,102 142,782LONG TERM DEPOSITS AND PREPAYMENTS 1,524 2,144CURRENT ASSETSStores, spares and loose tools 3,034,268 2,407,988Stock in trade 258,094 642,836Trade debts 495,929 1,722,602Loans and advances 136,944 83,917Deposits and prepayments 107,369 33,665Other receivables 1,233,479 1,542,763Short term investments 3,511,563 3,027,664Cash and bank balances 931,865 1,350,000

9,709,511 10,811,435Total Assets 31,918,963 29,241,214

Income Statement of Engro Fertilizers

Income Statement for the year ended December 31, 20082008 2007

(Rupees '000)

(Rupees '000)

Sales 30,592,806 28,429,005Cost of sales 18,234,692 18,311,525GROSS PROFIT 12,358,114 10,117,480Distribution cost 2,668,571 2,418,793

9,689,543 7,698,687Finance cost 695,371 703,612Other expenses 895,647 845,327

8,098,525 6,149,748Other income 1,942,558 1,665,205NET PROFIT BEFORE TAXATION 10,041,083 7,814,953Provision for taxation 3,516,000 2,454,000NET PROFIT AFTER TAXATION 6,525,083 5,360,953Earnings per share - basic and diluted 13.22 10.86

Documents

Fauji vs Engro