Final Report of Engro

University of Central Punjab

ANALYSIS OF FINANCIAL STATEMENTS

FINAL REPORTSubmitted To:

Prof. ASIF BASHIR

Submitted By:

WASEEM AZAM L1F09MBAM2141

Section: A

Faculty of Management

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Date of Submission: 11-06-2011

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PREFACE

The financial analysis of companies is usually undertaken so that investors, creditors, and other stakeholder can make decisions about those companies. Business environments are becoming more and more complex with the passage of time. To understand and deal with such riddle phenomena, one need a lot of energy and knowledge .So business education has become an evolving science, which helps to solve the business problems. Academic education provides general knowledge about business decision and policies.

Financial analysis– as an integral part of MBA (Finance) , provides the opportunity of peeping into real professional life of the business people. It enables us to evaluate and understand the practical application of all the

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terms & techniques that we have studied during our course work.

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AKNOWLEDGEMENT

Praises to Almighty ALLAH, who blessed upon me the potential and ability to accomplish the task. Salaam to Holy Prophet Hazrat Muhammad (S.A.A.W).

I wish to express deep sense of gratitude to, SIR ASIF BASHIR, who provided me this opportunity to achieve this practical experience under his valuable supervision and helping suggestions to complete this report.

I am thankful to all those people who help me a lot and provided me an Opportunity to understand and learn every aspect of analysis.

Waseem Azam

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DEDICATED

TO MY

EVER LOVING PARENTS

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Table of ContentsPREFACE........................................................................................................................................2

AKNOWLEDGEMENT..................................................................................................................3

Introduction:....................................................................................................................................9

Principal line of Business:...............................................................................................................9

Diversification:..............................................................................................................................10

Competitors:..................................................................................................................................10

Competitor Comparison:...............................................................................................................11

Sales Trend:...................................................................................................................................12

Table 1.......................................................................................................................................12

Table 2.......................................................................................................................................13

Sales trend Analysis:......................................................................................................................13

Capitalization:................................................................................................................................14

SECP Registration:........................................................................................................................14

Ownership:.....................................................................................................................................15

International:..................................................................................................................................15

Export Sales...............................................................................................................................15

Credit Analysis..............................................................................................................................16

Revenue Recognition.....................................................................................................................16

Stock in trade.................................................................................................................................16

Factorization..................................................................................................................................16

Line of Credit.................................................................................................................................17

Restriction on sales of Assets........................................................................................................18

Business Cycle...............................................................................................................................18

Analysis of current assets and current liabilities Composition:.....................................................18

Current assets composition:.......................................................................................................18

Operating current assets cycle:..............................................................................................18

Line Graph of Assets composition:.......................................................................................20

Finding:..................................................................................................................................20

Current liabilities composition:.....................................................................................................21

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Break down of Current Liabilities.............................................................................................21

Findings:................................................................................................................................22

Working Capital:...........................................................................................................................22

Current Ratio:................................................................................................................................23

Graph of current ratio:...............................................................................................................23

Finding:......................................................................................................................................23

Net Trade cycle:.............................................................................................................................23

Graph of trade cycle:.................................................................................................................24

Findings:....................................................................................................................................24

Cash Ratio:.....................................................................................................................................24

Graph of cash ratio.....................................................................................................................25

Finding:......................................................................................................................................25

Operating Measures, Account Receivable:....................................................................................25

Account Receivable Turnover:..................................................................................................26

Collection period.......................................................................................................................26

Operating Measure, Inventory Turnover:......................................................................................27

Inventory turnover ratio:................................................................................................................27

Days to sell inventory:...............................................................................................................28

Conversion period:.........................................................................................................................28

Days in purchases in account payable:..........................................................................................29

Liquidity Index:.............................................................................................................................29

Acid Test Ratio:.............................................................................................................................30

Lines of credits:.............................................................................................................................31

Credit analysis decision:............................................................................................................31

Sensitivity analysis........................................................................................................................32

Pro-forma income statement:.........................................................................................................32

Pro- Forma balance sheet statement..............................................................................................34

Pro- forma cash flow statement.....................................................................................................35

LONG TERM SOLVENCY..........................................................................................................38

Deferred Tax liability account:......................................................................................................38

Liquidity Risk:...............................................................................................................................39

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Pension, gratuity and provident fund.............................................................................................39

Unconsolidated subsidiaries..........................................................................................................39

Minority interest:...........................................................................................................................40

Inventory:.......................................................................................................................................40

Intangible Assets:...........................................................................................................................40

Computer software and licenses................................................................................................40

Rights to future gas utilization...................................................................................................41

Contingent liabilities......................................................................................................................41

Market value of assets:..................................................................................................................41

Borrowing to total capital:.............................................................................................................42

Debt to Equity ratio.......................................................................................................................43

Fixed assets to common equity......................................................................................................44

Net tangible assets to long term assets..........................................................................................44

Total liabilities to net tangible assets.............................................................................................44

Time interest earned:.....................................................................................................................45

Z- Score.........................................................................................................................................45

Long term solvency decision:........................................................................................................46

PROFITABILITY..........................................................................................................................47

Return On Invested Capital...........................................................................................................47

Return on Equity:...........................................................................................................................47

Du-Pont Analysis...........................................................................................................................48

Return on Assets............................................................................................................................49

Return on long term capitalization:...............................................................................................50

Disaggregation of return of assets:................................................................................................51

Sustainable rate..............................................................................................................................52

VALUATION:...............................................................................................................................53

Estimated required rate of Return:.................................................................................................53

Interpretation:............................................................................................................................53

COST OF ASSETS PRICING MODEL (CAPM):.......................................................................53

Interpretation:............................................................................................................................53

Regression line...............................................................................................................................54

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Security Market line:.....................................................................................................................54

Estimated price:.............................................................................................................................56

Price comparison:..........................................................................................................................56

Price valuation decision:............................................................................................................56

Conclusion:....................................................................................................................................57

Reference:......................................................................................................................................58

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Introduction:

At the end of 2009, Engro Chemcial Pakistan Limited (ECPL) demerged and transferred its core

fertilizer business iinto a new subsidiary, Engro Fertilizers Limited. This demerger is part of

Engro Chemical Pakistan Limited’s conversion into a holding company structure, namely Engro

Corporation Limited.

Engro Chemical Pakistan Limited is the second largest producer of Urea fertilizer in Pakistan.

The company was incorporated in 1965 and was formerly Exxon Chemical Pakistan Limited

until 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of

then Exxon Chemical Pakistan Limited, in partnership with leading international and local

financial institutions bought out Exxon’s 75% equity. This was at the time and perhaps still is the

most successful employee buy- out in the corporate history of Pakistan. Renamed as Engro

Chemical Pakistan Limited, the company has gone from strength to strength, reflected in its

consistent and enviable financial performance, growth 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”

Principal line of Business:

Engro is an agricultural based company. The core business is manufacturing and marketing of

chemical fertilizers. We are Pakistan’s one of the largest producers of urea fertilizer which is

manufactured at Daharki and marketed under brand name Engro. We also produce crop specific

NPK fertilizers at our plant at Port Qasim Karachi. Engro also markets imported MAP fertilizer

under the brand name of Zorawar and imported DAP fertilizer.

Engro Chemical Pakistan Limited produced a large quantity of fertilizers such as

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Engro Urea

Engro DAP

Engro Zorawar ; and

Engro Zarkhez.

Diversification: The Engro Corp holding the following business units

Engro Fertilizers Limited

Engro Vopak Terminal Limited

Engro Polymer & Chemical Limited

Engro Energy Limited.

Competitors:

Fuaji Fertilizer Company Limited

Dawood Hercules

Pak Saudi Fertilizer Limited

Pak Arab Fertilizer

When we talk about Engro chemical’s competitor in the market, engro chemical’s main

competitor is FFC (FAUJI FERTILIZER COMPANY).

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 largest urea manufacturing facility of Pakistan consisting of two ammonia/urea units owned

by FFC is built at Goth Machhi in district Rahim Yar Khan. Goth Machhi is situated at a distance

of 2 kms from the main Lahore-Karachi highway and is adjacent to the main railway line. The

two plants are based on natural gas from Mari Gas Fields and have an annual designed

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production capacity of 1.3 million tons of urea. Fauji Fertilizer Company currently has 1,769

employees with sales of 16.79 billion Pakistan.

The following tables provide a comparison of operating performance of ECPL with its closest

competitor and market leader - Fauji Fertilizer Company:

Competitor Comparison:

Engro Chemical Fauji Fertilizer

Market

share

16% 49%

Capacity 850,000 tons per annum (2

plants)

1,300,000 tons per annum (1

plant)

Products Aside from sale of Engro

urea, ECPL also sells

imported DAP, NP, MOP

and NPK fertilizers and

hybrid seeds.

Sells prilled urea.

Affiliate (FFC Jordan)

manufactures granular urea

& DAP.

Brand Engro Urea – popular brand

in southern part of the

country.

Sona urea – very popular

product, esp. in northern

Pakistan. Sona is granular

urea which is perceived to be

better.

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Sales Trend:

Table 1

Year Sales(Million Rupees) FY 2000 8,080 FY 2001 8,006 FY 2002 10,620 FY 2003 11,884 FY 2004 12,798 FY 2005 18,276 FY 2006 17,602 FY 2007 23,183 FY 2008 23,317 FY 2009 30,172

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FY 2000

FY 2001

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Sales(Million Rupees)

Sales(Million Rupees)

Table 2

Year Sales(Million Rupees)

Change in Amount

Change in Percentage

FY 2000 8,080 - -FY 2001 8,006 (74) -1%FY 2002 10,620 2,614 33%FY 2003 11,884 1,264 12%FY 2004 12,798 914 8%FY 2005 18,276 5,478 43%FY 2006 17,602 (674) -4%FY 2007 23,183 5,581 32%FY 2008 23,317 134 1%FY 2009 30,172 6,855 29%

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FY 2001

FY 2002

FY 2003

FY 2004

FY 2005

FY 2006

FY 2007

FY 2008

FY 2009

-10%

0%

10%

20%

30%

40%

50%

Change in Percentage -

Change in Percentage -

Sales trend Analysis:The table 2 shows that Engro chemical Pakistan limited sales were not consistent. In 2005

company shows a good financial performance in every field, the sales of that year were higher

than 2004 by 43%. But in very next year 2006 sales drop down about 4% which was not good

sign for upcoming future. The company performs reverse to the expectation and got 32%

increase in sales in 2007, but repeated the previous situation in 2008.

Capitalization:Current Price (4/3/2011): Rs. 227.10

Ticker: ENGRO Country: PAKISTAN

Exchanges: KAR Major Industry: Chemicals

Sub Industry: Miscellaneous Chemicals

2009 Sales 58,152,368,000(Year Ending Jan

Employees: 873

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2010).

Currency: Pakistan Rupees Market Cap: 74,429,031,595

Fiscal Yr Ends:

December Shares Outstanding:

327,736,819

Share Type: Ordinary Closely Held Shares:

135,368,043

SECP Registration:

Name: ENGRO CORPORATION LIMITED

Registration # 0002159

Old Registration # 1879/19650907

Registration Date Tuesday, September 28, 1965

CRO Karachi

Ownership:Engro Corp (Engro chemicals Pakistan limited) is an independent company. Shareholder holding 10% or more voting interest in the company is Dawood Hercules Chemicals Ltd.

International:

Export Sales

Subsidiary Companies

2009 2008

Engro Foods Limited

15,994 9,923

Engro Ploymer and

1,463,441 79,223

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Chemical LimitedAvanceon Limited

259,224 212,251

Engro Eximp (private) Limited

114,303 Nil

Credit Analysis

Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefit will flow to the

group and the amount of revenue can be measured reliably. Revenue is measured at the fair value

of the consideration received or receivable and is reduced for marketing allowances. Revenue is

recognized on the following basis:

Sales revenue is recognized when product is dispatched to customers or services are

delivered.

Income on deposits and other financial assets is recognized on accrual basis.

Dividend income from investment is recognized when the Group’s right to receive

payment has been established.

Revenue from the supply of electricity is recorded based upon the output delivered.

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Stock in trade

These are valued at the lower of cost and net realized value. Cost is determined using weighted

average method except for raw material in transit which are stated at cost (invoice value) plus

other charges incurred thereon till the balance sheet date. Cost in relation to finished goods

includes application purchase cost and manufacturing expenses. The cost of work in process

includes material and proportionate conversion costs.

Net realized value signifies the estimated selling price in the ordinary course of business less all

estimated costs of completion and costs necessarily to be incurred in order to make the sales.

Factorization There is no concept of factorization in Engro Corporation limited Pakistan.

Line of Credit Engro Corporation Limited has rated as

TFCs-I 18-Apr-11 AA TFCs-II 24-May-11 AA

Ratings (April 2011)

ENGRO CORPORATION LIMITED (ECL) Entity

New Previous

Long Term AA AA

Short Term TFCs Secured, Listed PKR 4,000mln Privately Placed PKR 4,000mln PKR 2,000mln

A1+ AA

AA

AA

A1+ AA

AA

AA

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Work-in Progress

Finished Goods

Raw Material

The above rating of ENGRO reflects relatively low business risk as from source a favorable

demand and supply situation, stable margin an increasing dividend income from subsidiaries.

The company start new urea expansion project, although the project increased leverage in

ENGRO’s capital structure, but financial risk is predictable to remain within in acceptable limits.

But when started project contributing towards profitability then rating has positive impact.

Restriction on sales of Assets

Business Cycle

Analysis of current assets and current liabilities Composition:

Current assets composition:

Current assets composition is the understanding of factors that have caused changes in the

amount of a company’s current assets over a period of time or mostly from one period to another

period, for analysis it’s important to know the changes that have occurred in current assets

composition. The importance of any company’s current asset composition depends on the

proportion of current assets to current liabilities not the Rupees amount of current assets

compositions.

Operating current assets cycle:

The first three elements (inventories, accounts receivable and cash) are operating current assets;

the cash is related to investment of excess cash.

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Cash is used to pay for raw materials and spent also on labor and other aspects that turn raw

materials into work in progress and, finally, into finished goods. The finished goods are sold

either for cash or on credit. In the case of credit customers, there will be a delay before the cash

is received from the sales. While the company is waiting for the cash payment to be received, it

will record the amount of sales as accounts receivable. When the cash is received, the cycle is

completed.

The size and composition of current assets can vary between industries. ENGRO is a

manufacturing business and typically invest heavily in raw material, work in progress and

finished goods, and finished goods, and often sell its goods on credit, thereby generating trade

debtors.

Annual

Annual

Annual Annual Annual

Period % Period % Period % Period % Period %

Description

2005 2006 2007 2008 2009

Cash and Cash Equivalents

1,142,485

8.10%

1,805,240

11.30%

1,617,524

4.21%

1,687,038

2.95%

3,955,342

4.22%

Short Term Marketable Securities

138,016

0.98%

228,518

1.43%

6,153,948

16.02%

1,549,437

2.71%

527,066 0.56%

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Cash and Cash Equivalent

Accounts Receivable

543,316

3.85%

623,349

3.90%

1,408,885

3.67%

261,508 0.46%

2,514,425

2.68%

Inventory

1,922,982

13.63%

923,448

5.78%

2,690,153

7.00%

4,680,896

8.19%

422,607 0.45%

Other Current Assets

1,264,756

8.96%

2,103,891

13.17%

3,814,825

9.93%

3,863,342

6.76%

3,329,431

3.55%

Total Current Assets

5,011,555

35.51%

5,684,446

35.57%

15,685,335

40.83%

12,042,221

21.07%

10,748,871

11.47%

Line Graph of Assets composition:

2005 2006 2007 2008 20090

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

Break down of current Assets

Other Current AssetsInventory Accounts ReceivableShort Term Marketable SecuritiesCash and Cash Equivalents

Amou

nts

in th

ousa

nd o

f Rup

ees

Finding: The above graph shows that the ENGRO’s assets composition at the peak in 2007 company have

less cash in account and more investment in short term marketable securities, collection from

account receivable was low, major portion of inventory lied under inventory account. The 2007

world financial crunch also effects the ENGRO’s current assets composition.

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The table above is the current composition of ENGRO, the reason of decrease in inventory is the

29.40% increase in sales during the year 2009. During the year company is more successful in

converting inventory into sales. Account receivable by following sales also increase 2.68%, cash

and cash equivalent also increase 4.22% due to the increase in sales and making less investment

in marketable securities and have more reserves in cash.

Current liabilities composition:

Accounts Payable 1,969,001 1,081,745 3,752,945 2,915,274 3,160,852

Short Term Borrowings 0 1,299,961 0 1,866,435 935,796 Short Term Portion of LT Debt

707,730 1,103,977 1,318,662 94,934 830,700

Other Current Liabilities

123,363 156,732 193,067 1,122,710 1,468,121

Total Current Liabilities

2,800,094 3,642,415 5,264,674 5,999,353 6,395,469

Accounts Payable 13.95% 6.77% 9.77% 5.10% 3.37%Short Term Borrowings 0.00% 8.13% 0.00% 3.27% 1.00%Short Term Portion of LT Debt 5.02% 6.91% 3.43% 0.17% 0.89%Other Current Liabilities 0.87% 0.98% 0.50% 1.96% 1.57%Total Current Liabilities 19.84% 22.79% 13.70% 10.49% 6.82%

Break down of Current Liabilities

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Findings: The above graph shows the ENGRO’s current liabilities composition the account payable

increase 3.37% during the year 2009, short term borrowing increase in 2008 to cancel out the

effect of financial crises. Short term portion of the long term debt also increase in 2009. The

reason of increase of account payable is purchase of large amount of raw material on credit, as

mostly done in manufacturing companies they bought raw material at credit.

Working Capital:Working capital is the current assets minus current liabilities. It measures how much in liquid

assets a company has available to build business.

2005 2006 2007 2008 2009Total Current Assets 5,011,55

55,684,44

615,685,33

512,042,22

110,748,87

1Total Current Liabilities 2,800,09

43,642,41

55,264,674 5,999,353 6,395,469

Working Capital 2,211,461

2,042,031

10,420,661

6,042,868 4,353,402

The above table shows the working capital of ENGRO. The company has positive working

capital it means more in liquid assets the company have to build its business. It shows that in

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2005 2006 2007 2008 20090

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Break down of Current Liabilities

Accounts Payable

Short Term Borrowings

Short Term Portion of LT Debt

Other Current Liabilities

Amou

nts i

n th

ousa

nd o

f Rup

ees

near future there is no chances of any financial difficulties that might arises. There is not much

need to borrow, working capital available to make payments to creditor.

Current Ratio:2005 2006 2007 2008 2009

Current Ratio 1.79 1.56 2.98 2.01 1.68

Graph of current ratio:

2005 2006 2007 2008 20090

0.5

1

1.5

2

2.5

3

3.5

Current Ratio

Current Ratio

Period

Curr

ent R

atio

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2005 2006 2007 2008 20090

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

Working Capital Total Current LiabilitiesTotal Current Assets

Finding: The above graph shows that the EGNRO company has the current ratio which is higher than 1

throughout the period. It means that company has more current assets against current liabilities.

This ratio is high in 2007 and decrease after the financial crisis.

Net Trade cycle:2005 2006 2007 2008 2009

Days to Account payable 50.14 29.54 75.01 62.15 49.64Days Required to Collect A/R

11 12 16 13 17

Days in Inventory 31 39 36 79 40

Net Trade Cycle -8.14 21.46 -23.01 29.85 7.36

Graph of trade cycle:

Findings:

The above table shows the ENGRO’s net trade cycle, the trade cycle is negative in 2005 and

2007 means company has the strong financial position manage the cash conversion cycle and

have excess cash to investment. In other years trade cycle is very high which means the

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2005 2006 2007 2008 20090.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

Trade Cycle

Days in InventoryDays Required to Collect A/RDays to Account payable

Days

company’s cash is caught up in trade functions and not available for other purposes such as for

investment and expansion of project.

Cash Ratio:2005 2006 2007 2008 2009

Cash ratio 0.4080 0.4956 0.3072 0.2812 0.6185

Graph of cash ratio

2005 2006 2007 2008 20090.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

Cash Ratio

Cash Ratio

Ratio

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Finding:

The table above shows the cash ratio of ENGRO, company has low amount of cash available to

meet the current liabilities or short term debt. The large amount of accumulated cash is not

always better for company because the cash is the unproductive asset it is better to use it for

investment.

Operating Measures, Account Receivable:

2005 2006 2007 2008 2009

Receivable Turnover 34.29 30.17 22.82 27.92 21.74Days Required to Collect A/R 11 12 16 13 17

2005 2006 2007 2008 20090

5

10

15

20

25

30

35

40

Receivable Turnover

Receivable Turnover

Account Receivable Turnover:

The above table shows that the ENGRO’s management is effective in extending credit as well as

collecting debts. The high account receivable turnover ratio of ENGRO implies that a company

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operates on a cash basis and its collection of account receivable is efficient. In 2008 the ratio is

higher as compare to previous year and it decreases in 2009 due to the decrease in sales.

Collection period

2005 2006 2007 2008 20090

2

4

6

8

10

12

14

16

18

Days Required to Collect A/R

Days Required to Collect A/R

The figure expresses in the above table the average time, in days, that receivables are

outstanding. It helps in determine if a change in receivables is due to a change in sales, or to

another factor such as a change in selling terms. It is very useful to compare days’ sales

outstanding with the company’s credit terms as an indication of how efficiently the company

manages its receivables. The collection days of ENGRO’s is not much higher except 2009, this

because of financial crisis, this depict that the credit policies that prevent higher sales are overly-

strict; there is no problem in collection and pressure on cash flows.

Operating Measure, Inventory Turnover:

2005 2006 2007 2008 2009

Inventory Turnover 11.9 9.4 10.1 4.6 9.1Days in Inventory 31 39 36 79 40Days to Account payable 30.67 38.83 36.14 79.35 40.11

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Conversion Period 42 51 52 92 57

Inventory turnover ratio:

2005 2006 2007 2008 20090

2

4

6

8

10

12

14

Inventory Turnover

Inventory Turnover

The inventory turnover ratio measures the efficiency of the business in managing and selling its

inventory. This ratio gauges the liquidity of the firm's inventory. The table above shows that the

inventory turnover ratio of ENGRO is high it means that the company is efficiently managing

and selling inventory except in 2008 the sales also very low in this year. The company has the

faster inventory sells it means the fewer funds the company has tied up in inventory. The high

inventory turnover is not always better ENGRO should be careful to the stock outs problem.

ENGRO should have the safety stock to handle the stock outs.

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2005 2006 2007 2008 20090

10

20

30

40

50

60

70

80

90

100

Days in InventoryDays to Account payable Conversion Period

Days to sell inventory:

The number of day's inventory is held measures the average numbers of days it takes to sell the

average inventory held. The above table shows that the high no. of days in inventory of ENGRO

is held are a sign of inefficient management and indicate the problem of stocking. The slower the

inventory sells means the more cash tied up in inventory.

Conversion period:

The conversion period is the sum of the days to account receivable and days to inventory. The

lower the conversion the better it is, it take less days to collect and days to sell inventory. The

conversion period of ENGRO is very high mean the management is inefficient in collection from

account receivable and it also take higher days to sell inventory. Conversion period should be

less than the days to account payable. But in ENGRO’s case the conversion period is very higher

than days to account payable.

Days in purchases in account payable:

31

Days in purchase in account payable that measures how well a business is managing its accounts

payable. The ENGRO has the higher days to account payable it means the slower the business in

paying its liabilities. ENGRO has the better credit terms with its supplier.

Liquidity Index:

2005 2006 2007 2008 2009

Liquidity Index (Days) 13 8 8 31 6Acid Test Ratio 0.65 0.73 1.74 0.58 1.09Operating Cash Flow to Net Income

0.54 1.02 -1.72 1.8 1.06

2005 2006 2007 2008 20090

5

10

15

20

25

30

35

Liquidity Index (Days)

Liquidity Index (Days)

The liquidity index means the number of days during which assets are removed from cash.

ENGRO takes the normal number of days except 2008 to convert accounts receivable and

inventory into cash. And company has not the strong ability to generate sufficient cash to meet

upcoming liabilities.

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2005 2006 2007 2008 2009

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Acid Test RatioOperating Cash Flow to Net Income

Acid Test Ratio:

ENGRO’s quick ratio is less than 1 means it cannot pay their current liabilities and should be

looked at with extreme caution. The company’s acid-test ratio is near to working capital ratio, it

means current assets are not highly dependent on inventory. In 2007 and 2009 the ratio is quite

wall but in 2008 the decrease as every in the history of company.

Lines of credits:

Ratings (April 2011)

ENGRO CORPORATION LIMITED (ECL)

33

Entity New Previous

Long Term AA AA

Short Term TFCs Secured, Listed PKR 4,000mln Privately Placed PKR 4,000mln PKR 2,000mln

A1+ AA

AA

AA

A1+ AA

AA

AA

Credit analysis decision:

After calculating the ratios given above I reached in a decision that ENGRO should not make

short term borrowing, in 2009 actual working capital is negative it manipulate it as positive by

buying bulk of inventory to increase current assets. Although it has high current liabilities, a

large portion of its earnings has retained from previous five years, I suggest it should utilize its

retained earning instead o f short term borrowings.

Sensitivity analysis Looking at the pro- forma statement of ENGRO, we find an approximate increase and decrease

in pro-forma income statement. If we decrease cost of goods sold by 10 percent our income

increase by 53.2 percent and decrease 53.2 percent if increase 10 percent. If change decrease by

34

10 percent in interest and tax then income increase by 2.3 and 3.2 percent respectively. By

changing increase 10 percent in interest and tax our income decreases by 2.3 and 3.2

respectively. It means the interest and tax change have little impact on the net income but

changing in sales and cost of goods sold have high impact on both sides whether we increase or

decrease it.

Pro-forma income statement: The pro-form income statement of ENGRO is developed for the next five years. The revenue growth rate is take from the excel sheet of horizontal analysis. All other items of the income statement are based on the revenue or the percentage of revenue.

Annual Annual Annual Annual Annual

Period Period Period Period Period

Enter Your Forecast Periods => 2010 2011 2012 2013 2014

Pro Forma Income Statement

Gross Revenues 36,254,241 43,563,267 52,345,827 62,898,992 75,579,726

Growth Assumptions 20.16% 20.16% 20.16% 20.16% 20.16%

Cost of Goods Sold (27,812,658) (33,419,822) (40,157,415) (48,253,340) (57,981,441)


Other operating Expense (620,329)

(745,391)

(895,665)

(1,076,235) (1,293,209)


Gross Profit 7,821,253 9,398,054

11,292,746

13,569,417 16,305,076

Growth Assumption 21.57% 21.57% 21.57% 21.57% 21.57%

Selling, General & Expense (2,623,450)

(3,152,350)

(3,787,879)

(4,551,533) (5,469,144)


Operating Income 5,197,803 6,245,704

7,504,868

9,017,884 10,835,932


Interest Expense (1,214,391) (1,459,218) (1,753,404) (2,106,898) (2,531,659)

35


Associated Company (loss) Gain 2,909,300 3,495,828 4,200,604 5,047,465 6,065,058


Income Tax Expense (1,667,033) (2,003,115) (2,406,953) (2,892,206) (3,475,288)


Total Income 5,225,677.53

6,279,198.77

7,545,114.87

9,066,245.62 10,894,043.50

36

Pro- Forma balance sheet statement Pro Forma Balance Sheet

Cash and Cash Equivalents 5,265,667 7,010,078 9,332,376 12,424,005 16,539,828 Short Term Marketable Securities

549,941 573,809 598,713 624,697 651,810

Accounts Receivable 3,625,424 4,356,327 5,234,583 6,289,899 7,557,973 Inventory 2,900,339 3,485,061 4,187,666 5,031,919 6,046,378 Other Current Assets 2,356,526 2,831,612 3,402,479 4,088,435 4,912,682 Total Current Assets 14,697,898 18,256,887 22,755,816 28,458,955 35,708,671

Fixed Assets 120,143,254

171,915,927

233,701,143 307,435,272 395,429,166

Accumulated Depreciation 6,518,395 5,768,027 4,991,024 4,186,439 3,353,293 Net Fixed Assets 126,661,64

9 177,683,95

4 238,692,167 311,621,711 398,782,459

Longterm Investments 15,275,544 17,421,851 19,774,528 22,353,336 25,179,921 Investments in Other Companies

2,787 2,787 2,787 2,787 2,787

Intangibles and Other Assets

53348.16 131650.78 324883.29 801735.90 1978496.49

Total Non Current Assets 141,993,328

195,240,243

258,794,365 334,779,570 425,943,663

Total Assets 156,691,225

213,497,130

281,550,181 363,238,525 461,652,334

Accounts Payable 6,163,221 7,405,755 8,898,791 10,692,829 12,848,553 Short Term Borrowings 4,350,509 5,227,592 6,281,499 7,547,879 9,069,567 Short Term Portion of LT Debt

2,029,370

4,957,677

12,111,424

29,587,768

72,281,841

Other Current Liabilities 2,175,254 2,613,796 3,140,750 3,773,940 4,534,784 Total Current Liabilities 14,718,354 20,204,820 30,432,463 51,602,415 98,734,745

Long term Debt / Borrowings

95,398,550 136,543,655

183,278,335 236,357,790 296,639,804

Other Long term Liabilities 1,352,352 1,465,975 1,589,145 1,722,663 1,867,399 Total Non Current Liabilities 96,750,901 138,009,63

0 184,867,479 238,080,453 298,507,204

Total Liabilities 111,469,256

158,214,450

215,299,943 289,682,868 397,241,949

37

Preferred Equity 0 0 0 0 0 Common Equity 3,426,340 3,940,292 4,531,336 5,211,037 5,992,694 Additional Paid in Capital 24,580,620 24,580,620 24,580,620 24,580,620 24,580,620 Retained Earnings 5,572,289 1,362,212 (3,465,978) (9,014,498) (15,404,004)Adj for Foreign Currency Transl

1,422,670 (6,164,883) 26,714,415 (115,762,114)

501,634,318

Treasury Stock 4,717,498 4,717,498 4,717,498 4,717,498 4,717,498 Total Equity 39,719,416 28,435,738 57,077,891 (90,267,458) 521,521,125

External Financing Required (EFR)

5,502,554 26,846,942 9,172,347 163,823,114 (457,110,740)

Pro- forma cash flow statement

38

39

Pro Forma Cash Flow Statement

Sources of Operating Cash Flow:Net Income 5,225,678 6,279,199 7,545,115 9,066,246 10,894,044 Depreciation and Amortization 724,644 750367.288 777003.436

1804585.100

2833145.844

Financial Charges paid (1,421,896) (2,663,939) (4,990,921) (9,350,549) (17,518,364)

Payment to Engro Foods Limited for acquisition of tax losses

(489,227) (531,873) (578,238) (628,643) (683,443)

Other operating 131,710 162,519 200,535 247,443 305,324 Tax paid (1,557,013) (1,557,013) (1,557,013) (1,557,013) (1,557,013)Retirement and other service benefits paid

(183,767) (240,124) (313,766) (409,993) (535,730)

(Increase) Decrease Defer Taxes 766,460 1,773,396 4,103,194 9,493,765 21,966,198 (Gain) Loss on Sale of Assets 0 0 0 0 0 (Increase) Decrease Current Assets 960,226 (1,973,437) (2,371,291) (2,849,355) (3,423,798)Increase (Decrease) Current Liab 6,293,515 2,558,159 3,073,896 3,693,608 4,438,257 Operating Cash Flow 10,450,331 4,557,254 5,888,515 8,510,095 14,718,620 Investment Sources of Cash Flow: Planned Sale of Assets 350,986 2,110,669 12,692,586 76,327,351 458,997,43

4 Planned Sale of Investments 124,061 139,065 155,884 174,738 195,872 Other Investment Sources to be used

2,401,670 3,096,922 3,993,440 5,149,489 6,640,199

Total Investment Sources of Cash 2,876,716 5,346,655 16,841,911 81,651,578 465,833,505

Planned Investments:Capital Expenditures (43,382,703

)(51,772,673

)(61,785,216

)(73,734,129

)(87,993,894)

Acquisitions in Other Co's 0 0 0 0 0 Purchases of Investments (2,082,041) (2,285,372) (2,508,561) (2,753,546) (3,022,457)Total Investment Applications of Cash

(45,464,744)

(54,058,045)

(64,293,777)

(76,487,675)

(91,016,351)

Cash Flow from Financing Activities:Proceeds from Loans & Debt 36,286,810 41,202,761 46,784,701 53,122,852 60,319,665 Proceeds from Minority Interest 0 0 0 0 0 Other Financing Activities 0 0 0 0 0 Total Financing Sources of Cash 36,286,810 41,202,761 46,784,701 53,122,852 60,319,665

Cash Flow Applied for Financing:Payments on Loans & Debt (66,456) (57,656) (50,021) (43,397) (37,650)Dividends Paid to Shareholders (2,011,650) (2,206,962) (2,421,237) (2,656,315) (2,914,218)Purchase / Retire Stock 0 0 0 0 0 Other Financing Activities 0 0 0 0 0 Total Financing Applications of Cash

(2,078,107) (2,264,618) (2,471,258) (2,699,712) (2,951,868)

Total Change to Cash 2,071,007 (5,215,993) 2,750,092 64,097,138 446,903,570

Beginning Cash Balance 3,955,342 6,026,349 810,357 3,560,448 67,657,586

LONG TERM SOLVENCY

Deferred Tax liability account:

ENGRO recorded its deferred tax on liabilities side in current liabilities. The company defer

(delay) taxes for some period of time, the longer the period, the longer it has use that cash, which

means it use it to make more money. ENGRO delay its tax payments, it create deferred tax

liability account to reflect future tax obligations. The reason of deferred tax liability accounts is

depreciation. When company buys property, plant, or equipment, it makes assumptions that

reduce the value of such assets slowly or quickly. To impress shareholder company showing

higher income by reducing depreciation slowly. Eventually when the company able to maintain

profit reverses the procedures and will have pay up taxes.

Deferred income tax is provided on temporary differences arising from investments in

subsidiaries and except where the timing of the reversal of the temporary difference is controlled

by the Group and it is probable that the difference will not reverse in the foreseeable future.

In ENGRO deferred tax is recognized using the balance sheet method. Providing for all

temporary differences between the carry amount of assets and liabilities for financial reporting

purposes and the amounts used for taxation purposes. Deferred tax is measured at the rates that

are expected to be applied to the temporary differences when they reverse, based on the laws that

have been enacted or substantively enacted by the reporting date. A deferred tax asset is

recognized to the extent that is probable that future taxable profits will be available against

which temporary difference can be utilized. Deferred tax assets are reviewed at each reporting

date and are reduced to the extent that is no longer probable that the related tax benefit will be

realized.

40

Liquidity Risk:

In order to maintain adequate liquidity for its working capital requirements, the board had

approved short term funded facilities of Rs. 7.0 billion. ENGRO’s policy is to ensure that

adequate medium term funding and committed bank facilities are available to meet the forecast

peak borrowing requirements. We mitigate liquidity risk by careful monitoring of our cash flow

needs, regular communication with our credit provides, and careful selection of financially

strong banks to participate in our operating lines.

Pension, gratuity and provident fund

The company maintains plans that provide post employment and retirement benefit s to its

employees. These include a contributory provident fund, a defined contributory (DC) pension

plan, a non contributory gratuity scheme for all employees and a defined benefit (DB) pension

scheme for the annuitants retired before july1, 2005.

The above mention plans are funded schemes recognized by the tax authorities. The latest

actuarial valuation of management pension and gratuity schemes was carried out at December

31, 2009 and the financial statements of June 30, 2009. The company has fully paid all its

obligations on all the above schemes.

Unconsolidated subsidiaries

Engro Vopak Terminal (EVTL) a 50% share joint venture of ECPL is an unlisted public limited

company incorporated in Pakistan under the companies’ ordinance, 1984. EVTL has been

granted the exclusive concession, right and license to design, finance, insure. Construct, test,

commission, complete, operate, manage and maintain an integrated liquid chemical terminal and

storage firm at the south western zone of port Qasim on build. Operate and transfer (BOT) basis.

In ENGRO subsidiary companies are consolidated are consolidated from the date on which more

than 50% voting rights are transferred to the group or power to control the company is

established and are excluded from consolidation from the date of disposal or reduction of

control.

41

Agrimall (private) Limited

Agrimall limited is a private company ENGRO invested 4096 (thousand rupees) in it for

year 2009.

Arabian Sea Country Club Limited

ENGRO invested 3197 (thousand rupees) in the year.

Minority interest:

Minority interest is that part of the net results of operations and of net assets of subsidiary

companies attributable to interest which are not owned by the holding company.

Inventory:

These are valued at the lower of cost and net realized value. Cost is determined using weighted

average method except for raw material in transit which are stated at cost (invoice value) plus

other charges incurred thereon till the balance sheet date. Cost in relation to finished goods

includes application purchase cost and manufacturing expenses. The cost of work in process

includes material and proportionate conversion costs.

Net realized value signifies the estimated selling price in the ordinary course of business less all

estimated costs of completion and costs necessarily to be incurred in order to make the sales.

Intangible Assets:

Computer software and licenses

Computer software and licenses cost rerated as intangible assets are amortized from the date the

software is put to use on a straight- line basis over a period of 3 to 5 years. The net book value of

computer software and licenses in during the year is 20,392 (thousand rupees).

42

Rights to future gas utilization

Rights for gas utilization represents premium paid to the government of Pakistan for allocation of

100 MMCFD natural gas for a period of twenty years from Qadirpur gas at predetermined price

for a period of ten years commencing from the date of commercial production. The rights will be

amortized on straight line basis. The net book value of rights to future gas utilization in year is

102312 (thousand rupees).

Contingent liabilities Claims, including pending lawsuits, against the company not acknowledge as debts

amounted to Rs. 47,658 (2008: 27,911)

Corporate guarantees of Rs. 173,482 (2008: Rs. 500,600) have been issued in favor of

third parties.

The company is contesting the penalty of (2008: Rs. 99,936) paid and expensed in 1997,

by imposed by the state bank of Pakistan (SBP) for alleged late payment of foreign

exchange risk cover fee on long term Loans and has filed a suit in the High Court of

Sindh. A partial refund of Rs. 62,618 was, however, recovered in 1999 from SBP and the

recovery of the balance amount is dependent on the court’s decision.

Market value of assets:Current Price (4/3/2011): Rs. 227.10

Ticker: ENGRO Country: PAKISTAN

Exchanges: KAR Major Industry: Chemicals

Sub Industry: Miscellaneous Chemicals

2009 Sales 58,152,368,000(Year Ending Jan 2010).

Employees: 873

Currency: Pakistan Rupees Market Cap: 74,429,031,595

43

Fiscal Yr Ends: December Shares Outstanding: 327,736,819

Share Type: Ordinary Closely Held Shares: 135,368,043

Borrowing to total capital:

Borrowing to total capital2005 2006 2007 2008 2009

Total borrowing 2,889,789 2,889,789 1,800,000 15,422,520

28,674,764

Total share holders’ equity 7,375,566 9,370,097 15,740,651

21,053,606

26,888,238

Total Capital 10,265,355

12,259,886

17,540,651

36,476,126

55,563,002

Borrowing to Equity 28.15% 23.57% 10.26% 42.28% 51.61%

2005 2006 2007 2008 20090.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Borrowing to Total share holders' equity

Borrowing to Equity

The graph above shows percentage of debt in total shareholder equity. The higher the borrowing

to total shareholders’ equity, the more debt the company has compared to its equity. This tells

44

investors whether a company is more prone to using debt financing or equity financing. As this

ratio increases the default risk increases with the borrowings.

The borrowing of debt increases over a period of time. In 2008, due to the financial crises of

2007 the percentage of borrowing increases to 42% and in 2009 it is 51% of total shareholder

equity. The portion of debt in equity is high it may cause of failure firm’s position in future.

Debt to Equity ratio

2005 2006 2007 2008 2009Total debt to Equity Capital 2.29 1.34 2.27 2.23 2.93

2005 2006 2007 2008 20090.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Total debt to Equity Capital

Total debt to Equity Capital

The above graph shows the debt to equity ratio of ENGRO limited over the five years. A high

debt/equity ratio generally means that a company has been aggressive in financing its growth

with debt. This can result in volatile earnings as a result of the additional interest expense. The

ratio is high in 2008 and 2009.it means a lot of debt is used to finance increased operation, the

company could potentially generate more earnings than it would have without this outside

financing. High debt to equity ratio of ENGRO is better if the utilize debt in efficient way to

45

generate more earnings than the cost of debt, in other words the earnings from debt easily meet

the cost of debt and they still left out some portion after it.

Fixed assets to common equity

2005 2006 2007 2008 2009Fixed assets to common equity 0.927 0.700 0.878 1.594 2.585

Fixed assets to common equity is a measure of the extent of an ENGRO’s investment in non-

liquid and often over valued fixed assets. The ratio is more than .75 except 2006 it means the

possible over- investment and causes a large annual depreciation charge that will be deducted

from the income statement. The ENGRO’s depreciation expenses increases over period of time,

one reason of high investment in fixed assets.

Net tangible assets to long term assets

2005 2006 2007 2008 2009Net tangible Assets 7,353,94

8 9,352,03

5 15,606,78

4 20,930,74

8 26,765,53

4 Long term Borrowing 3,935,97

0 2,968,30

4 17,410,06

0 30,111,78

0 60,425,73

1 Net tangible assets to long term debt

1.87 3.15 0.90 0.70 0.44

This ratio measures that a firm has sufficient tangible assets to meet the long term obligations

without the intangible assets in case of liquidation. In first two years ENGRO easily meet the its

long term borrowing, but after that the company has less tangible assets to meet long term

borrowing in case of liquidation. The long term creditors’ of the firm are uncomfortable with the

firm’s situation of fewer tangible assets to meet the long term obligations.

46

Total liabilities to net tangible assets

2005 2006 2007 2008 2009Net tangible Assets 7,353,94

8 9,352,03

5 15,606,78

4 20,930,74

8 26,765,53

4 Total Liabilities 6,736,06

4 6,610,71

9 22,674,73

4 36,111,13

3 66,821,20

0 total liabilities to net tangible 0.916

0 0.7069

1.4529

1.7253

2.4965

This ratio yields a still more conservative assessment of debt-paying ability when the carrying

amounts of tangible assets are understated. The ratio is lower means the firm have less tangible

assets to meets total liabilities in the case of liquidation which is also a bad signal for the

creditors.

Time interest earned:

2005 2006 2007 2008 2009

Time Interest earned 12 11 9 4 5

It measure how many times a company can cover its interest charges on pretax basis. The ratio is

high in 2005, 2006 but it fell to down to 5 times in 2009. In previous years the earnings are

significantly greater than annual interest obligations. In lower times to interest earned into means

fewer earnings are available to meet interest payments. It is an indicator to tell if a company is

running into financial trouble. Failing to meet interest obligations could force a company into

bankruptcy.

Z- Score

2005 2006 2007 2008 2009Z Score 7.66 11.79 3.49 1.52 1.30

Z- Score measure the long term solvency of the company. If

47

Z-Score < 1.2 high chances of bankruptcy Distress Zones

Z-Score > 2.9 low chances of bankruptcy Safe zones

1.2<Z-score<2.9 Ambiguity Grey zone

Z-score measures the probability of failure of firm in future. The overall situation of company is

favorable in first three years and lies under the safe zone and in last two years the company has

little weak financial situation, ambiguity and lies under grey zone. The reasons of decrease z-

score is the decrease in the ratio of market value of capital to book value of debt in last two year

it is .43 and .55 respectively and in previous year it is 5.22,9.56 and 2 respectively.

Long term solvency decision:

After the deep analysis of capital structure and debt ratio of ENGRO, I decided that ENGRO

should take the long term loan but only for mega project and for exiting project expansion.

ENGRO started urea expansion project on the basis of the long term loan. And they expect high

production on completion of it. According to debt to equity ratio the firm should not take long

term loan because firm has 51.6% debt in total capital of the firm. The portion of debt increase

continually, in first 2 years the z-score is very high which has positive impact on image of

company but in last three years especially in last year the z-score is 1.30 and company lie down

under grey zone which could be dangerous in future, so suggestion of long term debt might be

another punch on face firm in his financial bad condition.

48

PROFITABILITY

Return On Invested Capital

2005 2006 2007 2008 2009Operating Income

2,354,634 2,468,353 2,939,275 3,959,192 4,562,058

Tax rate

35% 35% 35% 35% 35%

Income after tax 1,530,512 1,604,429 1,910,529 2,573,475 2,965,338 Total Capital 7,375,566 9,370,097 15,740,651 21,053,60

6 26,888,238

ROIC 20.75% 17.12% 12.14% 12.22% 11.03%

Return on invested capital used to measure efficiency at allocating the capital under its control to

profitable investments. It gives sense of how well a company is using its money to generate

returns. If the ROIC is 10% or less than of it, means company invested in neutral project that

generate less return. The ROIC of ENGRO is more than 10% it means the company invested in

profitable projects that generating excess return on investment.

Return on Equity:

49

2005 2006 2007 2008 2009

Return on Share-holder Equity

0.787109776718532

0.515563595546277

0.31542565344487

0.261884150618265

0.173712478752075

5%

15%

25%

35%

45%

55%

65%

75%

85%

Return on Shareholder EquityP

erc

en

tage

s

ROE indicates what return a company is generating on the equity, the rate that shareholders are

earning on shares. It tells investors how effectively their capital is being reinvested. The ROE of

ENGRO is very high it means company pays its shareholders off handsomely; the reason of

periodical decrease in ROE is the increase in the total shareholder capital. In shareholder capital

retain earning continuous increases over period of time. High and growing ROE always attract

the investors and shareholders. When I compare ROE of ENGRO with industrial ROE,

company’s ROE is greater than the industry.

Du-Pont Analysis

Title of Ratio 2005 2006 2007 2008 2009

Financial leverage 1.9 1.7 2.4 2.7 3.5 Total Asset Turnover 1.3 1.1 0.6 0.4 0.3

Net Profit Margin 13% 14% 13% 17% 15%

Du-Pont Analysis ROE 31.92% 26.34% 18.67% 18.81% 16.97%

When we compare simple ROE with the Du-Pont analysis ROE, it is lower than of simple ROE.

In 2006, the ROE decrease as compare to previous year but it is good sign that the net profit

margin ratio increases in this year and decrease in financial leverage. ROE decreases over all

periods.

50

Financial leveraged increases over last three years, it means firm taking debt more

aggressively and the portion of debt in equity increases over a period of time. The

planning and controlling area of ENGRO is little weak and not efficiently manage the

capital structure of firm.

Assets turnover decrease over period of time. It means ENGRO’s management not

efficiently utilized the assets to generate the sales; they generate less than on sale against

each unit of asset.

Net profit margin has little fluctuation and decrease in last year. It is because the sales

increase over a period of time. It has less portion of profit in sales.

Return on Assets

2005 2006 2007 2008 2009

Return on Total As-sets - Company

0.154130508367449

0.169300029648636

0.115985415966825

0.0890888151599385

0.0525328731370644

1.00%

3.00%

5.00%

7.00%

9.00%

11.00%

13.00%

15.00%

17.00%

Return on Total Assets - Company

Perc

enta

ges

The return on assets will be lower than the return on capital. The ROA gives investor an idea of

effectively the company is converting the money it has to invest into net income. In 2006

ENGRO was earning more money on less investment. But in last two year the company has 9%

and 5% ROA respectively; the company earns less money on more assets invested. For

acceptance of any new project is necessary that ROA rate should be greater than borrowing rate.

ENGRO need to invest more money to continue generating earning.

51

Return on long term capitalization:

2005 2006 2007 2008 2009

Return on long term cpitaliza-tion

0.205019194563851

0.206455115213065

0.0951588338482397

0.0832117244263534

0.0453870903520605

2.50%

7.50%

12.50%

17.50%

22.50%

Return on long term capitalization

perc

enta

ges

Return on long term capitalization measure the firm’s return on equity and long term debt

respectively. This ratio shows the decrease trend over the period. It means firm generates less

income by utilizing equity and long term capitalization. The other reason of decrease in ratio is

the dramatically increase in long term debt over last three year.

Disaggregation of return of assets:

2005 2006 2007 2008 2009

Total Asset Turnover

1.29512161245724

1.10143205453339

0.603487951506929

0.407894768836433

0.321968850138661

Net Profit Margin

0.128835539098034

0.140233122973962

0.126784577225719

0.16979707424537

0.151204115669347

Disaggre-gation of ROA

0.164338350707892

0.159398994394279

0.0821176984169233

0.0744787796547099

0.0422895183727385

0.1 0.3 0.5 0.7 0.9 1.1 1.3

Disaggregation

Perc

enta

ges

52

Disaggregation ROA is lower than simple ROA. The above chart shows the decrease trend in

assets turnover over the period. It means the ENGRO’s management generates fewer sales by

utilizing its assets. The utilization of assets is not efficient in the firm. There is little fluctuation

in net profit margin. The firm has little control on expense relative to sales. Sales increase over

the period of time in ENGRO and sales have less portion of profit in it. ENGRO’s can improve

the ROA by increasing profit margin ratio or asset turnover ratio or both.

Sustainable rate

2005 2006 2007 2008 2009

Retention ratio 0.3556 0.305300000000001

0.645800000000002

0.6932 0.5373

ROE 0.79 0.52 0.320000000000001

0.26 0.17

Sustainable growth rate

0.2799 0.157400000000001

0.2037 0.1815 0.0933000000000001

5.00%15.00%25.00%35.00%45.00%55.00%65.00%75.00%85.00%

Sustainable Growth rate

Perc

enta

ges

53

How much a firm grows without utilizing external borrowing money is a sustainable growth rate.

When firm achieves this growth rate it must borrow from other resources for further growth. It is

the lenders major concern while lending money to company. Sustainable growth rate is very high

in 2005, and in decrease in 2006, 2008 and 2009. It is because the ROE is higher in 2005 and

decrease in respective years. ENGRO has more in retained earnings and pays less as dividend.

ENGRO should make invest instead of save money in retained earnings.

54

VALUATION:

Estimated required rate of Return:K^= (D1/P) + g

Sustainable growth rate gs 9.33%

Current Price of stock in stock exchange P 194.3

Dividend in period one D1 6.728694

Estimated Required Return K^ 12.80%

Interpretation:I have calculated the sustainable growth rate by multiplying ROE into RR of year to 2009. P is

the current price of ENGRO’s stock on 31 may, 2010 in stock exchange. And D1 is the dividend

on period one after growing dividend with growth rate.

COST OF ASSETS PRICING MODEL (CAPM): K= Rf + β (MRP)

Risk free rate Rf 13.2%

Sensitivity of market Beta 0.814984

Market risk premium MRP 8.00%

current dividend paid Do 6.1543

Required rate of return on stock Ks 19.72%

Interpretation: In CAPM the risk free rate, the rate on 3 month treasury bills that we convert it into annually

basis, the rate compensates the investors for placing money in government over a period of time.

The other half of the formula represents risk and the amount of compensation the investor needs

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for taking on additional risk of beta (beta is the market sensitivity) with the market risk premium

on taking of risk.

Regression line

-60.00% -40.00% -20.00% 0.00% 20.00% 40.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

KmLinear (Km)

KM

KS

Linear regression line analyze the relationship of X and Y variables. In this case we take the

market return KM of indices on the X-axis as independent variable and return of stock KS on Y-

axis as dependent variable. The regression line fit between the data, it means the market return

and stock return have strong correlation during the period of time.

Security Market line:Beta K

0 13.2%

0.814983656 19.72%

1.314983656 23.72%

1.814983656 27.72%

2.314983656 31.72%

2.814983656 35.72%

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Security market line graph shows the relationship of systematic risk or beta and the required rate

of return. Beta is the market risk on X-axis and Return on Y-axis. SML shows all risky assets.

The blue line shows the required rate of return which is the 19.72%. The area below the intercept

line is the risk free rate which is 13.2%.

K > K^ Stock Overvalued

K< K^ Stock Undervalued

K=K^ Fairly valued

The estimated return that I calculate is 12.08% at the beta of 0.815, which means the stock is

overvalued. The stock is overvalued because for a given amount of risk (beta), the return is

lower as compare to required rate of return.

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Stock Over Valued

Required rate of return 19.72%

Estimated price:

P^=D1 / (K-gs)

Sustainable growth rate gs 9.33%

Required rate of return K 19.72%Dividend of period one D1 6.728694

Estimated value of stock P^ 64.78498

Price comparison:

Estimated Price of stock

P^ 64.78498

price in stock exchange P 194.3Price to Earnings (P/E) 10.8 11.3 16.3 4.8 13.8

When we compare estimated price with the current stock price, the current stock price is greater

than the estimated price so stock is overvalued, ENGRO should sell the stock. The price to

earnings ratio of EGNRO in 2009 is 13.8 times due to the high earning investor more buy the

stock of company and stock is overvalued, but the stock should be traded at Rs. 64.78. So, we

can say that the price to earnings ratio is the one of reason of being stock overvalued.

P > P^ Stock Overvalued Sell the stock

P< P^ Stock Undervalued Buy the stock

P=P^ fairly valued nor buy and sell

The earnings ratio of company is much higher than its competitor and investors willing to pay

more for ENGRO’s stock because the company has superior growth potential.

Price valuation decision:The value of stock is overvalued and the price of the stock should be fall in future.

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Conclusion:The ENGRO LMITED PAKISTAN is manufacturing company and major operation of ENGRO is fertilizer but it also has unrelated diversification in energy sector, food, chemicals and joint venture with some firms. It has unconsolidated firms in which they invest money and not mention these firms in balance sheet. ENGRO is financially strong companies its market worth is high and behind the FFC, which is its major competitor. It has good market share as compare to the competitors. Company’s management manipulate the current assets in 2009, and they acquired inventory just before the end of financial year to increase current assets, working capital of firm is negative during the year but they have not mention it in statement. Debt ratio continually increases over a period of year which is not good sign of firm, it might at other hand helpful for firm because they start urea expansion project with the help of it.

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Reference:

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

http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C58640650

http://www.engro.com/

http://www.engro.com/investors/financial-reporting/engro-corporation-limited/

http://engro.com/wp-content/themes/engro-v1.0/pdf/pastanualreports/ar_engro2009.pdf

http://www.marketwatch.com/

http://www.brecorder.com/market-data/karachi-stocks/stock/568/?currExchange=K&currPageType=W&currSector=29&currDate=2011-06-06&scrType=1366%7C768

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http://www.marketwatch.com/

http://engro.com/wp-content/themes/engro-v1.0/pdf/pastanualreports/ar_engro2009.pdf

http://www.engro.com/investors/financial-reporting/engro-corporation-limited/

http://www.engro.com/

http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C58640650

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