FERTILIZER
The Pakistan Credit Rating Agency Limited
ENGRO CHEMICAL PAKISTAN LIMITED (ECPL)
Ratings (June 2008) RATING RATIONALE AND KEY DRIVERS
ENGRO CHEMICAL PAKISTAN The ratings reflect ECPL’s relatively low business risk emanating from a favourable demand/supply
LIMITED (ECPL) situation, stable margins and increasing dividend income from subsidiaries. The ratings also take into
Entity New Previous account the company’s well-conceived strategy of preserving its position through urea expansion project.
Meanwhile, though urea project has increased leverage in ECPL’s capital structure, financial risk is
Long Term AA AA
expected to remain within acceptable limits.
Short Term A1+ A1+
These ratings are dependent on the effective execution of the company’s overall growth plans, especially
TFCs urea project, which is expected to come online by mid 2010. Ratings are likely to have positive
Secured, Listed implications once the new plant starts contributing towards profitability with decline in gearing and
PKR 4,000mln AA AA improvement in joint venture/subsidiaries performance. In the mean time, stability in cash flows,
Privately Placed supplemented by dividend income stream from strategic investments, would remain critical for ECPL’s
PKR 4,000mln ratings.
AA AA
PKR 2,000mln AA AA ASSESSMENT
Urea sales, at 4.9 million tons, witnessed a decline of 6% on YoY basis. The year constitutes a correction
L.T Entity Rating History
of 0.25 million tons, following 5.2% annual growth in industry sales during the preceding three years.
AA+
Some 70,000 tons of sales are attributable to nation wide closure during December, which is a peak selling
month. At the same time, the market remained deficient in supply with demand being fed through higher
AA cost imports. With continuing hike in DAP prices, driven by global demand/supply dynamics, fertilizer
consumption pattern experienced a reverse shift towards urea - more pronounced in 1H08. Given limited
AA- potential for growth in production in the medium-term, domestic demand is expected to continue
surpassing supply, until commencement of urea expansion project, mainly of ECPL. Beyond 2010, urea
A+ market is expected to reach demand/supply equilibrium, without any change in DAP market.
During 2007, ECPL’s urea production registered nominal decline, caused by outages. ECPL’s net sales
June June April May May June
showed impressive growth, mainly on the back of higher volumes of DAP sales. Although the company
2003 2004 2005 2006 2007 2008 experienced significant turnover growth, fuelled by higher volumes and prices, the full impact could not be
translated into the core profitability due to a modest reduction in the reported gross margins. Meanwhile,
Financial Data PKR (mln) ECPL’s profitability was augmented by a sizeable dividend income from subsidiaries. At the same time,
ECPL’s operating cost structure, adjusted for inflation, witnessed no major change on YoY basis.
31-Dec-07 31-Dec-06
Nonetheless, ECPL’s RoE registered a slight decline, attributable to equity injection for the urea project.
Total Assets 38,156.6 15,980.8 The new urea plant, which would cost around US$ 1bln with capacity of 1.3million tons is expected to
Equity 15,481.9 9,370.1 lead to higher efficiency in operations. ECPL’s post expansion market share for urea is expected to increase
Net Income 3,154.6 2,547.3 from 19% to 35%. Furthermore, ECPL purchased currency option contracts to hedge its Euro-Dollar
currency exposure related to the outflows for the expansion project. This hedging strategy is expected to
EBITDA 5405.1 4,430.2
help in controlling the overall cost of the urea project. Meanwhile, ECPL is exploring offshore fertilizer
ROA (%) 11.6 16.9 opportunities to compliment its domestic fertilizer business.
ROE (%) 25.3 30.4 ECPL, with a strategic investment portfolio of PKR 7.8bln at end-07, has diversified its interests in the form of
EBITDA / joint venture with foreign collaboration. Engro Foods Limited (EFL), a wholly owned subsidiary of ECPL,
Interest (x) 14.6 14.2 with its leading brand (Olper’s), has increased its market share to 17%. EFL plans to invest PKR 1.8bln in
Net Debt / 2008 for capacity expansion of milk collection infrastructure. Engro Polymer Chemical Limited (EPCL),
Equity (%) 57.8 23 owned 65% by ECPL, witnessed appreciable growth in profitability funded by enhanced business volumes.
Analysts Furthermore, EPCL’s back integration project is expected to come online by 2009. Engro Energy (Pvt.)
Waqas Munir Limited (EEPL), a wholly owned subsidiary of ECPL, is setting up power plant with net output of 217MW.
+92 42 586 9504 The company is expected to generate dividend by 2010, which would support ECPL’s profitability. Engro
waqas@[Link] Innovative Automation limited (EIAL), with 63% stake held by ECPL, acquired 70% stake in Advance
Jhangeer Hanif Automation LP, a company providing industrial solutions in automation controls and allied services. Engro
+92 42 586 9504 Vopak Terminal Limited (EVTL), a 50:50 joint venture between ECPL and Royal Vopak of Netherlands, being a
jhangeer@[Link] jetty and chemical terminal facility, largely maintained its market share during 2007.
TFC ISSUE Significant procurement of debt for the $1bln urea expansion project has substantially increased leverage
ECPL has issued a secured and listed TFC of in the capital structure of ECPL. Debt to equity ratio has reached 52:48 (2006: 24:76). With increased
PKR 4,000mln .The tenor of the instrument is
financial obligations, cash flows and coverages have come under stress. Nonetheless, ECPL’s already
8 years carrying profit based on 6month
strong cash generating ability from core operations and dividend income from subsidiaries largely mitigate
KIBOR plus 155bps. Also, ECPL issued two
the risk associated with the project.
privately placed TFCs of PKR 4,000mln and
PKR 2,000mln respectively, instead of PROFILE
previously planned subordinated listed TFC Incorporated in 1965, Engro Chemical Pakistan Limited (ECPL) is listed on all stock exchanges of the
of PKR 6,000mln. PPTFC 1 issue has country. The core business of ECPL, the second largest producer of urea in the country, is manufacturing and
markup of six months KIBOR plus 1.7% marketing of fertilizers. ECPL markets urea under the brand name of Engro Urea, MAP under the brand name
and PPTFC II issue has markup of six of Zorawar, NPK under Zarkhez as well as DAP as Engro DAP. ECPL’s urea plant, with a capacity of
months KIBOR plus 1.25%. PPTFCs are 975,000tons per annum, is located at Daharki, whereas NPK plant is situated at Port Qasim.
perpetual in nature with a five-year call and
ten year put option. Dawood Group (DG) holds a majority (42%) stake in ECPL, while the holding of Engro employees and
Employees Trust stands at 10%. The BoD of ECPL comprises five members from its own management including
Mr. Asad Umar (President and Chief Executive Officer), three from DG, and two independent directors.
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