Business

Engro launches certificates to meet working capital needs

Engro announces Rupiya Certificates with aim to target retail investors.

Ghazanfar Ali October 14, 2010

KARACHI: Engro Corporation on Thursday announced the launch of Rupiya Certificates with an aim to target retail investors and gather funds to meet expansion requirements of its fertiliser and food businesses.

The asset-backed issue of Term Finance Certificates (TFCs) will be for a period of three years offering a return of 14.5 per cent per annum, which Engro believes is a good attraction for people who usually invest in long-term National Savings Certificates.

The total size of the TFCs, which will be available at 11 banks and TCS outlets from Friday with a minimum investment of Rs25,000, is Rs4 billion. Of the total, the initial offer is worth Rs2 billion with a green shoe option of another Rs2 billion.

Giving details at a presentation here on Thursday, Hafsa Shamsie, Manager Finance at Engro Corporation, brushed aside the risk of default on the debt instrument, saying Engro is a leveraged company and is capable of meeting its debt obligations.

“We are already serving Rs89 billion in debt and another Rs4 billion will not be an issue. We have set aside assets worth double the value of the TFC to guarantee returns and redemption.”

Pakistan’s corporate debt market is not yet developed and Engro claims that the objective of tapping the market is to give it a boost and offer a lucrative and risk-free investment option to Pakistani citizens, non-resident Pakistanis and corporate bodies.

“We could have borrowed from banks instead, but the intent is to develop the fledgling corporate debt market. Although banks charge high interest rates of 15-18 per cent, the TFC issue is not cheap either with marketing expenses swallowing Rs200 million,” explained Shamsie.

Of the targeted amount of Rs4 billion for meeting working capital needs, Rs3 billion will be injected into the fertiliser business and Rs1 billion into food business.

With the help of these funds, the annual fertiliser production capacity of Engro will increase 26 per cent from 975,000 tons to 1.23 million tons. “Together with Fatima Fertiliser, we will be able to meet the country’s demand for fertiliser in future when both projects come on stream,” said Shamsie.

According to data released by the National Fertiliser Development Centre (NFDC) last month, fertiliser offtake dropped 14 per cent to 4.9 million tons in January-August 2010 compared with 5.7 million tons in the same period last year. During calendar year 2009, total fertiliser sales stood at 9.3 million tons.

The company sees no significant increase in the demand for fertiliser in the current Rabi crop sowing season after floods damaged and affected an estimated 4.23 million acres of cultivated land. “There was an initial spike in demand in August but we see no significant rise in consumption in coming months. Also, the TFC is not aimed at meeting any increase in demand after the floods,” she added.

In the food category, the company produces dairy products like milk and ice cream and has plans to spread into grain and fruit markets.

Published in The Express Tribune, October 15^th, 2010.

COMMENTS (27)

Ali Husain | 14 years ago | Reply Engro's income primarily comes from their fertilizer business, what would happen if profitability of this company would come down? Would they be able to service Rs 89 billion loan. The food company has done well with milk, they had the heart to spend money to buy market share. To date they are loosing money and ice cream business is not in the best shape. Will they use the money Rs 1 billion for distribution or for meeting cash flows? Need more details how they will use Rs 1 billion. I would be careful investing large sum of money. I feel a bit nervous seeing their media campaign, they seems to be insired by Olpers ad. Here they are selling a financial product not milk or a consumer product.

M TAUSEEF BARLAS | 14 years ago | Reply quite risky investment it will be. a company with huge debt. in pakistani anything can happen. better not to invest money.

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Zafar Iqbal Tahir | 14 years ago | Reply Being Provate Sector what is the safety for investor's funds in case of any loss. Profit for investors per annum is attractive but investors are bound for long prescribed period and what is the procedure for those investors at dis-investment durig the bound period and there is confustion on some other issues.

Zahid Hassan | 14 years ago | Reply Never heard about variations in the interest in the past. I do not think it is possible,yes it is possible make new investment if company announces new profit margin at higher side after three month and so on.

Abdullah | 14 years ago | Reply If Engro has decided to issue TFCs for Rs 4 billion at 14.5% it must be because it must be the least cost financing option available to them - despite the underwriting fees and tremendous marketing expense incurred so far to advertise these TFCs. I would assume that this expense would exceed 200 million easily, which means that perhaps issueing TFCs to the general public is at least as expensive as raising bank debt (@ KIBOR +2%), or a secondary issue of capital. Perhaps Engro's team has exhausted all other financing options, such as raising bank debt, which is not a good sign. Nevertheless, the only risk for the investor in purchasing a TFC traded on the secondary market is whether Engro's credit rating be downgraded before the maturity period. To that end, the question to ask is whether the money will be invested (and revenues will respond quickly enough) or whether it will be used to buy up the market for its new products - which means another TFC issuance down the line, perhaps?

Farooq Shaikh | 14 years ago | Reply With interest rates expected to increase by 50bps in december and the probability of further increase quite high, it wouldn't be prudent to lock oneself at 14.5% for three years.

Umair Waheed Sheikh, Khayban e Hafiz,Karachi | 14 years ago | Reply I was interviewed by them for a job and when I asked the CFO Mr Rohail where would he be in 3 years time he said: " I would be in the Caribbean enjoying my mojitos". If the CFO says that it means the company will cease to exist. I declined their job offer!

M. Amjad | 14 years ago | Reply Not profitable at all...

wafa | 14 years ago | Reply i m confused with all this discucssion just tell me this to invest in this is profitable or not?

Shaikh Perwaiz Raees | 14 years ago | Reply Probably, another Dewan Group in making,

Zahid Hassan | 14 years ago | Reply People has a fear if another Finance Companies delima repeats,then what will happen? This is also heard that Company's business is going towards declination and they are collecting money from the common people to withstand. some company starts such attractions from their employees. Some thoughts state that they are expanding their business towards food industry and power energy,so they decided instead of getting loans from bank at high rate,why should not asked people of Pakistan expand company's business on their wealth. Question is this if a company goes to a bank for a loan,bank asks kind of gurantees to the company asgainst loan, Can an individual asks Engro to give him a gurantee in case of company claims bankrupt? or the bank who is sharing with company business, can provide kind of gurantee to common man in case of failure? if so then no harm to invest but if not,then people of pakistan who will invest, may ready to stand in long Q for getting their money back and same delima of Finance Companies is ready to repeat.

Hur Qaisar | 14 years ago | Reply This ship is going down!

Amadeus | 14 years ago | Reply @Haroon: almost every company which raises debt in Pakistan is rated AA - which does not necessarily imply low-default risk; but conflict of interest on part of the rating agencies.

Meekal Ahmed | 14 years ago | Reply Halal? Are government savings instruments halal? is the pensioners and/or seniors certificates halal? They offer a fixed rate of return. They call it rate of "profit" do as not to offend people. What about bank deposits? That's fixed more or less. Lending rates are pretty much fixed and/or move in a fairly narrow band unless the central bank does something to its policy rate. I believe even in Saudi, the self-appointed guardians of Islam, they are many "schemes" with fixed rates of profit. And so it is in other Muslim countries as well. It is a bit of a paradox that in America leasing (a very Islamic concept) is very common. My car is leased. I will return it next year when my 3-year lease ends and lease another. Before we get all twisted into knots, look at what other Islamic/Muslim countries are doing. Of course there are banks in Pakistan and around the world that operate on Islamic-compliant lines. Nothing wrong with that either.

Haroon | 14 years ago | Reply If the investment is so risky why does it have a AA rating? That should mean it pretty solid investment.

sohail | 14 years ago | Reply nice move by engro.one question Is it halal product from islamic point of view.

shaxia malik | 14 years ago | Reply this is a good step a nice idea but at one end the company is involve in fmcg and other end selling financial service...... this diversification is not making me satisfied.... i m like ?????????????????

Mohammad Hanif | 14 years ago | Reply Sir: TFC offered by Engro is nice step toward the development. Would you kindly advise me the rating of this TFC offered on October 15, 2010. Also I intend to invest abt. 4 million during my next visit to Pakistan in Nov.2010. Can I buy from any MCB branch near my residence at Lahore. Appreciate yr reply via e-mail. Kind Regards M. Hanif

Muhammad Fahad | 14 years ago | Reply already highly leveraged company especially food business not providing returns. NSS recent rate hike may not attract investors to engro. why take 1 or 1.5 % more risk in corporate debt security over safer NSS option?

Amadeus | 14 years ago | Reply @Nide: You need to look at the annual statements first. The interest on Engro’s bank debt isn’t more than 13-14%. Targeting retail investors means net cost of 15.5% – which a company would only do, if its really desperate for cash; which Engro is right now. @Vijay: Borrowing from retail investors is more costly than borrowing from banks - Engro is only doing that probably because it can't raise any further debt from banks or institutional investors since it already has a debt load of PKR100bn (the highest for any corporate in Pakisan). And NO, the government is not providing any guarantee, nor will it do so.

vijay kishan | 14 years ago | Reply its nice step to go ahead for increasing fertilizing rate n to save themselves 4rm high rate borrowing from banks............againa question iz waiting ti be answered that is government gives any security by purchasing the certificete..........

Meekal Ahmed | 14 years ago | Reply I think my family has Engro shares and unless I am mistaken they give excellent dividends and bonus shares. I think this TFC giving a yield which should turn sharply positive in "real" terms as inflation declines in the period ahead is an excellent instrument. I don't know why you guys are so cynical. Maybe you know something I don't?

Nida Wasif | 14 years ago | Reply It's a good shot of investment. Nice movie by the cmpany to save themselves from the bank loans @ 20-23% per annum. They take ppl's money inject it into business, pay off 14.5% to investors and save themselves approximately 6% per annum interest. Profit on certificates is based on the grounds that the company make substantial percentage of profits every year out of which 14.5% can be given out as profits to lenders. Again i would say nice move by Engro. It's a common practice in foreign land by several companies. One question: Is it possible to purchase shares of less than Rs 25,000 (minimum investment limit).???

Mohammad Arif Murid | 14 years ago | Reply lets try with a small investment to see the result, though its not a bad move for such a huge company but one should be more carefull to see the pakistan business and investment condition.

Umair Waheed Sheikh, Khayban e Hafiz,Karachi | 14 years ago | Reply Engro is like a pyramid scheme. The company doesnt have any cash and once the growth rates start declining the company will get bankrupt and the CEO and employees will laugh their way to the bank as they would have sold their shares. No one should invest in these!

Ali | 14 years ago | Reply I just love this company! :)

Pseudo | 14 years ago | Reply This ship is going down baby!!

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