Corporate results: Fertilizers decimates otherwise strong year for Engro

Foods now the largest subsidiary of the conglomerate by any measure.

KARACHI:

Engro Corporation may be well on its way to becoming a well-diversified conglomerate, but during earnings season, one truth hits home: its core business is still fertiliser manufacturing, and that core is dragging down an otherwise outstanding company.

After the announcements of the earnings of Engro Foods and Engro Fertilizers, the market largely knew what to expect, but it was still grim reading: revenue increased a paltry 8.7% (below inflation) to Rs125 billion and profits plummeted 83% to Rs1.3 billion. The overwhelming bulk of that decline can be attributed to the fertiliser manufacturing business, which went from a Rs4.6 billion profit in 2011 to a Rs2.9 billion loss.

Excluding the losses from Fertilizers, the conglomerate saw its revenues increase by 13.5% and its profits by a much healthier 22.9% during the year ending December 31, 2012. So anaemic is the fertiliser business that it is no longer the largest business: 2012 also has the distinction of being the year that Foods became, in every respect, the largest subsidiary of Engro Corporation. The North American subsidiary of Engro Foods – Al-Safa Halal – also registered a substantial revenue number for the first time, of around $11 million.

At the press conference announcing its results, however, Engro CEO Aliuddin Ansari spent the bulk of his time talking about the problems in the fertiliser business, specifically how the company was able to get only 9% of the gas that the government is obligated – by sovereign guarantee – to provide the $1.1 billion plant in Dharki. Most worryingly for shareholders, the CEO did not present any backup plan for how the company might deal with the failure of the government to supply it with natural gas.

The new plant for Engro was financed largely through debt, which has been a particularly troublesome burden for the company in light of the amount of time the plant spends idle, and thus unable to generate revenues. During the course of 2012, the company spent Rs13.6 billion in servicing its debt, including about Rs4.9 billion in principal payments.

Ansari claimed that the government was being highly discriminatory in its attitude towards Engro, adding that other fertiliser manufacturers – especially Fatima Fertilizer – were getting natural gas, even though both Engro and Fatima have identical agreements with the government.

Fertilizers may soon have at least some relief from the chronic gas shortages, however. The state-owned Oil and Gas Development Company, the largest oil exploration and development company in the country, signed agreements with several fertiliser manufacturers, including Engro, to sell them natural gas directly through its low-BTU wells, bypassing the state-owned gas distribution companies, which also have to cater to several other constituencies.

Engro’s other businesses have begun to do well and have a significant impact on the company’s bottom line. Engro Vopak, its chemical storage business, had an net income of Rs1.5 billion. Engro Polymer & Chemicals finally swung to a narrow profit of Rs77 million after years of losses, and Engro Energy contributed Rs2 billion to the conglomerate’s bottom line.

Published in The Express Tribune, February 16^th, 2013.

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