Engro Fertilizer posts above expectation profit

Engro fertilizer Limited (EFERT) has posted disappointing quarterly financial results; there is no surprise because these are close to analysts’ forecast. The blame for this disappointing performance should go to the Government of Pakistan (GoP) for following bad policies rather than the management of EFERT for any inefficiency.

The Company has posted profit after tax of Rs2,121 million (EPS: Rs1.59) for January-March 2016 quarter (1QFY14) as compared to net profit of Rs3,058 million (EPS: Rs2.30), posting a decline of 31 percent.

If one compares the performance with 4QCY15 the disappointment is even bigger, because the Company had posted Rs5,123 million (EPS: Rs3.89) a hefty decline of 59 percent.

In its report AKD securities has 1QCY16 result above its projected net profit of Rs1.65 billion (EPS: RS1.24) with the deviation in gross margin (more than expected inventory level). It has also attributed 59%QoQ decline in earnings mainly to depressed fertilizer industry dynamics and seasonality.

Key highlights of the result include: 1) Topline coming off by 29%YoY/65%QoQ owing to significantly lower volumetric sales (down 37%YoY/48%QoQ), 2) a 87bpsYoY increase in GP margin from 38.3% in 1QCY15 to 39.2% in 1QCY16 mainly on account of concessionary gas pricing for Enven Plant, 3) a 65%YoY lower other income as a result of 54%YoY reduction in T-Bills and other fixed income placements to Rs10 billion and 4) a 41%YoY decrease in finance cost on account of swift deleveraging.

KAPCO profit declines by 13 percent

Pakistan’s biggest independent power producer, Kot Addu Power Company (KAPCO) has released its third quarter financial results for the current financial year (FY16). The company has posted profit after tax of Rs6.204 billion (EPS: Rs7.05) for 9Mfy16 as compared to net profit of Rs7.122 billion (EPS: Rs8.09) for 9MFY15, down by 13%YoY.

They keyways are: 1) sales declined by 36 percent, 2) cost of sales declined by 39 percent and 3) gross profit declined by 17 percent. In declining cost scenario 34 percent increase in administrative cost a bit odd but in the absence of detailed accounts it may not be possible to give any rationale for this hike.

There are two other interesting observations: 1) a 43 percent decline in other income and 2) a 54 percent reduction in financial cost. In the declining interest rate scenario this can be termed an indication that other income was drawn from higher remunerative assets.

Reduction in cost of sales can be attributed to greater use of gas as compared to furnace oil during the period under review. However, a point arises that despite cost being a passed on factor there has not be corresponding reduction in electricity by NEPRA.

Despite many odds the scrip still looks worth considering as KAPCO has already paid Rs4.25 dividend for the first half and a similar payout can be expected for the second half of the FY16.  

Rupees in million				9MFY16		9MFY15		YoY%
Sales				47,937.15		74,736		-36%
Cost of Sales				(39,032.74)		(64,046)		-39%
Gross Profit				8,904.41		10,690		-17%
Administrative Expenses				(369.09)		(276)		34%
Other Income				2,958.65		5,221		-43%
Profit From Operations				11,494		15,635		-26%
Finance Cost				(2,446.33)		(5,266)		-54%
Profit Before Tax				9,048		10,369		-13%
Taxation				(2,843.87)		(3,246)		-12%
Profit For the Period				6,204		7,122		-13%
EPS		-		7.05		8.09		-

Engro Fertilizer earnings to nose dive

Engro Fertilizer limited (EFERT), one of Pakistan’s largest urea manufacturing companies,

is scheduled to announce its financial results for January-March quarter (1QCY16) on 25^th April. According to a forecast by AKD Securities the company is expected to post profit after tax of Rs1.65 billion (EPS: Rs1.24) for 1QCY16 as compared to net profit of Rs3.06 billion (EPS: Rs2.3) for 1QCY15, a decline of 46%YoY/68%QoQ.

This significant fall in earnings will be at the back of: 1) a decline of 28%YoY/64%QoQ in topline to Rs12.79 billion caused by likely 34%YoY decrease in Urea offtake to 302,000 tons from 481,000 tons during the corresponding period, 2) Gross margins (GMs) coming off by 200bps to 36.3% on account of increase in feedstock and fuel gas prices in September 2015 and low product prices (6%YoY decrease in urea prices) on the back of depressed international price trend ‑ down by 25%YoY to an average of US$238/tons during 1QCY16 and 3) a 70%YoY lower other income as a result of 54% YoY reduction in T‐Bills and other fixed income placements to Rs10.1 billion. A dividend payout of Rs0.75/share is expected to accompany the result announcement.

CY16 is expected to be a very tough year for the fertilizer manufacturers with no major volumetric growth, depressed farmer income, weak pricing power and high cost of raw material (gas prices slated to go up in July'16). EFERT remains top pick of analysts among the fertilizer companies primarily on account of concessionary gas pricing for Enven Plant and swift deleveraging resulting in significant saving in financial cost and integration of DAP business (2MCY16 offtake of 51,000 tons) that constitutes a 25% market share in the industry). Analysts advocate building positions in EFERT due to potential upside.

Pakistani entrepreneurs seeking joint venture partners

For more than quarter of a century I have been working as economic analysts. Later on, I ventured into political economy and the new focus is geopolitical affairs. Ever since Pakistan and China have agreed to build China Pakistan Economic Corridor (CPEC) both the local and global investors are trying to understand the importance and economic implication of this project. Without going into too many details it may be said that CPEC is a game changer and those who get associated with the main and even peripheral projects now will enjoy the ‘early bird’ advantage.

By this time it has become evident that China is developing two routes to minimize the distance covered by its imports and exports. These two routes have been termed ‘Silk Routes’, one on land and the other in waters. Let one point be kept in mind that various roads/railway tracks already exist, which are now being interconnected. Similarly, ports are already operating in almost all the countries, though enjoying different levels of technology. Effectively China is creating interconnectivity and upgrading technologies under CPEC.

One of the most recent examples is the commencement of a rail service that passes through various countries and offers the ultimate connectivity between China and Turkey. On the sea front two new ports are being developed; Chabahar and Gwadar. Chabahar is located in Iran and Gwadar is situated in Pakistan. The key objective behind the construction of both the ports is to get access to land locked Central Asian countries, Russia and China. Other countries will also benefit from these ports and the biggest beneficiary is Afghanistan as it will get cost efficient connectivity for its transit trade.

If one looks at the map of the region, Pakistan can be rightly termed ‘natural corridor for trade and energy’ because two of the proposed mega gas pipelines; Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) will also pass through Pakistan. It is no secret that even today Pakistan offers the shortest and most cost efficient route to Afghanistan.

For ensuring the most efficient service, Pakistani entrepreneurs will have to focus on three key areas: 1) logistic, 2) warehousing and 3) collateral management services. I will admit it point blank that Pakistan is weak in all the three areas, mainly because of shortage of funds as well as lack of expertise. Therefore, the entrepreneurs are seeking joint venture partners, who have the capital as well as the expertise.

Pakistan’s central bank, with the help of multilateral donors, is also ready to offer loans on concessional interest rate. However, little success has been achieved as local entrepreneurs have not been able to get in touch with overseas investors. One of the reasons for the poor response from the overseas investors is that those are shy in investing in Pakistan, due to geopolitical condition of the region.

However, regional landscape is changing fast. China, Russia and United States seem to be arriving at the consensus that ‘enough is enough’ and for boosting the global economy policy must shift to cooperation from confrontation. Global downturn must be reversed and this will not be possible without establishing peace and tranquility in the region.

P.S. The foreign investors keen in locating joint venture partners in Pakistan are invited to contact us in locating a trustworthy business partner. They may send their queries at shkazmipk@gmail.com