A CASE STUDY ON ENGRO FERTILIZERS: DECLINED SALES, PROFITS & SOLUTIONS Manisha, Sarmad, Sajid, Anmol, Haneef, & Somaan SUKKUR INSTITUTE OF BUSINESS ADMINISTRATION ABSTRACT This case study aims to describe how Engro Fertilizers Limited had lost its competitiveness, under what situation Engro production went down, and the reasons behind the relative declined sales of Engro Fertilizers Limited Company and the rapid decline of profits in its FY12. The Agriculture industry is very much in demand, therefore, making a great importance of fertilizers in Pakistan. The findings also revealed the marketing mix problems of Engro Fertilizers, more specifically placement which is considered important factors by consumers. INTRODUCTION A.I ntroduction to Fertilizer I ndustry 1.An Economy Deriving 20% of Its Output from Agriculture Pakistan has moved from an economy, which was heavily dependent on agriculture, to a relatively balanced economy based on services, industry and agriculture. As of FY14, agriculture contributed 25.1% to the overall GDP. The governments policies are directed towards improvement of agricultural output through increased credit disbursements to the agricultural sector and improvement in irrigation. 2.Low Penetration of Fertilizers Expected to I mprove Fertilizer usage in Pakistan is low and the current fertilizer consumption stands at 162.5kg per hectare. This is in large part responsible for the low yield per hectare of cultivated land which stands at 1.44tn per hectare. Fertilizer consumption closely follows economic growth of the country as exhibited by the strong positive correlation (R2=0.9841) between fertilizer consumption per hectare and nominal GDP. As the economy is expected to perform well in the future with an estimated nominal GDP growth of 14%, we expect fertilizer penetration to increase to 187kg per hectare. This greater demand is expected to continue in the future as economic growth continues. 3.Excess Demand Situation The industry capacity currently stands at 5.8mntpa whereas local demand is 6.8mntpa. This excessive demand ensures sales of total production.4.Low Resource Costs Result in High Profitability Pakistans fertilizer manufacturers have low resource costs due to feedstock gas subsidy advanced by the government. Through this subsidy manufacturers are able to get feed stock gas at significantly lower rates than the market which improves their profitability. This subsidy is expected to remain in place at least for the next three to four years i.e. until the industry faces an excess supply situation. Later on the subsidy may be withdrawn from that portion of production which is exported. Production directed towards local sales is expected to continue receiving the subsidy. 5.Expansions May Open Up Attractive Export Avenues The current excess demand situation has prompted capacity expansions which are likely to open up profitable export avenues. Industry supply is expected to reach 7.5mntpa which will be higher than local demand. This surplus is likely to be exported to the neighboring countries. 6.Expansions May Open Up Attractive Export Avenues The current excess demand situation has prompted capacity expansions which are likely to open up profitable export avenues post 2010. Industry supply is expected to reach 7.5mntpa by 2010 which will be higher than local demand. This surplus is likely to be exported to the neighboring countries. B.I ntroduction to Engro Fertilizers Public Limited It was the time of 1957 when the Pak Stanvac, an ESSO/MOBIL joint venture led to the discovery of Mari Gas reserves near Daharki. Thus, ESSO proposed the establishment of ureaPlantandthisleadtothesignedFertilizerPlantagreementin1964.Inthe subsequent year the ESSO Pakistan chemical industry was incorporated. Later, as part of aninternationalnamechangeprogram,EssobecameExxonin1978andtheCompany was renamed Exxon Chemical Pakistan Limited.In 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of, those times, Exxon Chemical Pakistan Limited partnered with international and local financialinstitutionsboughtoutalmostExxons75%equity.Itwasthetimewhenthe most successful employee buy- out in the corporate history of Pakistan recorded. Later on the Exxon Chemical Pakistan Limited was renamed as Engro Chemical Pakistan Limited, thecompanyhadfacedmanyhardshipsbutduetoitsconsistentandenviablefinancial performanceithasgrownofthecorefertilizerbusinessandsuccessfulbusiness 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. EngroFertilizersLimitedproducealargequantityoffertilizers,fewofthemareas follows: oEngro Urea,oEngro DAP, oEngro Zingro, andoEngro Zarkhez. The principal activities of Engro FertilizersLimited are the manufacturing, and marketing offertilizers.TheCompany'sfertilizerbrand,Engro',isthesecondhighestsellingurea brandinPakistan.TheCompany'sfinancialandmanagementstrengthisdenotedbyits AA- rating by the Pakistan Credit Rating Agency. C. I ntroduction to Daharki Daharki isacityof GhotkiDistrict inthe Sindh provinceofPakistan.Itisthecapital of DaharkiTaluka -anadministrativesubdivisionofthedistrict. Itissituateabout 100 km from Sukkur, and between Mirpur Mathelo and Ubaro. ThisisasmallcityliketowninprovinceofSindhinPakistan.Daharkiisabusiness centrewithnumerousindustriesparticularlycottonfactories,afertilizerplantEngro FertilizerLtd,oilandgasexplorationcompaniesMariGasCo.andTulloOilPakistan Ltd, Power Plants Star power co, Fauji Power Plant and Liberty power Plant. PLANTS OF ENGRO FERTILIZERS DAHARKI Plant-A Plant-Awasestablishedin1964byanAmericanCompany.Theannualcapacityof Plant-1 is 173,000 tons per day. Plant-B Plant-B is made of Japan technology. It has the annual capacity of 802,000 tons per day. Plant-C Plant-C was made in 2010. It has the annual capacity of 1,300,000 tons per day. INDUSTRY TREND Fertilizer industry in Pakistan faced over a 2.7 million tons urea production loss in 2012 mainly due to gas curtailment. The industry could only produce 4.2 million tons of urea having the maximum capacity of about 6.9 million tons per annum. The sources from the interview told our group that during the last fewyears of fertilizer industry,ithasinvested$2.3billion,whichisequaltoapproximatelyRs.230arab,in Pakistan based on the government approved agreement designed to encourage investment infertilizersector.However,groundbreakinggascurtailmenttofertilizerplants,in violationofthegovernmentexistingsupplycontractof12monthayear,hascaused significantlosstothefertilizerindustryandthusabigplayerofindustryaswellduring the year of 2012.The interviewee also informed us that so far the industry has suffered a production loss of over2.7milliontonsin2012.Thedomesticfertilizerplantsproducedonly4.2million tons of urea against a total production capacity of over 6.9 million tons per annum. Thisdeclinationindomesticproductionofureaalsohascompelledthegovernmentto importhugequantityofureafertilizertomeetthefarmersdemand.Theinterviewee further added because of this loss of production the government has imported over 1.23 milliontonsofureatherefore;thespendingonthisimportis$566milliondollarsand alsopaidoverRs.24billionrupeessubsidytokeeptheimportedureaspricessameas with locally produced urea. OnthecontrarythepersonalsoaddedthatthecashstrappedMinistryofFinanceisnot very happy over this situation. They are not happybecause Pakistan has all the required productionfacilitytomeetthedomesticdemand andevenPakistancanexportoverone million ton of urea to earn hundreds of millions of dollars every year if domestic fertilizer plants are provided with uninterrupted gas. Thecountrysoverallureaproductioncapacityisabout6.9milliontonsannually,as against the demand of some 5.8 million tons. This extra production of Urea than demand, if produced, can provide an opportunity to export some one million ton of urea annually. Thesourcessaidthatdespiteallthepressingproblems,domesticureapriceisstill Rs.1840 per bag that is below international urea price which is 2200, which is almost five times larger than feed gas subsidy of Rs.400 per bag. The current domestic urea price is Rs 1,840 per bag, including company price Rs 1,564 perbagandRs.276perbagGeneralSalesTaxandadvancedtax,asagainstaverage international urea price of Rs 2,990 per bag inclusive of GST during 2012, we inquired. TheupliftoffertilizerindustrybyPakistanigovernmentwasactuallymeanttopasson thebenefitofdomesticmanufacturingtothefarmer.Thisisevidentfromthefactthat during 2012 domestic urea sold at $311 per ton while it received gas at $3.8 per MMBTU (MillionMetricBritishThermalUnits).IncomparisonMiddleEasternproducerssold urea at $470 per ton while paying approximately $0.7 per MMBTU for gas. They further said that over the last five years the farmers have received benefit of Rs 500 billion,ofthisRs140billionwascontributedbythegovernmentinformoffeedgas subsidy and Rs 360 billion was contributed by the fertilizer manufactures by keeping urea prices significantly lower than the international prices. TheconcernedpersonclaimedthatSNGPL-basedplantsarefacingtheworstcrisisof their history as such gas curtailment was never witnessed before 2012. He further added that the fertilizer sector despite making a large investment of $2.3 billion in last 4-5 years onnewproductioncapacity,whichismakingPakistanworlds7thlargesturea production country, is sitting on an idle urea capacity of over 2.5 million tons. The person also claimed and curious about thegas curtailmentand said that if the same gascurtailmentcontinuesduring2013,theSNGPL-basedfertilizerplantsmayforceto shutdownpermanentlyresultinginlayoffofhighlyskilledmanpower,increaseinbad debtsandhugeburdenonnationalexchequeraswellasincreasingthenumberof unemployed person in Pakistan, to import urea to meet the urea shortfall. Concluding the industry trends, its not just fertilizer plants that would face the burnt, the wholefarmerscommunity,aswellasthegovernmentwouldbetheultimatelosersand theeconomydownfalliffertilizerplantswithover2milliontonsofcapacitywere shutdownduetounavailabilityofgas.Thegovernmentneedstosupportfertilizer industry to ensure inexpensive local urea to farmers and import fuel for the power sector and the industry which is more cost effective. Stakeholders Perspectives on Engro Fertilizers Engro Fertilizers is skating on thin ice because customers are unhappy because of the high prices. Strategic decisions and sustainability development must be made to help theorganizationtohelptheorganizationtogetbackonthetrack.Specialattention must be given to find the new gas reserves for the production of Urea. The company is expecting to invite public to invest in business, in other words IPO. -5051015202530352009 2010 2011 2012SalesProfits FINANCIAL PERFORMANCE OF ENGRO FERTILIZERS Thecompanyshowsagoodfinancialperformanceineveryfield,thesalesoftheyear 2007wereRs.23.2billionwhichishigherthan2006by32%.Theprofitaftertaxwas 3.15billionwhichisanew recordofthecompanyand higherby24%overthe2006 profitofRs.2.55billion. However, as the graph depicts, Salesin2009wereRs.30.1 billion and profits were Rs. 3.9 billion. Sales in 2010 wereRs. 19billionandProfitsRs.3.7 billion. Sales in 2011 wereRs. 31.3billionandprofitswere Rs.4.5billion.Salesin2012 wereRs.30.6billionandlose were (Rs. 2.9 billion).Therearefewreasonsfor whichthisgraphofProfitis declined.Thispaperfurther discussesthesituationofthe companyandthereasons behindthesuddenprofit decline. Figure 1.1 THE SITUATION I ssue and Opportunity Identification Engro Fertilizers Limited possesses a 24 year old fertilizers experience and possesses 1,769 employees. Three plants for fertilizers in Daharki can produce up to 2,275,000 perday,975,000fromoldPlantsatDaharkiand1,300,000.Thecompanyisfacing fewchallengesbecauseofGovernmentbackofffromtheagreement,fewergas reserves,inconsistentproductionoffertilizers,alltogetherresultinginlower production which leads to lower sales and finally lower profits. Customers demands are not fulfilled due to the low production and consequently it gives space to the new entrantsandcompetitorstofillinthespaceandsnatchthemarketshareofEngro Fertilizers. A manageratEngroFertilizers claims, The biggest challenge for Engro istofindthenewthegassupplyreserves.Thecompanywillhavetofigureout strategies to overcome the challenges. Problems 1.Declined Sales:The sales of Engro fertilizers declined with a rate of approximately 3%.

2.Declined Profits:The profits of Engro fertilizers declined with a rate of 164%, this shows a negative profit or net loss. 3.Hefty Financial Charge:Hefty Financial charges on its finances are also a major problem for Engro fertilizer to overcome. Otherwise, it will have to face a lot of serious financial losses. 4.Placement I ssue:Inourinterview,wecomeacrossanotherproblemofEngrothatisplacement.The intervieweetoldusthattherearetwophasesofShortSupplyandLongSupply.In ShortSupplydemandoffertilizersisgreaterthanthesupplyoffertilizers.InLong Supplydemandoffertilizersislessthanthesupplyoffertilizers.Inshortsupply dealershavethechancetochargehigherpricesbecauseofdemandsupplygap,but Engro company push the dealers not to charge higher prices, on the contrary in long supplywhenthereislessdemandandmoresupplythenEngropushthedealersto placeEngrowhetheritisbeingsoldornot.Thisdoesntcreateawin-winsituation andthereforethedealersdontwanttohelpthecompanyinitsbadtime,because company doesnt allow them to charge higher prices when there is short supply. This createsaproblemforEngroinplacementinlongsupplyandalsoincurscostof warehousing the urea in long supply.Root Causes of Problems Declined Sales: The3%salesdeclineinFY12isactuallycausedbythefloodsatBadin-themain city and capital of Badin District in Sindh, Pakistan. It lies east of the Indus River. Theregionisswampy,fertile,andsuitableforgrowingrice.Someoilfieldsare locatednearthetownintheseasonallyinundated RannofKutch region.Itisthe main town of Badin District, in 2011. A flood caused in Badin became the reason forthedownfallofsalesinthebeginningofthenewFY12ofEngroFertilizers. Not only this, the flood at the end of the FiscalYear 2012 (FY12) in theKhyber Pakhtunkhwa, UpperSindh, Southern Punjab and Balochistan regionsof Pakistan furtheraidsinthedeclinationofSalesinFY12.Therefore,thedemandsof fertilizers in the affected areas were no more and the same was the case with other playersoffertilizerindustry.Theywerealsoaffectedbythesefloodsandthey movedtheirinventoriestootherpartsofcountrywhichcreatescompetitionto Engro to encourage its sales. Thus, this all scenario affected the sales ofEngro in the FY12. Declined Profits and Hefty Financial Charges Thereasonsforthedeclinedsalesandheftyfinancialchargesarebecauseof variousreasons.Actually,thefirstreasonistheagreementbetweenEngroand Government and then government back off from the agreement.EngroFertilizersandGovernmenthadacontracttoreceiveuninterruptedgasfor 20 years and at concessionary prices for 10years as per the Gas Sales Agreement (GSA).AftertheagreementEngrowasuptosettinguptheworldslargesturea train plant.Therefore,inDecember2006undertheumbrellaofFertilizerpolicy2001the Governmentinvitedbidsforallocationof100mmscfdgastoenhancelocalurea production and to reduce reliance on imports. This was the first time that gas was allocatedthroughaninternationalcompetitivebidandEngroFertilizerswas awardedthisgasinatransparentandcompetitivebiddingprocessinvolvingfour local and international parties. EngroFertilizers,then,invested$1.1billiondollarsoneofthelargestprivate investmenteverinthehistoryofPakistanonthecommitmentoftheGovernment of Pakistan for guaranteed gas on an uninterrupted basis for Engro Fertilizers. The plantwhichwasestablishedin2010istheworldslargestsingletrainureaplant. ThetermsofGSAwereagreeduponpriortothebiddingprocessandhavenot been changed in any way since. Later on, in April 2010 Pakistan started facing gas shortages which in result lead to gas curtailment to the fertilizer industry. Due to low priority given to the fertilizer sector in thisgas deficit scenario,Engro Enven only receivedgas for 189 days in 2011and45daysin2012(NotedasImportant).EngroFertilizerssuffered severelywithacombinedmarginlossofRs.45billionin2011-12andalso reported a pre-tax loss of Rs. 3.9 billion during 2012 and a after tax loss of Rs. 2.9 billion.Thisagreementwasamajorreasonandcanbesaidastherootcauseofall problems,whetheritisdeclinedinsales,declinedinprofits,orheftyfinancial charges.Gas shortage in Pakistan became the reason for the breach in this agreement.It is becauseofgasshortagethattheproductionfromthenewplantwasnotasperto expectation but it also affected the production of other two plants of Engro as well, which became the reasons for low production and ultimately lower sales for FY12.It is because of this agreement for which Engro went into the decision of setting up theworldslargestureatrainplant.Thisagreementleadstothefinancingof$1.1 billion. Therefore,Engrotooklong-termloanandequityfinancing,tofinancethe worlds largest urea train plant, from creditors and investors and also took loan of $30millionfromWorldBank,tohelpitselfwithanexpansionplanthatwill double production and create job opportunities.Aftertheacquiredfinancesandsuccessfulcompletionofproject,ofnewplantin Daharki,thecompanywasreadytotouchnewheightsofproduction,sales,and profitsbutitdidnotgoasplannedandtheygotstuckupwithgascurtailment, production losses, sales decline, and hefty charges.Payment of loan was not possible in this state. Therefore, the company was forced to approach its creditors to re-profile and re-schedule its long term obligations, as the company was in danger of facing bankruptcy due to the gas curtailment. After bearing this loss Engro fertilizers has filed a claim of Rs. 53.63 billion against Sui Northern Gas Pipelines Limited (SNGPL) due to losses from gas curtailment, and this claim increases by Rs2.5-3.0 billion for each month till gas is restored. In October 2011, the Sindh High Court ordered the immediate restoration of gas to EngroFertilizersunderthecontractupholdingthesovereignguaranteeandthe GSA but this decision was not implemented. Insimple,becauseoftheagreementofGassupply,EngroandGovernmentcame into an agreement of making a new plant at Daharki. In result, Engro took loan and used its equity finances to finance this new project of new plant but because of gas curtailment government was unable to fulfill its promise of providing the required gastorunthenewplant.This,inresult,decreasethesales,rapidlydecreasedthe profits and it was about to put Engro in bankruptcy, but Engro rescheduled and re-profileitslongtermobligationbypayingthemHeftyFinancialCharges-finance charge is often an aggregated cost, including the cost of the carrying the debt itself along with any related transaction fees. PROPOSED SOLUTIONS 1.I dentify the Alternatives The primary purpose of any business, including Engro Fertilizers, is to meet the needs ofthecustomerswiththecompanysproduct.Withoutacustomertosellto,the businesswouldnotexist.As,EngroFertilizersrecentlyexperiencedadeclineinthe sales due to various reasons mentioned above this ultimately has resulted in decreased revenueandcompanyprofit.Therefore,thecompanyshouldidentifysomeother alternatives in order to fulfill the demand, to produce the expected production of 2.27 million tons.An alternative can be, as mentioned by the interviewee as well,to take the supply of Gas from Guddu Gas reserves. Though the Gas supply in Guddu is low but Engro can use power compressors to supply the gas to its Plant for urea production.2.Evaluation of Alternatives InorderforEngroFertilizerstosucceed,thecompanymustconsidertherisksand challengesassociatedwiththealternatives.Whenseekingtheoptimalsolutionin form of an alternative, management must consider the challenges associated with the alternative.Intheproposedsolution,Engromustconsidertherisksandchallengesassociated with the alternatives. In this situation, Engro must consider that whether they can use thatGasreservesinGuddutohaveitssupply.CantheGasreservesissufficientto supply the gas to its plants? And, will there be any problems face by this alternative? 3.Making the Decision Whendecidingtheproposedsolution,EngroFertilizersmustunderstandwhattheir goalsare,andalsowhatchallengestheyhavefaced.Thesefactorswillhelpthe companydecidehowtomoveforwardandbecometheleadingcompanyby overcomingtheproblems.TheEngroCompanyafteridentifyandevaluatethe alternativesmustmakedecisionaccordingly,bylookingattheprosandconsofthe alternative and then make the decision.IntheproposedsolutionEngromustlookthatwhetherthecompanycanaffordthe new gas supply of Guddu and use it effectively and then make the decision whether to go or not to go with this decision. 4.Developing and Implementing the Solution Inorderfortheplantosucceed,itmustbeimplementedcorrectly.The implementationpartofaplanisdifficultbecauseofnegotiations,internalresistance to change, and meeting difficult timelines. Communication between management and employeesmustbecomethenormduringtheimplementationprocess.Insuccessful projects,preparationforimplementationisdoneinadvance.Itisaddressedinthe initial plan and throughout the project. IntheproposedsolutiontheEngrofertilizersshouldimplementtheideaofgetting supply from Guddu and implement it using different tools, like contracts, agreement, negotiations, etc. 5.Evaluating the Results In this step company should evaluate the expected benefits of the alternatives after a time period to ensure that the proposed alternative is going as planned. Intheproposedsolutions,theEngroFertilizersmustfocusontheaftermathof implementing the alternative. ThecompanyshouldalsoprovidesomebenefitstothedealersinShortsupplyin order to overcome placement issue she is facing. CONCLUSION The case study research has proven that the there is decline in Sales and profits of the company and it has badly influence the overall performance of Engro, which lead the company to lose its competitiveness. It also has proven that the company is facing the placement issue. Therefore, Engro Fertilizer must focus on identifying the new supply of Gas by spending on R&D and should provide win-win situation to overcome placement issue. A PICTURE WITH MR. SYED MUHAMMAD SHERIYAR, DISTRBUTOR OFFICER