ASSIGNMENTFINANCIAL MANAGEMENT

Topic:

Acquisition of Funds, Utilization of Funds and Ratio AnalysisOn Engro Fertilizers (2012-2013)

Submitted to:

Sir Shabir Shaikh

Submitted by:

Mahzeb Ali Shah2k13/MBAE/23

University of Sindh

Introduction

This assignment is based on Acquisition of funds, Utilization of funds and Financial Ratios and their Analysis based on Pakistani company list in Stock Market. This study is on Two year’s data (2012-2013) of company “Engro Fertilizers” which are collected from their annual report of the respective year’s due to lack of Time this study doesn’t cover any other Industrial comparison. So this assignment majorly dependent on only one company data set gathered from the company annual reports. This study covers some major Ratios of Financial Management.

Engro Fertilizer Ltd.

About the company:

Engro Fertilizers Limited is a leading name in the country’s urea producers. It is primarily in the business of manufacturing and marketing of urea and NPK (compound) fertilizers. With the establishment of 1.3 MT state of the art fertilizer complex in 2011, the Company’s annual urea production capacity stands at 2.3 MT representing 33% of that of entire Pakistan’s. Engro’s product line comprises Urea sold under the brand name of Engro Urea, NPK compound fertilizer – as Zarkhez. The Company, as an agent to Engro Eximp Private Limited (a sister concern), is also engaged in distribution and marketing of phosphate-based fertilizers mainly DAP and MAP. The Company was incorporated as an independent entity as a result of the demerger of fertilizer operations from Engro Corporation Limited (previously called Engro Chemical Pakistan Limited) on January 1, 2010. This demerger resulted in the transfer of all fertilizer assets and liabilities to the Company with its current status as a wholly owned subsidiary of Engro Corporation Limited. The Company has been in fertilizer business since 1965 when Esso Pakistan Fertilizer Company Limited was established following the discovery of the Mari gas field near Daharki. In 1978, as part of an international name change program, Esso became Exxon and the company was renamed Exxon Chemical Pakistan Limited (ECPL). Later in 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of the time, in partnership with local financial institutions, led a management buyout of Exxon’s equity stake and subsequently renamed the company as “Engro Chemical Pakistan Limited”. With time the Company diversified by establishing several other business lines in the form of subsidiaries. In 2009, a demerger of the fertilizer business was proposed with the ECPL adopting a holding company structure to manage the affairs of its various businesses which include Engro Fertilizers, Engro Foods, Engro Powergen, Engro Eximp, Engro Polymers and Chemicals, Engro Vopak, Engro Foods Netherlands and Elengy Terminal Pakistan. With its head office in Karachi and manufacturing facilities based in Daharki and Karachi, Engro Fertilizers Limited employs over 1,200 individuals.

Business ReviewOverview

The year ended December 31, 2013 was a turnaround year for Engro Fertilizers Limited. The Company managed to return back to profitability after incurring a loss in 2012 and in the process, achieved it’s highest ever revenue. The sound financial performance was on the back of highest ever production and sales of 1,562 k tons and 1,570 k tons respectively. With improved profitability, the Company decided to go for an IPO which was a huge success as it was oversubscribed by 4 times.

Market Review

In 2013 the urea industry grew by 13% after the downturn in 2012 (5,900K tons in 2013 versus 5,230 k tons in 2012). This growth was mainly attributable to better economics on major crops; weather conditions also remained favorable, casting a positive impact on demand. Increase in off take is also a result of restoration of channel confidence at retail and trade level. The Government also played an important role by improving gas allocation to the industry. Local production increased by 17% as a result of which the Government managed to reduce the subsidy on imported urea. The prices of locally produced urea remained fairly stable throughout the year. Average price of domestic urea during the year increased by 3.5% only (1% was due to sales tax changes) versus overall inflation of 9%. The international urea prices which were around USD 400/ton CFR at the start of the year started to decline in Q2 2013 on account of lower demand due to bad weather in Europe and North America. Surplus production, particularly from China further contributed to the oversupply situation and pulled the prices downwards to around USD 300/ton. However, in Q4, urea prices started stabilizing as world demand normalized. Currently the international urea prices are in the range of USD 350/ton CFR (equivalent to local cost of Rs 2,560/bag after including all the ancillary charges) which shows that there is a significant gap of Rs 775/bag between locally produced urea and international prices. The fertilizer industry continues to make significant contribution to the agricultural economy by keeping domestic prices substantially lower than international prices. In 2013, the industry provided a net benefit to farmers of approximately Rs. 65,000 Million.

UreaAdditional gas availability has helped the Company to achieve record sales of 1,570 k tons versus 953 k tons in the comparative period. Q4 witnessed the highest ever Urea sales of 494 k tons. The improved sales were a result of higher urea demand coinciding with increased production. The Company’s share of the urea market increased to 26% in 2013 as compared to 18% in 2012. The share of domestically produced urea also improved to 32% compared to 23% in same period last year.

Zarkhez

The Company’s blended fertilizers’ (Zarkhez & Engro NP) sales for the year increased by 19% to 95 k tons compared to 80 k tons during 2012. Pakistan’s overall potash market remained stable at 20 k tons during 2013. Our market share in potash industry grew to around 50% from 40% last year. This was a result of the Company’s focused efforts which enabled it to capitalize on opportunities for increasing market share. Farmers were engaged through crop-focused programs, consumer incentive schemes, seminars, field visits, demo-plots, advisory services, and other promotional activities. Approximately 52,000 farmers were contacted through market development activities.

Acquisition Of funds in year 2013

External Sources

In 2013, the Company forayed into the capital markets and tapped the financial markets to raise the necessary capital required to fund development capex on securing additional gas supplies along with restructuring of the balance sheet to optimize the capital structure of the company. The IPO was a roaring success being oversubscribed four times in the book building process whilst being oversubscribed for three times at the time of public issue.

During the 2013 company acquired funds from external sources, the Company increased its authorized capital by 100,000,000 ordinary shares of Rs.10 each, authorized capital increased from 1300000000 to 1400000000. With improved profitability, the Company decided to go for an IPO which was a huge success as it was oversubscribed by 4 times. The Company has made an Initial Public Offer (IPO) through issue of 75 million ordinary shares of Rs.10 each at a price of Rs.28.25 per share determined through book building process. Out of the total issue of 75 million ordinary shares, and company collected PKR 750 million. 56.25 million Shares were subscribed through book building by High Net worth Individuals and institutional investors, against those shares company collected PKR 562.5 million, whereas the remaining 18.75 million shares were subscribed by the general public at the face value of PKR 10. The shares have been duly allotted subsequent to the year end. On January 17, 2014, the Karachi and Lahore Stock Exchanges have approved the Company's application for formal listing and quotation of shares, and company collected PKR 187.5 million during the year of 2013 company was issued total number of outstanding shares were 150 million. Therefore the company generated PKR 1.5 billion.

Internal Sources

Engro Fertilizer disposed the property plant assets and acquired funds from internal sources in 2013 and the details of operating assets disposed / written off during the year are as follows: From Sales of Plant and machinery Old Ammonia 1 plant for the amount of Rs.50,431 thousands, form sales of Vehicles Rs.21,310 thousands, From sales through bid Rs.6,171, From sales of Furniture, fixtures and equipment Rs.449

thousands, from insurance claim 2,608 thousands. Engro Fertilizer raised funds Rs.80969 thousands from internal sources sales of fixed assets.

Utilization of Funds

During 2013 Company utilized PKR 1.47 billion in Capex increased assets with respect to Plant and machineries, long term gas pipe lines, Furniture, fixture and equipment. Company purchased & installed plant and machineries of PKR 1.397 billion and acquired Building and civil work including gas pipe line of PKR 66.86 million and purchased Furniture, Fixture and equipment of PKR 10.47 million

Impact of Investment in Fixed Assets

A company needs to equip its facilities; it therefore needs to invest in fixed assets, i.e. assets (property, equipment, fixtures and fittings, etc.) which it will keep on a long term basis. These assets are related to both the business premises and the equipment required for business operation.

Engro Fertilizer invested plant and machinery and other productive fixed assets for the purpose of generating sales. Therefore, the efficiency of fixed assets should be judged in relation to sales. Generally, a high fixed assets turnover ratio indicates efficient utilization of fixed assets in generating sales, fixed assets investment improved company’s assets turnover ratio increased to 48% as compared 31% in 2012, purchased plant and machinery increased in a urea production by 60% Additional production availability has helped the Company to achieve record sales of 1,570 k tons versus 953 k tons in 2012. The improved sales were a result of higher urea demand coinciding with increased production. The Company’s share of the urea market increased to 26% in 2013 as compared to 18% in 2012. The share of domestically produced urea also improved to 32% compared to 23% in same period last year. Sales revenue for 2013 was Rs.50,129 million which was higher by 64% as compared to the corresponding period (2012: Rs.30,627 million). Gross profit for the year 2013 was Rs.22,121 million as compared to Rs.9,861 million for the same period.

Engro Fertilizerprofit and loss accountfor the year ended december 31, 2013(Amounts in thousands except for earnings / (loss) per share) 2013 2012

Note (Rupee)

Net sales 26 50,128,936 30,626,520Cost of sales 27 (28,007,905) (20,765,773)Gross profit 22,121,031 9,860,747Selling and distribution expenses 28 (3,511,155) (2,499,982)Administrative expenses 29 (600,990) (582,779)

18,008,886 6,777,986

Other income 30 1,104,650 379,443Other operating expenses 31 (2,060,015) (405,977)Finance cost 32 (8,669,569) (10,703,246)

(10,729,584) (11,109,223)

Profit / (loss) before taxation 8,383,952 (3,951,794)

Taxation 33 (2,886,847) 1,017,219

Profit / (loss) for the year 5,497,105 (2,934,575)

RestatedEarnings / (loss) per share - basic and diluted 34 4.66 (2.59)

Engro FertilizerBalance sheetas at december 31, 2013(Amounts in thousand)

ASSETS Note 2013 2012Non-Current Assets (Rupee)

Property, plant and equipment 4 79,315,218 82,877,701Intangible assets 5 138,464 161,555Long term loans and advances 6 109,349 83,763

79,563,031 83,123,019Current assets

Stores, spares and loose tools 7 4,368,863 4,107,291Stock-in-trade 8 1,381,665 1,687,072Trade debts 9 758,253 1,046,091Derivative financial instruments 19 130,207 545Loans, advances, deposits and prepayments 10 625,832 395,150Other receivables 11 28,177 61,0038Taxes recoverable 556,314 2,000,249Short term investments 12 18,058,054 2,635,339Cash and bank balances 13 4,458,391 2,449,168

30,365,756 14,381,943

TOTAL ASSETS109,928,78

7 97,504,962

Equity & LiabilitiesNote 2013 2012

Equity (Rupees)

Share capital 14 12,228,000 10,728,000Share premium 11,144 1 1,144Advance against issue of shares 15 2,118,750 -Hedging reserve 16 (147,644) (323,880)Remeasurement of post-employment benefits (20886) -Unappropriated profit 10,879,868 5,382,763

12,841,232 5,070,027

Total Equity 25,069,232 15,798,027

Liabilities

Non-current liabilities

Borrowings 17 52,896,382 48,481,626Subordinated loan from Holding Company 1 18 3,000,000 3,000,000Derivative financial instruments 19 1,531,252 497,869Deferred liabilities 20 4,654,523 3,380,705Retirement and other service benefits obligations 21 104,053 99,029

62,186,210 55,459,229Current liabilities

Trade and other payables 22 18,012,445 7,957,173Accrued interest / mark-up 23 1,479,667 1,788,282Current portion of: - borrowings 17 2,924,299 14,896,412 - retirement and other service benefits obligations 21 21 43,893 39,624Short term borrowings 24 - 999,791Derivative financial instruments 19 213,041 566,424

22,673,345 26,247,706

Total liabilities 84,859,555 81,706,935Contingencies and Commitments 25

TOTAL EQUITY & LIABILITIES 109,928,787 97,504,962

Required Data Set Collected from the Annual Report.

Summary of Balance Sheet(Amount in Thousands)

No. Items Year 2013 Year 201201 Cash 4458391 244916802 Quick Assets 28984091 1269487103 Current Assets 30365756 1438194304 Account Receivable 1522647 171630005 Net Fixed Assets 79563031 8312301906 Average Total Assets 103716875 9919097807 Current Liability 22673345 2624770608 Non-Current Liability 62186210 5545922919 Total Equity 25069232 1579802710 Total liability 84859555 8170693511 Average Common Equity 20433630 1720754312 Average Shares outstanding 1185300 107280013 Average Inventory 1534639 1760710

Summary of Profit & Loss Statement (Amount in Thousands)

No. Items Year 2013 Year 201214 Net Sales 50128936 3062652015 Gross profit 22121031 986074716 Interest Expenses 8669569 1070324617 Net Income 5497105 (2934575)18 EBIT 8383952 (3951794)19 Cost of Goods Sold 28007905 20765773

Current Price of Share

20 Current Market Price per Share 34.32 -Financial Ratios and Their Analysis

Liquidity Ratios

1. Current Ratio2. Quick Ratio3. Cash Ratio

Assets Management Ratios

4. Account Receivable 5. Average Collection Period6. Inventory Turnover 7. Days in Inventory 8. Total Assets turnover

Debt Management Ratios

9. Debt Ratio10.Debt to Equity ratio11.Times-interest Earned Ratio

Profitability Ratios

12. Gross Profit Margin13. Net Profit Margin14. Return on Investment/Assets15. Return on Equity

Market/Book Ratios

16. Earnings per Share17. Price/Earnings Ratio18. Book Value per Share

Liquidity Ratio

Current Ratio

Formula

Current AssetsCurrent Liabilities

In Times

Ratio Year 2013 Year 2012Current Ratio 1.34 0.55

Analysis:

Year 2013 has the high ratio 1.34 than the 0.55 in 2012. Generally, acceptable current ratio is 2. It is better to close two, since the company improved this current ratio compare to last year, that’s mean, company faced less financial difficulty to meant Current Liability in the 2013 year.

Acid Test /Quick Ratio

Formula

Current Assets - Inventory Current Liabilities

In Times Ratio Year 2013 Year 2012Quick Ratio 1.28 0.48

Analysis:

The Quick Ratio, higher the better. The Company improved quick ratio in 2013 to 1.28 as compare to 0.48 in 2012. The upward trend leads a better position in comparison to the last year. That means the company has a better liquidity position to paying debtors.

Cash Ratio

FormulaCash

Current Liabilities

In Times

Ratio Year 2013 Year 2012Cash Ratio 0.20 0.09

Analysis:

Cash Ratio 1:1 is acceptable, in some countries a cash ratio of not less than 0.5 is considered as acceptable. In 2013 company has improved cash ratio to 0.20. It is lower from industry average, but better than the last year by 0.155, it seems the efficiency of Cash management improved than last year.

Assets Management Ratios

Account Receivable Turnover

FormulaNet Credit Sales

Account Receivables

In Times

Ratio Year 2013 Year 2012Account Receivable turnover 32.92 17.84Analysis:

Accounts receivable turnover is indication of the quality of credit sales and

receivables. Higher efficiency is favorable from a cash flow standpoint. In 2013 Company’s A/R turnover ratio is 32.92, it is higher as compare to previous year to 17.84 times. The accounts receivable turnover ratio of 10 is good, As you can see, Engro’s turnover is almost 33. This means that Engro collects his receivables about 33 times in a year, the company is too restrictive in its credit and collection policies and not extending credit to enough customers.

Accounts Receivable Turnover in Days

Formula365 days

Accounts receivable turnover

In DaysRatio Year 2013 Year 2012Average Collection Period 11 20

Analysis:

In this particular case, decreased in collection period form 20 days in 2012 to 11 days in 2013, it’s a better sign, the industry average collection period is around 45 days. In 2013 ratio is much satisfactory period. Lower of collection period represent the better credit policy and efficient collection method of company.

Inventory Turnover

FormulaCost of Goods SoldAverage Inventory

In Times

Ratio Year 2013 Year 2012Inventory Turnover 18.25 11.79

Analysis:

Company increased inventory turnover in 2013 to 18.25 as compared to 11.79 in year 2012. The Company showed it improving efficiency in inventory management. The higher trend to inventory represents that, the company has invested significant concentration to increased liquidity and profitability. This also represents the company procurement, supplier relation and production efficiency.

Inventory Turnover in Days

FormulaDay in inventory (365)

Inventory Turnover

In Days

Ratio Year 2013 Year 2012Inventory Turnover in Days 20 31

Analysis:

Inventory is an expensive for a company to keep, maintain, and store. Companies also have to be worried about protecting inventory from theft and obsolescence. Engro fertilizer’s Inventory turnover ratio in 2013 is 20 days which

is lower than the last year to 31 days. This ratio is lower the better, this means that the company will turn his inventory into cash in the next 20 days. The average days to convert inventory into cash are 45 days and lower the better.

Total Asset Turnover

FormulaNet Sales

Average Total Assets

In %Ratio Year 2013 Year 2012Total Assets Turnover 48 31

Analysis: Total Assets Turnover ratio shows the better development trend as

compare to last year . Company’s Total assets turnover ratio in 2013 is 48% this ratio is improved as compared to 31% in last year .This indicates that the engro fertilizer generates 48 paisa in net sales for every rupee invested in assets. Ratio is not efficient with its use of assets the average ratio is 2.

Debt Management Ratios

Debt Ratio/ Total Debts to Assets

Formula

Total LiabilitiesTotal Assets

In %

Ratio Year 2013 Year 2012Debt Ratio 77% 84%

Analysis:

Each industry has its own benchmarks for debt, but 35% to 40% is reasonable ratio. The Company’s debt ratio Compare to last year is lower from 84% to 77%, lower the better position. It is higher leverage percentage from standard but company improved debt ratio as compared to 84% in 2012. That means, the company getting funds from other resources except debt.

Debt to Equity Ratio

Formula

Total DebtStockholder’s Equity

In %

Ratio Year 2013 Year 2012Debt to Equity Ratio 3.38 5.17

Analysis:

Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-equity ratio is unfavorable because it means that the business relies more on external lenders thus it is at higher risk, The Engro fertilizer’s debt to equity ratio is 3.38 which is lower as compared to 5.17 in year 2012. That shows the company declined external lenders debt and acquired funds from equity choice.

Interest Coverage Ratio (Times Interest Earned)

FormulaEBIT

Interest Expense

In Times.Ratio Year 2013 Year 2012Times-Interest Earned Ratio 1 (0.37)

Analysis:

The ratio indicates how many times a company could pay the interest with it’s before tax income, so obviously the larger ratios are considered more favorable than smaller ratios. The Engro Fertilizer’s times-interest earned ratio is 1 in 2013 it is better as compare to (0.37) in last year. The times- interest earned ratio in 2013 is below the industry average which is 4. Engro Fertilizer cannot afford to pay additional interest expenses.

Profitability Ratios

Gross Profit Margin

FormulaGross Profit

Net Sales

In %

Ratio 2013 2012Gross Profit Margin 44.1 32.2

Analysis:

Higher value indicates that more paisa are earned per rupee of revenue which is favorable because more profit will be available to cover non-production costs. Engro fertilizer’s Gross profit margin is 44.13% in 2013, it is increased from 32.20% in comparative year. This is a high ratio than the industry average of 26%. This means that after Engro Fertilizer pays off his inventory costs, company still has 44.13 percent of his sales revenue to cover his operating costs.

Net Profit Margin (Return on Sales)

FormulaNet Income

Net Sales

In %

Ratio 2013 2012Net Profit Margin 10.97 (9.58)

Analysis:

The profit margin ratio directly measures what percentage of sales is made up of net income. The company’s net profit margin ratio is 10.97% in 2013, it is improved as compared to (9.58%) in 2012. Company managed to convert 10.97% of its sales into net income, it is less than the average which is 13.7% but improved than the last year.

Return on Assets/ Investment

Formula

Net Income Average Total Assets

In %

Ratio 2013 2012Return on investment 5 (3)

Analysis:

It only makes sense that a higher ratio is more favorable to investors because it shows that the company is more effectively managing its assets to produce greater amounts of net income. The current return on assets ratio is 5% increased as compared to (3%) in previous year. It shows the every rupee invested in assets during the year produces 5 paisa. It is less than the average but improved from last year.

Return on Equity

FormulaNet Income

Equity

In %

Ratio 2013 2012Return on Equity 26.9 (17.1)

Analysis:

Engro fertilizer’s return on equity ratio is 26.90% it is satisfactory in terms of value of return and also improved to (17.1%) in last year. This means that every rupee of common shareholder's equity earned about 26.9 paisa in 2013. This indicates that The Engro fertilizer is a growing company.

Market/Book Ratios

Earnings Per Share

FormulaNet Income –Dividends Preferred stockAverage Common Shares Outstanding

Rs.

Ratio 2013 2012Earnings Per Share 4.63 (2.74)

Analysis:

As you can see, Quality's EPS for the year of 2013 is 4.63. It is increased to (2.74) in 2012. This means that , each share would receive Rs.4.63. Higher earnings per share is always better than a lower ratio because this means the company is more profitable and the company has more profits to distribute to its shareholders.

Price/Earnings Ratio

FormulaCurrent Market Price Per Share

Earnings Per Share

In TimesRatio 2013 2012Price/Earnings Ratio 7.25 (12.52)

Analysis:

P/E ratio is a very useful tool for financial forecasting. It gives information about the amount that the investors are willing to invest in the company to earn each rupee. Engro Fertilizer’s P/E is 7.25 in 2013, this is not match to industry average but upward to (12.52) in 2012. This shows the market is willing to pay about Rs.7.25 for every Rupee in earnings.

Book Value Per Share

FormulaStockholders Equity- Preferred Stock

Common Shares OutstandingRs.Ratio 2013 2012Price/Earnings Ratio 19.32 14.73

Analysis:

The company’s BV is 19.32 in 2013 which is considerably lower than the industry average, but it is higher than the previous year.