Saroash Saleem 21110181
Ahmed Kamran 21110355
Mehr Ejaz 21110212
Abdullah Zahid 21020351
Fin-100 Project
About Engro
Engro Fertilizers Limited is a subsidiary of Engro Corporation and a renowned name in
Pakistan’s fertilizer industry. It is traded on the stock market under the symbol ‘EFERT. Engro
holds a vast, nationwide production and marketing infrastructure and produces leading fertilizer
brands optimized for local cultivation needs and demand. Engro is also a leading importer and
seller of Phosphate products, which are marketed extensively across Pakistan as phospatic
fertilizers. Engro Fertilizers Limited enjoys loyal customer base across Pakistan owing to its
trusted fertilizer brands and continual farmer assistance in training and education. Engro
Fertilizers Limited was incorporated in June 2009, following a decision to demerge fertilizer
concern from its parent company Engro Chemical Pakistan Limited. The continual expansions
and diversifications in its enterprises necessitated a broad restructuring in Engro Chemical
operations and management. To facilitate better oversight, Engro Chemical Pakistan was
converted into a holding company named Engro Corporation, and its fertilizer business was
subsequently demerged to a newly formed Engro subsidiary –Engro Fertilizers Limited. Engro is
a dynamic company driven by a vision to improve productivity and lifestyle for thousands of
farmers across Pakistan. Engro Fertilizers Limited has earned itself a distinguished name by
continually striving to uphold its tradition and trust of its loyal consumer base.
Ratio Analysis:
LIQUIDITY
Current ratio and quick ratio indicate the liquidity of a company. Current ratio decreased from
1.34 to 1.04 from 2013 to 2017. Quick ratio also decreased from 1.05 to 0.66. These figures
show that a major chunk of current assets is caused by inventories in later years compared to the
previous years. Working capital, which is the total liabilities subtracted from total assets, has
significantly increased from 25,069,232 in 2013 to 42,470,000 in 2017 which shows that the
ratio of total assets to total liabilities has increased. Although this is a good sign, the very liquid
assets compared to the current liabilities are decreasing which can result in the difficulty for the
firm to fulfil its short-term obligations.
MANAGEMENT EFFICIENCY RATIO
Receivable turnover ratio has decreased from 55.56 in 2013 to 11.86 in 2017, resulting in the
average collection period of bills from 6.57 days to 30.77 days, which shows that company is
facing a hard time in managing their efficiency in the collection process, a bad credit policy or
bad customers or customers with financial difficulty. Generally, however, a low ratio implies that
the company should reassess its credit policies and improve its collection process. Inventory
turnover was very erratic throughout 2013-2017 by increasing from 18.25 to 31.28 from 2013 to
2014 but started to decrease again after touching this peak value to 7.47 that shows an overall
decrease. The inventory turnover ratio basically gives us a picture that how many times a firm’s
inventory has been sold and replaced back in a given period of time. The peak value of 31.28 in
2014 shows that it took only 11.67 days compared to 20 days in previous year. Since discussed
above that the ratio has decreased overall, the ratio in 2017 shows that it took 48.87 days to sell
and replace back the inventory suggesting a lack of management in the selling department of the
firm. The asset turnover, which means that amount of sales being generated per unit total assets,
has shown an increasing trend from 0.48 to 0.72, which means that overall sales are increasing at
a rate greater than the rate at which the assets are increasing. This is a plus point for the company
because small amount of investment is required each year to grow its sales and that the sales are
showing an increasing trend because the demand for its products, such as Urea, is increasing.
SOLVENCY
Times interest ratio, which is basically how many times more profit is generated than the interest
we are paying, has significantly increased from 2013 to 2017 suggesting that the firm is better
able to make contractual interest payments. Also, the company has maintained its Debt to asset
ratio on almost the same level throughout and is less than 1 which translates to the fact that a
greater portion of a company's assets is funded by equity. It also shows that the financial
leverage is low, and the firm is less riskier which automatically decreases the rate of return that
investors require from the frim. Debt to equity ratio is also a powerful tool to see what proportion
of assets are being financed by either the debt or by the shareholders’ equity. The decrease in this
ratio indicates that a company is not taking advantage of the increased profits that
financial leverage may bring.
PROFITABILITY ANALYSIS
Gross profit Margin has an overall decreasing trend. This is perhaps due, to the fact that the rise
in cost of sales due to inflation is not matched by the rise in sales since the demand growth must
be dampened. However, net profit margin has an overall increasing trend. This reflects that
Engro to account for the lower GP margin and to maintain its profitability kept its operating
expenses in check. They were tightly controlled except for 2016 where it decreased instead of
improving. In 2017, however, Engro employed tighter controls to prevent operating expenses
from rising hence the 2017 NP margin was back on track. Similarly Return on Assets has an
overall increasing trend except for 2016. This reflects that Engro is highly efficient as it is
squeezing as much as possible return out of the limited resources invested.
Du Pont ANALYSIS
Net profit margin *Asset Turnover * Equity Multiplier
2013 – 10.97 x 0.48 x 4.38- 23.06
2014 – 13.36 x 0.55 x 3.23 – 23.73
2015- 17.68 x 0.78 x 2.51- 34.61
2016 – 12.98 x 0.67 x 2.47 – 21.48
The above analysis is done to calculate Return on Equity of a company. Engro’s ROE had an
overall increasing trend up until 2016. It was rising as all the three components NP margin; asset
turnover and the financial leverage were improving. This reflects that in 2012-2015 as compared
to 2016 the firm was better utilizing its assets in relation to the revenue earned as well as keeping
operating expenses in control which helped improving the net profit margin. Furthermore, the
financial leverage measured using the equity multiplier reflects that overtime lesser of Engro’s
equity is financed through debt. The stark rise in ROE figure in 2015 is mostly due to the Net
profit components of ROE. Engro was highly efficient in preventing operating expenses to go
out of hand resulting in higher net return on sales as well as on equity. In 2016, as compared to
earlier years, there is a drop in Engro’s ROE figure perhaps due to the improvement in financial
leverage. This shows that Engro has less debt in relation to its total assets. On the other hand,
Engro needs to work on cutting down or keeping the operating expenses in check for future years
as it will worsen the NP margin reducing Return on Equity. The Du Pont analysis hints that for
ENGRO the most important component affecting its ROE is perhaps the NP margin. Hence
Engro should keep operating expenses in control for the future.
Agriculture Industry Analysis
Pakistan is dependent on agriculture produce, where around 20% of the country’s GDP is provided by
the agricultural sector. In light of higher dependence, usage of fertilizers becomes an important concern
for timely production of agricultural crops. Limitations in agricultural sector growth are:
- Limited arable land
- Limited irrigation water supply
- Depleting soil fertility
- Lack of technological advancement
Fertilizer demand
- Urea constitutes around 65% of the total fertilizer demand followed by DAP with a 20% share.
Urea prices
International prices have increased on account of increase in urea imports by India, better demand from
Brazil, lower exports by China, shut down of plants for maintenance by Middle East manufacturers and
short covering by Egyptian traders. While prices are expected to sustain in the short term due to better
seasonal demand from Asia, they are expected to decline subsequently and are not expected to sustain
at current levels.
Local fertilizer players
Production Capacity
-Engro fertilizer
2,375,000
-Fauji fertilizer
2,048,000
-Fatima fertilizer
1,280,000
-Fauji fertilizer Bin Qasim
1,201,100
Ratio Analysis
Current Ratio
Quick Ratio
Inventory Turnover
Total Asset Turnover
Return on Equity
Return on Asset
Net Profit Margin
Debt to Equity Ratio
Engro Fertilizer
1.04
0.66
7.47
0.72
26.27%
9.98%
14.46%
1.63
Assumptions for Pro Forma Statements
Industry average
2.01
1.93
65.8
0.82
43.04%
15%
18.07%
0.34
Revenue Drivers:

Population Growth:
Increase in population naturally increases the demand for agricultural products to cater to the
needs of the additional population and this complements the demand for fertilizers in crop
farming. Hence, an increase in population increases the demand for fertilizers, almost
proportionately. Population growth rate in Pakistan is at a decline, hence, we have assumed it to
decline by a steady rate of 0.2% each year starting with the population growth rate of 2.01% in
2018. Since Engro has 30% of the market share, a 2.01% increase in population means Engro
will attract a 2.01%*30% increase in demand, that is, 0.60%, and so on.

Price of Urea:
Being the sixth largest Urea producer in the world, the cost of production of Engro is directly
affected by the price of Urea. The price has showed a 3.7% change in Jan 2018 and was
assumed to carry this rate with an increment of 0.25% for the coming years as well.

Demand of Agricultural crops:
In addition to the increase in demand of fertilizers due to population growth, the demand for
fertilizers by the existing population is also increasing due to a steady increase in the demand for
food and other agricultural crops that serve as raw materials for important industries in Pakistan,
such as, cotton for textile industries. The demand for fertilizers is inelastic and according to the
research conducted the demand for fertilizers was growing at 3% and we assumed that it will
grow at rate of 0.55% per year, therefore to get its effect on Engro, we multiply it by our market
share of 30% to get 0.90% in 2018, and so on.

Inflation Rate:
The inflation rate in the country is roughly 5% and has stayed this way for some time.
Therefore, we decided to predict it as staying constant disregarding any booms or recessions the
economy would face. Thus, at this figure the effect on Engro of inflation would be 5% on the
price of fertilizers and hence on the sales revenue.
Cost of Sales and Other Expenses:
The Cost of Sales and all the other expenses are calculated as a percentage of sales and a
regression formula is applied through excel to predict the future expenses of the firm as a
percentage of sales. The trends analysis and the forecasted graphs are all given in the excel file
that is submitted along with this file.
Pro forma Balance Sheet:
Those variables that are affected by the sales of the firm are only taken into consideration when
forecasting the future balance sheets. These variables are taken as percentage of sales and then
these percentages are forecasted throughout the future years by taking moving average. In noncurrent assets, it includes property, plant and equipment and in current assets portion, these
include stores, spares and loose tools, stock in trades (Inventory), and trade debts (Account
Receivables). Similarly, for the current liability section, Current portion of borrowings and
Current portion of service benefits obligations are taken out their relative percentages of long
term portions as they are also affected each year. All the other variables are taken constant.
After all these assumptions, a financing figure has to be balanced which basically means that this
specific amount of assets is to be financed either through liabilities or through equity or a
mixture of both.
WACC Assumptions:

Risk Free Rate: The risk free rate that we have taken in our calculation of CAPM is 9%
according to the government bonds.

Market Return: The market return (KSE 100 index) is relatively less accurate since it is
calculated using the monthly closing prices instead of daily closing prices.

Total Debt: For Value of total Debt we have taken current portion of long term
borrowings & benefits and total non-current liabilities.
Investment Decision:
Price (31st December 2017): Rs 68.33
Price Calculated: 73.30
Since the Price, that we have calculated using the Free Cash flows and discounting them to
present value, is greater than the actual price on that date, suggests that our stock is undervalued
and has the potential to increase according to our calculations. Therefore we suggest that it is a
good buy and can give a significant return in future.