Paradigm shift at Engro Corp

engro2Engro Corporation (ENGRO) recently held a briefing for analysts to discuss 1HCY15 financial results. ENGRO had announced Profit after tax (PAT) of Rs9.56 billion (EPS: Rs15.28) for 1HCY15 as against Rs3.16 billion (adjusted EPS: Rs5.12) for 1HCY14. On a sequential basis net profit of Rs5.32 billion is up 26%QoQ as compared to profit of Rs4.23 billion for1QCY15. 

The key highlights of the result include: 1) topline growth of 13%YoY during 1HCY15 owing to higher EFERT (up 38%YoY) and EFOODS (up 27%YoY) sales, 2) decline in financial cost by 15.2%YoY to Rs4.49 bn due to lower interest rates and, 3) increase in share of income from JV& associates (commissioning of LNG terminal) by 32%YoY to Rs476 million during 1HCY15.

Going forward aggressive capital outlays would require capital re-alignment to higher return projects (Powergen Thar Coal with IRR of 20%), where analysts opine that further ownership dilution by ENGRO in its subsidiaries are in the offing.

EFERT: Despite concessionary gas rate being implemented for 2QCY15, lower-than-expected gross margins were due to EFERT booking asset charge off against Guddu compressors eroding earnings by Rs577 million. On the flipside, non-cash tax related, revaluation of tax assets had a net positive impact of Rs601 million on the bottomline. Subsequently EFERT posted a 1HCY15 PAT of Rs6.85 billion (EPS: Rs5.16).

EFOODS: The Company has posted PAT of Rs909 million (EPS: Rs1.19) for 2QCY15 as compared to net profit of Rs139 million (EPS: Rs0.18) for 2QCY14. This has quantum jump effectively took 1HCY15 earnings to Rs1.9 billion (EPS: Rs2.58), higher. The Company managed to consistently grow volumetrically where dairy volumes for 1HCY15 have increased by a solid 25%YoY. This has effectively taken the company’s market share to 55% in May’15 as compared to 51% in May’14. However, on a QoQ basis, volumes deteriorated by 7% reflecting seasonal slowdown. Despite no price increment, gross margins for 2QCY15 clocked in 600bps higher on the back of depressed global milk prices. Additional support to margins came from lower energy costs (fuel and power) that constitute 4% to the total COGS.

EPCL: Incurred a net loss of Rs435.3 billion (LPS: Rs0.66) for 1HCY15, where the business witnessed some improvement in pricing dynamics for PVC, but adverse cost dynamics prevailed. Costs were elevated mainly due to shrinking margin between PVC and Ethylene prices and the increase in import duty to 5% from 2% on ethylene.

EPQL: Lower earnings in EPQL were due to forced outage from grid issues pertaining to WAPDA, resulting in lower load factor. Additionally, the plant underwent a major overhaul where downtime of 33days during the period elevated costs and dented O&M savings.

JVs and Subsidiaries: VOPAK benefited from high handling volume of LPG, which was due to the temporary closure of SSGC’s terminal. Also, LNG handling revenue from five shipments of 324,620 tons (exact amount of revenue from LNG handling was not disclosed) and three additional ship-to-ship transfers drove earnings.

SECMC and Thar Coal Power Project: At and estimated project cost of US$2 billion (US$0.95 billion for 3.8 million tpa coal mining and US$1.12 billion for 660MW power plant), for the mining operations US$750 million is to be raised through debt (US$500 million local and US$250 million foreign component). This would be the first project financed in collaboration with a Chinese entity, where debt from local banks has been raised at an interest rate of Kibor+1.7% whereas Chinese lenders have agreed at terms of Libor+3.3%.

Rice and commodities: ENGRO had taken complete control of the rice trading business from Eximp before divesting the fertilizer trading arm to EFERT in 1QCY15. The Company aims at reducing the fixed cost of the business (200 workers laid off) and is looking to venture into high quality (Basmati) branded rice rather than generating high volumes on unbranded rice sold on a B2B model, where a consumer based export model is being considered.

Moral of the story: Beating the index by 41% CYTD, ENGRO remains one of the top performers at the local bourses as the stock price performance was driven by positive developments in its foods and fertilizer subsidiaries. Hinting that further re-allocation of funds (similar to funds from the recent SPO for EFERT being used to capitalize ENGRO’s investment in Elengy) would be a continuing trend. Following an aggressive capital outlay program would require capital re-alignment to higher return projects (Powergen Thar Coal with IRR of 20%).



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