PakSearch.com - Pakistan's Best Business site with Annual Reports, Laws and Articles

For business information, annual reports, laws, ordinances, regulations and articles.

ENGRO

ANNUAL REPORT 1997

CONTENTS

Company Information

BOARD OF DIRECTORS

Shaukat R. Mirza, Chairman

Zaffar A. Khan

S. Naseem Ahmad

Javed Akbar

Michael G. Essex

Parvez Ghias

Behram Hasan

Nisar A. Memon

Stephen Potter

Asif Qadir

Gulrez Rashid

SECRETARY

Andalib Alavi

BANKERS

ABN AMRO Bank

ANZ Grindlays Bank plc

Bank of America NT&SA

Citibank N.A.

Faysal Bank Limited

Habib Bank Limited

Muslim Commercial Bank Limited

National Bank of Pakistan

Standard Chartered Bank

United Bank Limited

AUDITORS

A. F. Ferguson & Co.

Chartered Accountants

REGISTERED OFFICE

PNSC Building

Moulvi Tamizuddin Khan Road

Karachi

Notice of Meeting

NOTICE IS HEREBY GIVEN that the Thirty Second Annual General Meeting of Engro Chemical

Pakistan Limited will be held at Karachi Marriott Hotel, Abdullah Haroon Road, Karachi on

Thursday, April 30, 1998 at 10.00 a.m. to transact the following business:

A. ORDINARY BUSINESS

(1) To receive and consider the Audited Accounts for the year ended December 31, 1997

and the Directors' and Auditors' Reports thereon.

(2) To declare a final dividend at the rate of Rs. 3.00 per share for the year ended

December 31, 1997.

(3) To appoint Auditors and fix their remuneration.

B. SPECIAL BUSINESS

4. To consider, and if thought fit, to pass the following Resolution as an

Ordinary Resolution:

"RESOLVED that:

(a) A sum of Rs. 131,414,400 (Rupees one hundred thirty one million, four

hundred fourteen thousand and four hundred only) out of the free

reserves of the Company be capitalized and applied towards the issue of

13,141,440 ordinary shares of Rs. 10/- each as bonus shares in the ratio of

15:100 i.e. 15% on ordinary shares held by the members whose names

appear on the Members Register on April 16, 1998. These bonus shares

shall rank pari passu in all respects with the existing shares but shall not

be eligible for the dividend declared for the year ended December 31, 1997.

(b) Members entitled to fractions of shares shall be given the sale proceeds of ~f~!~~

their fractional entitlements for which purpose the fractions shall be

consolidated into whole shares and sold on the Karachi Stock Exchange.

authorised to give such directions as they deem fit to settle any question or any diffi-

culties that may arise in the distribution of the said bonus shares or in the payment of

the sale proceeds of the fractions."

A statement under Section 160 of the Companies Ordinance, 1984 setting forth all material facts

concerning the Resolution contained in item (4)of the Notice which will be considered for adop-

tion at the Meeting is annexed to this Notice of Meeting being sent to Members.

N.B. (1) The share transfer books of the Company will be closed and no transfers of shares will

be accepted for registration from Thursday, April 16, 1998 to Thursday, April 30, 1998

(both days inclusive). Transfers received in order at the Registered Office of the

Company upto the close of business (4:30 p.m.) on Wednesday, April 15, 1998 will be

in time to be passed for payment of the final dividend and issue of bonus shares to

the transferees.

(2) A member entitled to attend and vote at this Meeting shall be entitled to appoint

another person, as his/her proxy to attend, speak and vote instead of him/her, and a

proxy so appointed shall have such rights, as respects attending, speaking and voting

at the Meeting as are available to a member. Proxies, in order to be effective, must be

received by the Company not less than 48 hours before the Meeting. A proxy need not

be a member of the Company.

Statement Under Section 160 of the Companies

Ordinance, 1984

This statement is annexed to the Notice of the Thirty-second Annual General

Meeting of Engro Chemical Pakistan Ltd. to be held on April 30, 1998 at which cer-

tain special business is to be transacted. The purpose of this Statement is to set forth

the material facts concerning such special business.

Item (4) Of The Agenda

The Board of Directors recommend that taking into account the financial position of

the Company the issued capital of the Company be increased by capitalization of free

reserves amounting to Rs. 131,414,400 and the issue of bonus shares in the ratio of

15:100 i.e. 15%. The Directors of the Company are interested in the business to the

extent of their shareholding in the Company.

Financial Highlights

1997

1996

Sales Revenue

Rs. Million

6,659

7,168

Earnings after Tax

Rs. Million

1,202

1,386

Dividend per Share

Rs. / Share

7.50

8.00

Return on Capital Employed

(%)

Current ratio

1.42

1.38

Debt: Equity Ratio

44:56

32:68

No. of Shares Outstanding

(000's)

87,610

70,087

Capital Expenditure

Rs. Million

1,921

494

Long Term Investments

Rs. Million

188

455

(during the year)

Market Capitalization (yr. end)

Rs. Million

10,000

9,426

Market Capitalization (yr. end)

US$ Million

227

234

The Directors' Report

The Board of Directors of Engro Chemical Pakistan Limited is pleased to present the thirty-second

annual report and the audited accounts of the Company for the year ended December 31, 1997.

UREA INDUSTRY ENVIRONMENT

The demand for urea after two successive years of double-digit growth declined by 10% to 3.5

million tons in 1997. The decline, which was primarily caused by a severe liquidity crunch and

poor farm economics, bottomed out in the first quarter of 1997. Thereafter, the Government

introduced an agriculture revival package that aside from offering much improved crop support

prices, provided for a significant increase in credit for agriculture. Demand rebounded especially

towards the end of the year. Indigenous production at 3.2 million tons was 3.5% lower than last

year. To meet demand approximately 0.4 million tons was imported compared to 0.6 million tons

imported in 1996. The supply of product in the market was abundant throughout the year.

To stimulate product demand, the price of urea in the local market reduced by approximately 5%.

Further, the cost pressures emanating from a hike in gas price, devaluation of the rupee and gen-

eral inflation was absorbed by industry. However, the pressures on margins were partially offset

by the reduction in imported urea volumes and drop in the international price of urea, which

reduced the subsidy burden incurred on sale of imported urea in the local market.

MARKETING

The Company's total fertilizer sales volume was 855,000 tons. This represented a

decrease of 18% compared to the record sales achieved in 1996. The largest drop

occurred in the sales volume of imported urea. Sale of Engro urea was 652,000 tons,

which was 12% below last year primarily due to lower plant production. Overall,

the Company's share of the urea market declined from 23% to 20% due to supply

limitations.

Sale of purchased phosphatic fertilizer at 137,000 tons represents a decline of 6% over 1996. The

sale was restricted in the first half of the year due to high inventory in government warehouses

which precluded direct import of DAP. As the situation eased in the second half, the Company

was able to directly import 92,000 tons of DAP. The product was offered in branded bags which

sold briskly and again established the preference Engro brand enjoys in the market.

The sluggish and over supplied market during most of the year resulted in higher sales promo-

tion and product warehousing costs.

MANUFACTURING

Production of Engro urea declined by 10% from

738,200 tons in 1996 to 665,600 tons in 1997. The drop

occurred due to operating difficulties, which necessi-

tated extended plant shutdowns during the course of

the year to repair or replace defective equipment. The

longer unplanned shutdowns and maintenance

adversely impacted manufacturing expenses.

However, from mid October onwards the plant oper-

ated smoothly and new daily, weekly and monthly

production records were established. Several projects

to improve the performance of the plant were

implemented successfully. These included the com-

missioning of an additional cooling tower in record

time to overcome operating limitations during the

humid summer months.

FINANCIAL RESULTS

The Company earned a profit after tax of Rs.1,202 million in 1997 as compared to the record prof-

it of Rs.1,386 million achieved during the previous year. The decrease in operating profit is pri-

marily attributable to lower production and sales of Engro urea, higher maintenance expenses due

to extended plant shutdowns and higher marketing expenses to affect sales in a sluggish market.

The Company has provided for "penalties" of Rs.100 million against late payment

of foreign exchange risk cover fee to State Bank of Pakistan and Rs.31 million for

delayed payment of land purchased at Port Qasim. The Company is forcefully con-

testing the validity of these claims with the organizations concerned, as it believes

these are unjustified. These expenses have been accrued as a matter of accounting

prudence.

Your Board recommends that the net profit of Rs.1,202.2 million earned during the

year together with the balance of unappropriated profit of Rs.1.6 million brought

forward from prior year be appropriated as follows:

Million Rupees

Total profit available for appropriation

1203.8

Appropriations

Transfer to general reserve

545.0

First interim dividend on 87.610 million shares of Rs.10

each at Rs. 2.50 per share declared on August 12, 1997

219.0

Second interim dividend on 87.610 million shares of Rs.10

each at Rs. 2.00 per share declared on November 12, 1997

175.2

Proposed final dividend on 87.610 million shares of Rs.10

each at Rs.3.00 per share

262.8

----------

Total Dividend for the year

657.0

----------

Unappropriated profit carried forward

1.8

==========

The Board recommends that bonus shares in the ratio of 15:100, i.e. 15°/, be issued

by capitalization of Rs.131.4 million out of the free reserves (share premium

account) of the Company. The said bonus shares will not be eligible for the dividend -

declared for the year ended December 31, 1997.

During 1997, the Company issued bonus shares in the proportion of one share for

every four ordinary shares held on the Members Register as of April 1, 1997, thus

increasing the number of paid up shares outstanding at year-end to 87.6 million.

The shareholders equity as at December 31, 1997 was Rs.3,952 million compared to

Rs.3,407 million last year.

In 1997, the Company was active in the debt market to secure funding for the retrofit expansion

project currently under implementation at Daharki. Loan agreements were signed for USS 29

million and Rs.1,176 million with international and local financial institutions at competitive rates

and tenors ranging from 3 to 9 years. The draw down of these funds has increased the Company's

debt to equity ratio from 32:68 in 1996 to 44:56 in 1997. The current ratio for the year closed at 1.42.

In recognition of its financial performance, the Company was presented during the year the

"Annual Top Companies Award" of the Karachi Stock Exchange for the years 1995 and 1996.

SAFETY, ENVIRONMENT

AND INDUSTRIAL HYGIENE

Safety, environment and industrial hygiene continued to receive the highest

consideration in management of the Company's business. Manufacturing

division achieved 1.4 million man-hours without any lost workday injury to own

employees and 3.5 million man-hours without lost workday injury to any contract

employee. The achievement is particularly creditable given the magnitude of

maintenance tasks and new project activity undertaken during the year. The safety

performance of the non-manufacturing functions remained excellent. They contin-

ued to build on their previous record and completed 10.5 years equivalent to 3.0

million man-hours without any on-the-job lost workday injury.

Implementation of programs

to manage the environment

continued to improve

performance at the plant

site. Environmental projects

costing Rs.90 million have

already been completed and

another Rs.100 million worth

of projects are currently

under implementation. The

Company is confident that

with the completion of these

projects it will fully comply

with the National Envir-

onment Quality Standards.

EMPLOYEE RELATIONS AND

ORGANIZATION DEVELOPMENT

A wide range of training activities was conducted to improve both managerial and technical skills

of employees. At the senior management levels Total Quality and Continuous Improvement were

the areas of emphasis. The Company has widened its panel of both local and foreign trainers to

keep pace with the organization development needs.

Employee relations remained cordial throughout the year. A new 27 months Collective Labour

Agreement was successfully negotiated with workers at plant site during the year. The new

agreement will expire on March 31, 1999.

INFORMATION TECHNOLOGY

The Company established its home page on the World Wide Web to provide easy access to Internet

users seeking information about the Company concerning published financial results, investor

relations data, on-going social programs and employment opportunities. The site address is

http://www. engro.com.

The Local Area Networks at head office and plant site are operating efficiently and contributing in

sharing of data and information by users. During 1998, the Company plans to establish a Wide

Area Network linking the head office to plant and marketing field locations. The Company is tak-

ing measures to ensure that all its computer applications, process controllers and hardware sys-

tems are free of the millenium bug and year 2000 compliant well before the turn of the century.

NATIONAL DEBT

RETIREMENT PROGRAMME

The Company responded to the Prime Minister's appeal for donations to the

National Debt Retirement Programme with a contribution of US$ 1 million as "Qarz-

e-Hasna", an interest free deposit scheme with principal redeemable after two years.

In recognition of this contribution, the Company was presented a silver medallion by

the Prime Minister.

COMMUNITY AND SOCIAL WELFARE

The Company continued to participate in community welfare programs both in the

rural and urban areas of Pakistan. Bulk of the efforts during 1997 were focused on com-

munity health related projects. The more significant activities were:

· Completion of the construction

of an Out Patient Department

building for the Ophthalmology

Department at the Jinnah

Postgraduate Medical Centre,

Karachi.

· Two successful medical and eye

camps at Daharki and

Nasirabad where 678 eye

surgeries, 90 X-rays and 232

ultrasounds were performed to

benefit the less privileged

persons of the area.

· Firming up of plans to construct

a permanent eye clinic at

Daharki.

· Free snakebite treatment pro-

vided to 2,122 victims after the

Company was able to persuade

the Government to allow

import of anti snakebite venom

from India.

· Donations given to several well

managed social welfare organi-

zations.

UREA BUSINESS GROWTH PLANS

Engineering, procurement and construction of the expansion and modernization project got fully

underway. The project will increase annual urea production capacity from 750,000 to 850,000 tons,

improve plant energy efficiency and strengthen environmental conservation measures. During

the year the project design was enhanced to reduce current gas consumption per unit of produc-

tion from 10% to 14°/,,. The delay in manufacture and shipment of some critical equipment by an

overseas supplier has delayed completion of the project from March 1998 to September 1998.

The project cost due to the change in scope and delayed commissioning has increased from

USS 59 million to USS 72 million. However, the project economics remain unchanged due to

enhancement in gas efficiency.

Basic design has been completed for the staged expansion of the Daharki plant to 1.2 million tons

per year. Engineering will commence on completion of the 850,000 tons expansion. project.

Additional gas required for expansion has already been requested from the Government.

The Company is also pursuing opportunities in the privatization of state owned fertilizer plants.

OTHER BUSINESS VENTURES

· Jetty and Terminal Facility

Engro Paktank Terminal Limited (EPTL), the Company's 50:50 joint venture with

Royal Pakhoed of the Netherlands completed the construction of the Jetty and

Chemical Terminal facility at Port Qasim within the budget of USS 65 million.

The facility has received the first two ship loads of chemicals required by its first

customer (ICI) for its PTA plant. The commissioning of the terminal marks the

start up of a world class bulk liquid chemical handling and storage facility in the

country, which will greatly enable the growth of the chemical industry in

Pakistan.

EPTL has successfully concluded an agreement with Engro's PVC joint venture

company for the handling and storage of VCM. EPTL was also granted approval

by the Government for setting up of a storage facility for LPG and is firming up

arrangements to construct these facilities at the earliest.

· Poly Vinyl Chloride (PVC) Resin Facility

The Company signed a joint venture agreement with Asahi Glass Company and Mitsubishi

Corporation to build Pakistan's first world scale PVC resin manufacturing facility at Port Qasim.

A new company, Engro Asahi Polymer & Chemicals (Private) Limited (EAPCL) was incorporated

during the year. Engro's share of equity in this venture is 50°/~,. A PVC plant with an initial capac-

ity of 100,000 tons per annum is expected to be completed by December 1999 at an estimated cost

of USS 83 million. In subsequent phases, further expansion of PVC capacity as well as backward

integration into manufacture of VCM is envisaged.

VCM, the feedstock for PVC, will be imported and handled at EPTL's jetty and terminal facility.

An agreement has been signed with Mitsubishi Corporation for supply of the major portion of the

VCM requirements. All long-term loan arrangements have been concluded at competitive rates

with leading financial institutions. The project has a debt to equity ratio of 49:51.

· Downstream PVC Processing

The Board of Directors approved an investment for the setting-up of PVC pipes and fittings

manufacturing plant at an estimated cost of USS 6 million. The facility with an annual production

capacity of 3,500 tons of high quality PVC pipes and fittings is expected to be commissioned

early in 1999. This venture is aimed at facilitating Engro's entry into the fast growing plastics

processing field.

· Polypropylene Project

The Company has completed a study to set up a Polypropylene resin manufacturing project.

Discussions are continuing with the Government and potential joint venture partners to expedite

the establishment of a 100,000 tons per annum capacity plant at Port Qasim.

AUDITORS

The auditors, A.F. Ferguson & Company, retire and offer themselves for re-appointment.

SHAREHOLDING

Major shareholders of Engro are its employees and the ECPL Employees' Trust, Commonwealth

Development Corporation and International Finance Corporation. Other shareholders are finan-

cial institutions including National Development Finance Corporation, Pak-Kuwait Investment

Company, overseas and local mutual funds and the general public.

A statement of the pattern of shareholding as at December 31, 1997 is shown on page

23 of this report.

The Central Depository Company has invited Engro to join the depository. This will

bring about a revolutionary change in the way shares of the Company are traded and

lead to a significant reduction in the vast quantities of paper presently generated by

the share registry.

BOARD OF DIRECTORS

At the Annual General Meeting held on April 15, 1997, Messrs. Javed Akbar, Michael

G. Essex, Behram Hasan, Zaffar A. Khan, Nisar A. Memon and Shaukat R. Mirza

were re-elected as Directors. Mr. Rafiq A. Akhund, Mr. Parvez Ghias, Vice President

Finance, Legal and Administrative Services, Mr. Asif Qadir, Vice President

Manufacturing and Mr. Gulrez Rashid, Vice President Marketing of the Company

were elected Directors for the first time at the same meeting. Mr. Stephen Potter has

been nominated on the Board of Directors of the Company by the Commonwealth

Development Corporation (CDC), a creditor of the Company by virtue of contractu-

al arrangements.

Mr. Shaukat R. Mirza retired from Company service as President and Chief Executive on July 21,

1997 and Mr. Zaffar A. Khan took over as the President and Chief Executive from July 22, 1997.

Mr. Shaukat R. Mirza continues as Chairman of the Board. Mr. Rafiq A. Akhund resigned from the

Board effective July 21, 1997 to take up an overseas assignment. The Board of Directors has

appointed Mr. S. Naseem Ahmad, Chairman and Managing Director, Philips Electrical Industries

of Pakistan Limited as a director in place of Mr. Akhund effective February 23, 1998.

The Board wishes to place on record its appreciation for the very significant contribution made by

Mr. Shaukat R. Mirza during his tenure as President and Chief Executive. The Board also wishes

to acknowledge the valuable contribution made by Messrs. Mahmud Dossa, Nasim A. Jafarey,

Imtiaz Samee and Abdul Shakur who were directors of the Company up to April 1997 and Mr.

Rafiq A. Akhund.

The term of office of the present Board expires in April 2000.

OUTLOOK AND CHALLENGES

In 1998 approximately one million tons of additional urea capacity is expected to

come on stream in the country. This will step up competitive pressures. Further, with

the recent fall in the international price of urea, the ability to recover escalations in

cost through higher prices will be limited. To be successful in this environment will

necessitate a sharper focus on cost control and improved productivity. The success-

ful commissioning of the innovative retrofit project at Daharki during 1998 will be a

significant step in this direction and will position the company well to compete effec-

tively.

The fertilizer policy of the government assigns highest priority to allocation of gas for

the fertilizer industry to boost agriculture production in the country. It is imperative

that the government abides by this policy and meets industry demand for addition-

al gas. An advance commitment for gas supplies from the Government is necessary