| ENGRO Chemical Pakistan Limited |
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| Annual
Report 1998 |
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| CONTENTS |
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| Company
Information |
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| Notice
of the Meeting |
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| Financial
Highlights |
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| Directors'
Report |
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| Board
of Directors |
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| Pattern
of Holding of Shares |
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| Auditors'
Report |
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| Balance
Sheet |
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| Profit
& Loss Account |
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| Cash
Flow Statement |
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| Notes
to the Accounts |
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| Ten
Years at a Glance |
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| Corporate
Committees |
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| COMPANY
INFORMATION |
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| BOARD
OF DIRECTORS |
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| Shaukat
R. Mirza, Chairman |
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| Zaffar
A. Khan, President & Chief Executive |
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| S.
Naseem Ahmad |
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| Javed Akbar |
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| Parvez Ghias |
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| Behram Hasan |
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| David
V. Johns |
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| Nisar
A. Memon |
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| Asif Qadir |
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| Atta-ur-Rahman |
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| Gulrez
Rashid |
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| SECRETARY |
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| Andalib
Alavi |
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| BANKERS |
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| ABN
AMRO Bank |
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| ANZ
Grindlays Bank plc |
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| Bank
of America NT&SA |
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| Citibank
N.A. |
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| Faysal
Bank Limited |
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| Habib
Bank Limited |
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| Muslim
Commercial Bank Limited |
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| National
Bank of Pakistan |
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| Standard
Chartered Bank |
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| United
Bank Limited |
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| AUDITORS |
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| A.F.
Ferguson & Co. |
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| Chartered
Accountants |
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| REGISTERED
OFFICE |
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| PNSC
Building |
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| Moulvi
Tamizuddin Khan Road |
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| Karachi. |
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| NOTICE
OF MEETING |
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| NOTICE
IS HEREBY GIVEN that the Thirty-third Annual General Meeting of Engro
Chemical |
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| Pakistan
Limited will be held at Karachi Marriott Hotel, Abdullah Haroon Road, Karachi
on |
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| Thursday,
April 15, 1999 at 10.00 a.m. to transact the following business: |
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| A.
ORDINARY BUSINESS |
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| (1)
To receive and consider the Audited Accounts for the year ended December 31, |
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| 1998
and the Directors' and Auditors' Reports thereon. |
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| (2)
To declare a final dividend at the rate of Rs.3.00 per share for the year
ended |
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| December
31, 1998. |
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| (3)
To appoint Auditors and fix their remuneration. |
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| B.
SPECIAL BUSINESS |
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| To
consider, and if thought fit, to pass the following Resolution as an Ordinary |
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| Resolution: |
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| "RESOLVED
that: |
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| (a)
A sum of Rs.201,502,080 (Rupees Two Hundred and One Million Five Hundred |
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| and
Two Thousand and Eighty only) out of the free reserves of the Company be |
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| capitalized
and applied towards the issue of 20,150,208 ordinary shares of Rs.10/- |
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| each
as bonus shares in the ratio of 1:5 i.e. one bonus share for every five
ordinary |
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| shares
held by the members whose names appear on the Members Register on |
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| April
2, 1999. These bonus shares shall rank pari passu in all respects with the |
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| existing
shares but shall not be eligible for the dividend declared for the year |
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| ended
December 31, 1998. |
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| (b)
Members entitled to fractions of shares as a result of their holding either
being less |
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| than
five ordinary shares or in excess of an exact multiple of five ordinary
shares |
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| shall
be given the sale proceeds of their fractional entitlements for which purpose |
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| the
fractions shall be consolidated into whole shares and sold on the Karachi |
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| Stock
Exchange. |
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| (c)
For the purpose of giving effect to the foregoing, the directors be and are
hereby |
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| authorised
to give such directions as they deem fit to settle any question or any |
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| difficulties
that may arise in the distribution of the said bonus shares or in the |
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| payment
of the sale proceeds of the fractions". |
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| A
statement under Section 160 of the Companies Ordinance, 1984 setting forth
all material |
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| facts
concerning the Resolution contained in item (4) of the Notice which will be
considered |
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| for
adoption at the Meeting is annexed to this Notice of Meeting being sent to
Members. |
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By Order of the Board |
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| Karachi, |
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|
Andalib Alavi |
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| Dated:
February 18, 1999 |
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Chief Legal Advisor & |
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Company Secretary |
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| N.B.
(1) The share transfer books of the Company will be closed and no transfers
of |
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| shares
will be accepted for registration from Friday, April 2, 1999 to Thursday |
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| April
15, 1999 (both days inclusive). Transfers received in order at the |
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| Registered
Office of the Company upto the close of business (4:30 p.m.) on |
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| Thursday,
April 1, 1999 will be in time to be passed for payment of the final |
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| dividend
and issue of bonus shares to the transferees. |
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| (2)
A member entitled to attend and vote al-this Meeting shall be entitled to
appoint |
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| another
person, as his/her proxy to attend, speak and vote instead of him/her, |
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| and
a proxy so appointed shall have such rights, as respects attending, speaking |
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| and
voting at the Meeting as are available to a member. Proxies, in order to be |
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| effective,
must be received by the Company not less than 48 hours before the |
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| Meeting.
A proxy need not be a member of the Company. |
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| Statement
under Section 160 of the |
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| Companies
Ordinance, 1984 |
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| This
statement is annexed to the Notice of the Thirty-third Annual General Meeting
of Engro |
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| Chemical
Pakistan Ltd., to be held on April 15, 1999 at which certain special business
is to |
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| be
transacted. The purpose of this Statement is to set forth the material facts
concerning such |
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| special
business. |
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| Item
(4) of the Agenda |
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| The
Board of Directors recommend that taking into account the financial position
of the |
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| Company
the issued capital of the Company be increased by capitalization of free
reserves |
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| amounting
to Rs.201,502,080 and the issue of bonus shares in the ratio of 1:5 i.e. 20%.
The |
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| Directors
of the Company are interested in the business to the extent of their
shareholding |
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| in
the Company. |
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By Order of the Board |
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| Karachi, |
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|
Andalib Alavi |
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| Dated:
February 18, 1999 |
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Chief Legal Advisor & |
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Company Secretary |
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| FINANCIAL
HIGHLIGHTS |
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1998 |
1997 |
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| Sales
Revenue |
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Rs. Million |
8,366 |
6,659 |
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| Earnings
after Tax |
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Rs. Million |
1,488 |
1,202 |
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| Dividend
per Share |
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Rs./Share |
8.00 |
7.50 |
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| Return
on Capital Employed |
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(%) |
25 |
24 |
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| Current
Ratio |
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1.20 |
1.42 |
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| Debt:
Equity Ratio |
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43:57 |
44:56 |
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| No.
of Shares Outstanding |
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(000's) |
100,752 |
87,610 |
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| Capital
Expenditure |
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Rs. Million |
1,465 |
1,921 |
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| Long
Term Investments |
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Rs. Million |
531 |
188 |
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| (during
the year) |
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| Market
Capitalization (yr. end) |
Rs. Million |
9,063 |
10,000 |
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| Market
Capitalization (yr. end) |
US$ Million |
182 |
227 |
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| THE
DIRECTORS' REPORT |
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| The
Board of Directors of Engro Chemical Pakistan Limited is pleased to present
the thirty-third |
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| annual
report and the audited accounts of the Company for the year ended December
31, |
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| 1998. |
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| 1998
was a difficult year for Pakistan. Economic sanctions, depletion of foreign
currency |
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| reserves
and depreciation of the rupee eroded business confidence. Fortunately
however, the |
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| agriculture
sector of the economy fared reasonably well and it enabled the Company to
make |
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| a
contribution by optimizing all dimensions of its fertilizer business. In
parallel, the Company |
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| persisted
with its program to expand and diversify its business by making sizeable
investments |
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| in
the country. |
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| UREA
INDUSTRY ENVIRONMENT |
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| The
industry demand for urea rebounded during 1998 and increased by 11% over
1997. The |
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| total
sale volume was 3.9 million tons. Good wheat, rice and sugarcane crops
coupled with |
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| supportive
Government policies stimulated demand. On the supply side, the indigenous |
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| production
at 3.4 million tons was 4% higher than last year but below the industry |
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| expectations
due to delayed start up of new plant capacities. To meet demand,
approximately |
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| 0.4
million tons was imported in 1998. The supply of product in the market was
adequate |
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| throughout
the year. |
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| There
was no increase in the price of natural gas for the second year running and
as a |
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| consequence
the price of urea in the domestic market remained steady. |
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| MARKETING |
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| The
Company's total fertilizer sales volume was 1,030,000 tons, which represents
a |
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| significant
increase of 21% over 1997. The largest increase occurred in the sale of |
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| imported
urea, which reached 131,000 tons compared to 65,000 tons sold last year. |
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| Increased
production from the expanded plant enabled the Company to increase |
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| sale
of Engro urea by 9% to 712,000 tons. Overall the Company achieved a urea |
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| market
share of 22% compared to 20% in 1997. |
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| The
Company imported sizeable volumes of phosphatic and potassic fertilizers to |
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| promote
balanced fertilization, which is so essential to achieve high crop yields. |
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| Timely
imports and confidence of the farmers in the Engro branded products |
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| enabled
the Company to sell a record 187,000 tons of these fertilizers representing |
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| a
36% increase over 1997. |
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| To
help maximize the production of cotton in the country, the Company organized |
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| a
seminar in Multan. Leading agriculture scientists, cotton breeders and
growers |
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| participated
and exchanged views on how to correct the declining trends in yields. |
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| Further,
the Company completed a new soil-testing laboratory in Multan to help |
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| farmers
optimize the use of fertilizers. This is the third soil-testing laboratory of
the |
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| Company;
the other two are in Hyderabad and Daharki. |
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| MANUFACTURING |
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| The
production of Engro urea in 1998 was 707,400 tons, up 6% over the level
achieved in |
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| 1997.
Several new daily and monthly production records were established during the
year. A |
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| very
significant accomplishment of the year was the successful implementation of
the $72 |
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| million
expansion cum modernization of the Daharki plant. The project was implemented
in |
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| two
phases necessitating a total plant shutdown of 54 days. Since completion in
October |
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| 1998,
the plant capacity has been revised from 750,000 tons to 850,000 tons p.a.
Further, a |
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| 13%
reduction in gas consumption per unit of urea production and appreciable
improvement |
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| in
environmental performance has been demonstrated. This innovative project |
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| was
conceived and managed by the Engro team and it has positioned the |
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| Company
well to compete effectively. |
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| The
phased program to upgrade pneumatic instrumentation of the plant |
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| is
almost complete. Several instrument and electrical loops have been re- |
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| engineered
and substituted with state-of-the-art electronic systems. A new bulk |
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| warehouse
was commissioned with a fully automated product bagging and |
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| loading
facility, the first of its kind in Pakistan. These facilities will enhance |
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| the
flexibility to effectively manage product storage and distribution at the |
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| plant site. |
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| The
Company has a total gas allocation of 103 MSCFD of Mari Gas from the
Government. |
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| 42
MSCFD of the gas is covered by an agreement up to the year 2013 and is then
renewable |
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| for
another 10 years. Another agreement covering 46 MSCFD gas expired in June
1998 but |
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| was
extended by 9 months to enable the renewal formalities to be |
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| completed.
It is expected that this agreement will be shortly renewed for a |
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| period
of 10 years and will also incorporate the 15 MSCFD allocated by |
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| the
Government in 1995. |
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| FINANCIAL
RESULTS |
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| In
1998, the Company earned a profit after tax of Rs.1,488 million as compared
to Rs.1,202 |
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| million
achieved during the previous year. The increase in operating profit is
primarily |
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| attributable
to higher production and sales of Engro urea, improved volume and margins on |
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| sale
of imported fertilizers and lower magnitude of prior period adjustments.
Depreciation, |
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| financial
and taxation charges are higher than 1997 on account of the capitalization of
the |
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| major
expansion project completed during the year. In 1997, the Company as matter
of |
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| accounting
prudence provided Rs.130 million as penalty charges imposed by State Bank of |
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| Pakistan
and the Port Qasim Authority. The Company is strongly contesting validity of
the |
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| penalty
charges with the authorities as it believes these to be unjustified and
invalid. |
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| Your
Board recommends that the net profit of Rs.1,488 million earned during the
year |
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| together
with the balance of unappropriated profit of Rs.2 million brought forward
from the |
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| prior
year be appropriated as follows: |
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|
Million Rupees |
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| Total
profit available for appropriation |
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1,490.0 |
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| Appropriations |
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| Transfer
to general reserve |
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595.0 |
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| Transfer
to reserve for issue of bonus shares |
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85.8 |
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| First
interim dividend on 100.751 million shares of Rs.10 |
|
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| each
at Rs.2.50 per share declared on August 12, 1998 |
251.9 |
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| Second
interim dividend on 100.751 million shares of Rs.10 |
|
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| each
at Rs.2.50 per share declared on January 11, 1999 |
251.9 |
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| Proposed
final dividend on 100.751 million shares of |
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| Rs.10
each at Rs.3.00 per share |
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302.2 |
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| Total
Dividend for the year |
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806.0 |
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---------- |
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| Unappropriated
profit carried forward |
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3.2 |
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========== |
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| The
Board recommends that bonus shares in the ratio of one bonus share for every
five |
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| shares,
i.e., 20% be issued by capitalization of Rs.201.5 million out of the free
reserves of |
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| the
Company. The said bonus shares will not be eligible for the dividend declared
for the |
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| year
ended December 31, 1998. |
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| In
April 1998, the Company issued bonus shares in the proportion of fifteen
shares for every |
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| one
hundred ordinary shares thus increasing the number of paid up shares
outstanding to |
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| 100.7
million. The shareholders equity as at December 31, 1998 was Rs.4,616 million |
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| compared
to Rs. 3,952 million last year. |
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| In
1998, the Company secured a Rs.700 million financing facility with a 5-year
tenor at a |
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| competitive
rate for its plant expansion cum modernization project and ongoing investment |
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| program.
The fall in the country's foreign exchange reserves following the imposition
of |
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| economic
sanctions caused the State Bank of Pakistan to withhold repayment of loan |
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| installments
due to overseas institutional lenders and dividends to foreign shareholders.
This |
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| became
a source of great concern and the Company continued its efforts to persuade
the |
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| Government
that these liabilities be discharged promptly. |
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| Pakistan
Credit Rating Agency in its recent review on Company's credit worthiness has |
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| maintained
Engro's long and short term ratings as "Single A Plus" and
"Single A One Plus" |
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| respectively.
These ratings reflect the Company's financial and management strength and the |
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| ability
to successfully face the difficulties emanating from the deteriorated
operating |
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| environment.
The Company's debt to equity ratio for the year ending 1998 is 43:57 compared |
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| to
44:56 in 1997. The current ratio for the year closed at a healthy 1.20. |
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| In
view of the uncertainty in the economic environment the Company decided to
make public |
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| its
business results each quarter. This makes Engro the first company in Pakistan
to share |
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| quarterly
information to benefit its shareholders. |
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| In
recognition of its financial performance, the Company was presented the
annual "Top 25 |
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| Companies
Award" of the Karachi Stock Exchange for year 1997. This was the 16th
time that |
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| the
Company has won this award. |
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| SAFETY,
ENVIRONMENT |
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| AND
INDUSTRIAL HYGIENE |
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| A
concerted effort was made to improve the environmental performance of the |
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| Daharki
plant. Following capital expenditure of Rs.73 million in 1997, another |
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| Rs.143
million was incurred in 1998 to recycle or reduce both effluents and |
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| emissions.
It is expected that in 1999 substantial compliance will be achieved |
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| versus
the National Environmental Quality Standards. Further, the Company is |
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| committed
to achieve high environmental standards and is targeting to become a |
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| role
model for industry in Pakistan. |
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| The
Manufacturing division of the company achieved 2.7 million man-hours |
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| without
any lost work injury (LWI) to its own employees and 2.1 million man-hours |
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| without
an LWI to any contract employee. This is a significant accomplishment |
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| given
the magnitude of new projects activity undertaken alongside an operating |
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| plant.
The safety performance of the non-manufacturing functions remained |
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| excellent.
They continued to build on their previous record and completed 11.7 |
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| years
equivalent to 3.3 million man-hours without an LWI. |
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|
| EMPLOYEE
RELATIONS AND |
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| ORGANIZATION
DEVELOPMENT |
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| All
the workers of the Company were involved in an interactive workshop to
discuss |
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| Engro's
Vision 2005. The workers appreciated the opportunity to contribute to the |
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| Company's
long term vision and participated enthusiastically. |
|
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| Relationship
with our own employees remained cordial throughout the year. A new |
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| Collective
Labour Agreement was amicably concluded with Karachi Staff Union. |
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| The
duration of this agreement is three years and became effective July 1, 1998. |
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| Disciplinary
issues were encountered with the labour of the loading contractor at |
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| the
plant site. These were dealt with firmly and discipline restored. |
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|
| INFORMATION
TECHNOLOGY |
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| Major
investments are being made in comprehensive Marketing Information |
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| System,
Plant Maintenance Management System and Human Resources System for |
|
| improved
efficiency and to meet emerging business needs. These systems are taking |
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| advantage
of the IT infrastructure developed in recent years. A security policy has |
|
| been
adopted to ensure adequate standards are in place to provide necessary |
|
| safeguards
to the corporate networks. |
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|
| The
Company has been working on the Y2K problem since 1997 with adequate |
|
| resources
and funding allocated to identify and resolve issues. Our current |
|
| assessment
based on work accomplished during 1998 indicates that by the third |
|
| quarter
of 1999, Engro would be in compliance relative to benchmarks set by the |
|
| British
Standard Institute. The company is also developing a contingency plan to |
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| further
ensure that business disruption risks if any are low. |
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|
| COMMUNITY
AND SOCIAL WELFARE |
|
|
| A
number of projects were undertaken by the Company in the vicinity of the |
|
| Daharki
plant to benefit the less privileged residents of the area. In addition, the |
|
| Company
contributed to more than 70 reputable charities and social welfare |
|
| organizations
operating in Karachi and other towns of Pakistan. Some of the more |
|
| significant
activities in 1998 were: |
|
|
| ·
Construction of a permanent eye clinic at Daharki. The facility will be made |
|
| operational
in 1999. |
|
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| ·
Two very successful eye camps held at Daharki and Umar Kot. Over 750 |
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| cataract
surgeries and intra ocular lens transplants were performed. |
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| ·
Snakebite treatment provided free of cost to 2,682 victims at the Company's
Daharki |
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| clinic. |
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|
|
|
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| ·
Several schools and drainage systems constructed or repaired in the villages
around |
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| Daharki. |
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|
|
|
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| ·
The Company contributed towards the construction of a Thalassaemia Centre in
Sukkur, |
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| which
is expected to be completed in 1999. |
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|
|
| UREA
BUSINESS GROWTH PLANS |
|
|
| In
1999, aside from demonstrating the enhanced urea capacity of 850,000 tons
over |
|
| the
full year, the Company intends to firm up its next debottlenecking step which
is |
|
| estimated
to take the capacity to 950,000 tons per annum. As has been previously |
|
| stated,
scoping studies have shown that the existing facilities at Daharki can be
cost |
|
| effectively
debottlenecked to 1.2 million tons urea production per year. |
|
|
| The
Company is pursuing its request to the Government for additional supply of
gas |
|
| to
launch its next major fertilizer project. |
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|
|
| OTHER
BUSINESS VENTURES |
|
|
|
| Jetty
and Terminal Facility |
|
| Engro
Paktank Terminal Limited, the Company's 50/50 joint venture with Royal
Pakhoed of the |
|
| Netherlands,
successfully completed its first year of operation. The terminal handled
102,000 |
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| tons
of paraxylene and acetic acid for ICI. In addition, handling of phosphoric
acid for FJFC |
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| was
added to the business slate. |
|
|
| During
the year significant progress was made to construct specialized storage tanks
for LPG |
|
| and
VCM. These facilities will be ready in 1999 at an estimated cost of US$ 13
million. These |
|
| additions
are being financed from debt and retained earnings of the joint venture. The
debt |
|
| equity
ratio of the venture at year-end 1998 was 55:45. |
|
|
| Poly
Vinyl Chloride (PVC) Resin Facility |
|
|
| The
Company's second 50% owned joint venture, Engro Asahi Polymer and Chemicals |
|
| Limited,
commenced construction of its 100,000 tons p.a. PVC plant at Port Qasim. The |
|
| project
is expected to be completed on schedule by the year end within the budgeted
amount |
|
| of
US$ 83 million. The project has a debt equity ratio of 51:49. The financing
package of the |
|
| facility
is fully in place. In 1998 Engro disbursed Rs.531 million as its share of
equity in the |
|
| joint
venture. On a cumulative basis the equity injection stands at Rs.719 million
which |
|
| represents
81% of its total equity obligation. The company plans to commence marketing |
|
| activities
ahead of the plant startup by selling imported PVC. |
|
|
|
| Other
Projects |
|
|
| Engro's
US$ 6 million project to manufacture PVC pipes and fittings has been put on
hold in |
|
| view
of the unfavourable business environment. The regional economic turmoil has
also |
|
| slowed
down the development of the proposed 100,000 tons p.a. polypropylene project. |
|
|
| A
comprehensive study to map out Engro's petrochemical diversification
possibilities is being |
|
| undertaken
with the help of a world class consultant with whom a contract has been
signed. |
|
| The
objective of the study is to identify projects that would be competitive in a
global context |
|
| and
to determine optimum sequencing for implementation. |
|
|
| AUDITORS |
|
|
| The
auditors, A.F. Ferguson & Company, retire and offer themselves for
re-appointment. |
|
|
| PATTERN
OF SHAREHOLDING |
|
|
| Major
shareholders of Engro Chemical are its employees and Engro Chemical
Employees' |
|
| Trust,
Commonwealth Development Corporation (CDC) and International Finance |
|
| Corporation
(IFC). Other shareholders are financial institutions such as National
Development |
|
| Finance
Corporation (NDFC), Pak-Kuwait Investment Company (PKIC), foreign mutual
funds |
|
| and
the general public. |
|
|
| A
statement of the pattern of shareholding as at December 31, 1998 is shown on
page 27 of |
|
| this report. |
|
|
| The
Company joined the Central Depository System effective July 1, 1998 and by
the year- |
|
| end
over 36% of the Company's shares had been dematerialized. This has resulted
in a |
|
| significant
reduction in the physical handling of shares previously lodged for transfer.
It is |
|
| expected
that most of the large institutional shareholders who have not yet converted
their |
|
| paper
scripts shall do so in 1999. |
|
|
| The
Company got listed on the Islamabad Stock Exchange effective November 2,
1998. |
|
| Engro
stock is now traded on all the Stock Exchanges of the country. |
|
|
| BOARD
OF DIRECTORS |
|
|
| Mr.
David V. Johns, the representative of Commonwealth Development Corporation
was |
|
| nominated
Director of the Company effective June 10, 1998 in place of the previous
nominee, |
|
| Mr.
Stephen Potter. Mr. Michael G. Essex resigned from the Board effective April
18, 1998. The |
|
| Board
of Directors appointed Professor Atta-ur-Rehman, Director HEJ Research
Institute of |
|
| Chemistry,
University of Karachi as a director in place of Mr. Essex effective August
12, 1998. |
|
| The
Board wishes to place on record its warm appreciation for the valuable
contributions |
|
| made
by Mr. Stephen Potter and Mr. Michael G. Essex. |
|
|
| OUTLOOK
AND CHALLENGES |
|
|
| The
significance of agriculture in sustaining the economy even under adverse
national and |
|
| global
circumstances was once again demonstrated in 1998. The priority assigned by
the |
|
| Government
to agriculture must be sustained and new programs initiated to improve rural |
|
| infrastructure
and the supply of inputs to boost farm production. The Company intends to |
|
| expand
its position as a key supplier of fertilizers. |
|
|
| Surplus
supply of urea in the international market is projected for 1999. Absence of
buying |
|
| from
major consuming countries such as China and India, is putting immense
pressure on |
|
| prices,
as producers with access to low price gas and desperate for hard currency
earnings |
|
| are
dumping product. The domestic supply situation which is already in excess due
to the |
|
| recent
addition of one million tons of new capacity, will unfairly disadvantage
local |
|
| producers
unless the Government takes measures to stop dumping. |
|
|
| The
investment climate in the country which received a setback in 1998 needs to
be |
|
| restored,
especially with the international community of investors. The recent measures |
|
| announced
by the Government to lift restrictions on remittance of foreign currency
loans |
|
| and
dividends is an essential first step. More measures are needed to shore up
the domestic |
|
| economy
whilst keeping the budgetary deficits in a manageable range. |
|
|
| Despite
the difficult local and regional business environment, the Company is
confident of |
|
| competing
effectively and taking new initiatives on its own and along with its two
promising |
|
| joint
ventures to build for the future. |
|
|
| Your
Board would like to take the opportunity to express its appreciation to the
Engro dealers |
|
| and
to the employees of the Company for their dedication and hard work throughout
the |
|
