Engro Chemicals Pakistan Limited - Annual Reports

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Engro Chemical Pakistan Limited

Annual Report 2001

CONTENTS

COMPANY INFORMATION

BOARD OF DIRECTORS

Nisar A. Memon, Chairman

Zaffar A. Khan, President & Chief Executive

S. Naseem Ahmad

Javed Akbar

Farid Dossani

Parvez Ghias

Shabbir Hashmi

Pervaiz Kausar

Tariq Iqbal Khan

Asif Qadir

Asad Umar

SECRETARY

BANKERS

Andalib Alavi

ABN AMRO Bank N.V

Standard Chartered Grindlays Bank Limited

Citibank N.A.

Faysal Bank Limited

Habib Bank Limited

Muslim Commercial Bank Limited

National Bank of Pakistan

Standard Chartered Bank

Union Bank Limited

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-sixth Annual General Meeting of Engro Chemical Pakistan -'

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

March 28, 2002 at 10.00 a.m. to transact the following business:

1. To receive and consider the Audited Accounts for the year ended December 31, 2001 and the

Directors' and Auditors' Reports thereon.

2. To declare a final dividend at the rate of Rs. 3.50 per share for the year ended

December 31 2001.

3. To appoint Auditors and fix their remuneration.

By Order of the Board

Andalib Alavi

Karachi,

Chief Legal Advisor &

Dated: January 30, 2002

Company Secretary

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, March 14, 2002 to Thursday, March 28, 2002 (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, March 13, 2002 will be in time for the purposes

of payment of the final dividend and entitlement to attend the Annual General Meeting.

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.

FINANCIAL HIGHLIGHTS

2001

2000

Sales Revenue

Rs. Million

8,220

8,394

Earnings after Tax

Rs. Million

1,064

1,126

No. of Shares Outstanding

(000's)

139,036

120,901

Earnings per share - Basic and diluted

Rs.

7.65

9.32

Dividend

Rs./Share

7.50

7.00

Return on Capital Employed

(%)

Current Ratio

1.23

1.27

Debt: Equity Ratio

36:64

37:63

Capital Expenditure

Rs. Million

435

0.58

Market Capitalization (yr. end)

Rs. Million

7,195

8,342

Market Capitalization (yr. end)

US$ Million

119

143

Price to Earnings Ratio

7.47

6.69

Net Assets Per Share

Rs.

37.70

43.20

THE DIRECTORS' REPORT

The Board of Directors of Engro Chemical

Pakistan Limited is pleased to present the

thirty-sixth annual report and the audited

accounts of the Company for the year ended

December 31, 2001.

FERTILIZER OPERATIONS

The year 2001 was a difficult period for the

agriculture sector in the economy. Shortage of

irrigation water both in the summer and winter

cropping seasons, reduced urea demand.

Additionally, the Government increased the price

of gas and levied General Sales Tax (GST) on a

deemed price of urea and requested the

producers to absorb the charge. The industry

agreed to help ease the financial burden on the

farming community who were suffering the impact

of drought conditions.

The demand for urea in 2001 declined by 1% to

4.0 million tons, while the indigenous production

increased by 7% to 4.2 million tons mainly on

account of better capacity utilization of the more

recently constructed plants. There was a nominal

import of 0.1 million tons early in the year, due to

low inventory levels in the country, but thereafter

supply was well in excess of demand for the rest

of the year.

The price of urea in the domestic market was

steady most of the year and remained at least

20% below international prices.

Engro Urea Business

Engro urea sales in 2001 were 795,000 tons,

marginally lower compared to 800,000 tons

achieved last year. The sales volume included a

limited quantity of 16,000 tons of purchased urea

which was imported and sold in the beginning

of the year to meet the market demand. The

Company held its overall urea market share of 20%.

The Company continued to provide technical

solutions and agronomic advice to the farming

community throughout the year free of cost. Over

7,000 soil samples were tested at the three Engro

laboratories to determine nutrient deficiencies in

the soil. Several seminars were held which were

well attended by the farmers and agri scientists,

to promote the use of fertilizer. In a bid to ease

the severity of the drought conditions, farmers

were advised on effective water management

techniques and shown successful demonstration

plots of cotton and maize crop substitution in

traditional rice growing areas. Additionally,

technical literature on efficient production

technology of fruit crops was published and

distributed free amongst the farmers. During the

year, the Company expanded its television and

radio advertising campaign to promote the

expanded product slate of NPK fertilizers and seeds.

The production of Engro urea at 790,000 tons

was down 2% from the previous best level of

808,000 tons achieved last year. The shortfall

was mainly due to equipment limitations. A new

redesigned rotor, to overcome the limitation, was

installed during the planned April 2001 plant

shutdown. However, other issues surfaced which

precluded achievement of the design production

rates. A concerted effort was made to overcome

these issues and plant operations were

significantly smoothened towards the end of the

year. Further programs to enhance long term

reliability of the plant have been developed to

achieve design capacity of 850,000 tons p.a.

These programs will be implemented during

2002 alongwith capital investment projects of

Rs.342 million.

In addition, a new innovative project was

executed which improved the physical attributes

of our product such as prill size and reduced fines

content. This has been appreciated by our

customers.

The Company has a total gas allocation of 103

MSCFD of Mari Gas, of which 42 MSCFD is

covered by an agreement that expires in 2013

and is then renewable for another 10 years.

The gas supply contract for the bulk of the

balance quantity expired in 1998 but with a 10

year renewal provision which has the approval of

the Government. Mari Gas Company Limited,

whilst supplying the required gas, has been

withholding formal renewal of this contract as

they wish to add certain new provisions in the

contract. Efforts to resolve the differences will be

continued and it is hoped that renewal will be

formalized in 2002. In the meanwhile, the supply

of gas to the fertilizer producers has been further

assured under the new Fertilizer Policy

announced by the government.

Phosphates

In 2001, the industry demand for DAP fertilizer

declined by 5% over last year to 1.2 million tons

due to drought conditions and the relatively high

price of DAP.

The Company arranged DAP imports to promote

balanced fertilization and sold 161,000 tons

compared to 194,000 tons in 2000. The shortfall

was partly due to reduced demand and partly to

insufficient supply sourcing in a period of

uncertainty related to levy of GST in Pakistan. The

Government imposed a 15% GST on the selling

price of phosphatic and other fertilizers effective

September 2, 2001.

NPK Fertilizers

The Company achieved mechanical completion

of its new 100,000 tons per annum NPK plant at

Port Qasim in April 2001. The project was

completed on schedule and within the budget

amount of US$ 10 million. An aggressive

marketing campaign promoting the benefits and

use of NPK fertilizer application to crops was

launched with the commencement of production

in June 2001 The project is expected to meet an

important agricultural input need of the country in

promoting balanced supply of nutrients to crops

and improvement of farm yields.

The plant encountered teething problems

upon start up which limited production

rates and incurred higher than anticipated

operating and maintenance expense.

During the period June-December 2001,

four different NPK grades totalling

31,000 tons were produced of which

24,000 tons were sold and well received

in the market. The NPK business recorded

a loss of Rs.109 million. Focused

management attention and a few months

of operational experience has brought

about appreciable improvements in plant

operations. The plant is now operating in

excess of 80% of its design capacity and

some reduction of operating expense has

been achieved. Further cost reductions are

required which are being worked upon to

make the business profitable within the

next couple of years.

Seeds Business

The Company completed its first year of entry into

the seeds business by marketing high quality

hybrid seeds of corn, sunflower and sorghum and

was able to achieve a modest market share of

about 4%. A good impact was created in the

market place with the establishment of our brand

name for seeds - "Bemisal". The immediate thrust

of the seed business is to increase sales volumes

to achieve an economic scale of operation. In

addition to growth in sale of hybrid seeds, the

Company has also made arrangements to launch

sales of open pollinated seeds of cotton, rice and

wheat in 2002.

FINANCIAL RESULTS

The Company earned a profit after tax of Rs.1,064 million in 2001 as compared to Rs.1,126

million achieved during the previous year. The profit numbers were impacted by a number of

favourable and unfavourable events which cumulatively resulted in a profit decline of ,.5.5%. Gains

were made through improvement in margins and an increase in dividend income from Engro Vopak

Terminal Ltd. However, the gains were more than offset by the cost of GST absorption, loss of

production and sales volume, high maintenance costs and start up losses on NPK and seeds

operation.

Your Board recommends that the net profit of Rs. 1,064 million earned during the year together with

the balance of unappropriated profit of Rs.4 million brought forward from prior years be

appropriated as follows:

Million Rupees

Total profit available for appropriation

1,068.1

Appropriations

Transfer to general reserve

20.0

First interim dividend on 139,036 million shares of Rs. 10 each

at Rs.2.00 per share declared on August 9, 2001

278.1

Second interim dividend on 139,036 million shares of

Rs.10 each at Rs.2.00 per share declared on October 25, 2001

278.1

Proposed final dividend on 139,036 million shares of

Rs. 10 each at Rs.3.50 per share.

486.6

------------------

Total Dividend for the year

1,042.8

------------------

Unappropriated profit carried forward

5.3

==========

The Board elected not to recommend the issuance of bonus shares versus the 15% bonus share

announcement of last year. The Board expressed their disappointment at the recent levy of a 10%

withholding tax on bonus shares. The shareholders' equity as at December 31, 2001 was over

Rs.5,240 million compared to Rs.5,219 million last year.

The eight year income tax holiday period granted to the Company for its 1993 plant expansion at

Daharki expired on September 30, 2001. While an agreement approved by the Central Board of

Revenue formed the basis for apportioning revenue and expenses between exempt and taxable

income, nearly all previously assessed tax returns are being disputed by the tax authorities at the

end of the 8 year tax holiday. This is a major disappointment and the Company is taking

appropriate action to defend its position.

During the year, the Company issued the first

tranche of Rs. 500 million Term Finance

Certificates for financing the ongoing capital

expenditure program. It is the first occasion that

the Company used a capital market instrument to

raise finance. The issue was rated AA- and was

significantly oversubscribed.

Pakistan Credit Rating Agency (PACRA) in its

recent annual review of the Company's

creditworthiness, has retained Engro's long and

short term ratings as "Single A Plus" and "Single

A One" respectively. These ratings reflect the

Company's financial and management strength

and denote a low expectation of credit risk and

the capacity for timely payment of financial

commitment. The Company's debt to equity ratio

for the year ending 2001 is 36:64 compared to

37:63 in 2000. The current ratio for the year

closed at a healthy 1.23.

The Company continued with its policy of keeping

the shareholders and the public informed of its

operations by way of quarterly releases of the

business results to the press and stock exchanges.

Security Analyst briefings were also held

regularly to explain business developments in the

Company and its joint ventures. This information

was regularly posted on the Company's web

page. The Company was recently recognized by

the Institute of Chartered Accountants and the

Institute of Cost and Management in Pakistan for

the presentation quality of the annual accounts.

The Company received the top award in its

category of industries. Further, in recognition of

its financial performance, the Company was once

again selected for the "Top 25 Companies

Award" of the Karachi Stock Exchange for the

year 2000. The Company has won this award for

the 19th time and holds the distinction of being

the most frequent winner amongst all companies.

SAFETY & ENVIRONMENT

The Manufacturing Division at Daharki achieved

6.4 million man-hours (MMH) without lost

workday injury (LWI) to any Company employee

over a 5-year period. This is a significant

achievement and an all time record since the start

up of the plant in 1968. In addition, the Division

completed 5.7 MMH without an LWI to

employees of our contractors. However, at the

new NPK plant at Port Qasi, one case of an LWI

to a Company employee was recorded post start

up of the facility. Efforts are underway to improve

the safety standards of own and contractor

employees at this site. The Non-manufacturing

functions also maintained their excellent safety

record and by year end they had achieved over

4.5 MMH over a period of 13.7 years without an

LWI. Particularly creditable is the effort of

marketing sales force who have achieved 13

million kilometers of safe driving over a period of

21 years without suffering an LWI.

As part of our continuing efforts to ensure high

standards of risk management, an external survey

was conducted by a leading insurance broker

from the U.K. The audit reconfirmed Engro's high

standards of risk management, but also

suggested new programs to further enhance

safety effectiveness.

The Company is firming plans with a renewed

international engineering firm to undertake a

comprehensive project to improve the

environmental performance of the plant site at

Daharki. The Company is committed to meeting

all environmental standards and to achieving

excellence in this field of operation.

EMPLOYEE RELATIONS AND

ORGANIZATION DEVELOPMENT

In early 2001, the Company initiated a

programme to revisit its "Corporate Vision 2005"

developed in mid 1990's. The new vision titled,

"Vision 2010" is in the process of being

developed and will be cascaded throughout the

organization.

The Company, as part of its focus to ensure

quality management systems, made good

progress towards achieving ISO certification.

During the year, Daharki manufacturing site was

awarded ISO 9002 while the Business Functional

Group comprising of all business support

functions received the new ISO 9001

certification. Work is progressing to achieve

similar certification for the remaining functions of

the organization in 2002.

The Company continued to suffer attrition of

skilled technical and engineering resources,

reflecting the brain drain phenomena prevailing

amongst the qualified professionals in the

country. Record recruitment was undertaken to

support the Company's business needs, including

its growth and diversification programs.

Structured orientation programs were offered to

facilitate early assimilation of the new hires and

training and employee development activities

were stepped up to enhance the overall

workforce productivity.

The overall industrial climate and employee

relations remained cordial throughout the year.

New Collective Labour Agreements were

successfully concluded with both the Daharki and

Karachi Unions for periods of 27 months and 36

months respectively, effective July 2001.

The Company continued to make sizable

contributions for projects in health care and

education to help improve the quality of life of the

less privileged people especially of those residing

in public communities around Daharki. Salient

projects and activities undertaken during the year

include:

* Launching a major school project in Daharki

which will be managed by "The Citizen's

Foundation", an organization promoting

quality education in low income areas of

Pakistan. The school will be made

operational in 2002 and when completed,

will accommodate 750 students selected on

merit. The Company will fully fund the

construction cost of Rs.20 million, spread

over three years.

* The employees of the Company largely

funded the construction of a school cum clinic

for a neighbouring community at Daharki.

* Over 1,050 teachers were trained during the

year at the Training & Resource Centre

established in Daharki in collaboration with

Ali Institute to improve the quality of

education in the local schools of the area.

* A free eye camp was held at Kot Diji in the

interior Sindh where 2,300 patients were

examined in the OPD and 285 cataract

surgeries and 254 IOL implants were

performed.

* At the Eye Care Centre built by the Company

in Daharki, 657 surgeries were performed

and IOLs were planted in more than 396

needy patients.