Acquisition of Funds, Utilization of Funds and Ratio Analysis On Engro Fertilizers (2012-2013)

1. ASSIGNMENT
FINANCIAL MANAGEMENT
Topic:
Acquisition of Funds, Utilization of Funds and Ratio Analysis
On Engro Fertilizers (2012-2013)
Submitted to:
Sir Shabir Shaikh
Submitted by:
Mahzeb Ali Shah
2k13/MBAE/23
University of Sindh

2. Introduction
This assignment is based on Acquisition of funds, Utilization of funds
and Financial Ratios and their Analysis based on Pakistani company list
in Stock Market. This study is on Two year’s data (2012-2013) of
company “Engro Fertilizers” which are collected from their annual
report of the respective year’s due to lack of Time this study doesn’t
cover any other Industrial comparison. So this assignment majorly
dependent on only one company data set gathered from the company
annual reports. This study covers some major Ratios of Financial
Management.

3. Engro Fertilizer Ltd.
About the company:
Engro Fertilizers Limited is a leading name in the country’s urea producers. It is
primarily in the business of manufacturing and marketing of urea and NPK
(compound) fertilizers. With the establishment of 1.3 MT state of the art fertilizer
complex in 2011, the Company’s annual urea production capacity stands at 2.3
MT representing 33% of that of entire Pakistan’s. Engro’s product line comprises
Urea sold under the brand name of Engro Urea, NPK compound fertilizer – as
Zarkhez. The Company, as an agent to Engro Eximp Private Limited (a sister
concern), is also engaged in distribution and marketing of phosphate-based
fertilizers mainly DAP and MAP. The Company was incorporated as an
independent entity as a result of the demerger of fertilizer operations from Engro
Corporation Limited (previously called Engro Chemical Pakistan Limited) on
January 1, 2010. This demerger resulted in the transfer of all fertilizer assets and
liabilities to the Company with its current status as a wholly owned subsidiary of
Engro Corporation Limited. The Company has been in fertilizer business since
1965 when Esso Pakistan Fertilizer Company Limited was established following
the discovery of the Mari gas field near Daharki. In 1978, as part of an
international name change program, Esso became Exxon and the company was
renamed Exxon Chemical Pakistan Limited (ECPL). Later in 1991, Exxon decided to
divest its fertilizer business on a global basis. The employees of the time, in
partnership with local financial institutions, led a management buyout of Exxon’s
equity stake and subsequently renamed the company as “Engro Chemical
Pakistan Limited”. With time the Company diversified by establishing several
other business lines in the form of subsidiaries. In 2009, a demerger of the
fertilizer business was proposed with the ECPL adopting a holding company
structure to manage the affairs of its various businesses which include Engro
Fertilizers, Engro Foods, Engro Powergen, Engro Eximp, Engro Polymers and
Chemicals, Engro Vopak, Engro Foods Netherlands and Elengy Terminal Pakistan.
With its head office in Karachi and manufacturing facilities based in Daharki and
Karachi, Engro Fertilizers Limited employs over 1,200 individuals.

4. Business Review
Overview
The year ended December 31, 2013 was a turnaround year for Engro Fertilizers
Limited. The Company managed to return back to profitability after incurring a
loss in 2012 and in the process, achieved it’s highest ever revenue. The sound
financial performance was on the back of highest ever production and sales of
1,562 k tons and 1,570 k tons respectively. With improved profitability, the
Company decided to go for an IPO which was a huge success as it was
oversubscribed by 4 times.
Market Review
In 2013 theurea industry grew by 13% after the downturn in 2012 (5,900K tons in
2013 versus 5,230 k tons in 2012). This growth was mainly attributable to better
economics on major crops; weather conditions also remained favorable, casting a
positive impact on demand. Increase in off take is also a result of restoration of
channel confidence at retail and trade level. The Government also played an
important role by improving gas allocation to the industry. Local production
increased by 17% as a result of which the Government managed to reduce the
subsidy on imported urea. The prices of locally produced urea remained fairly
stable throughout the year. Average price of domestic urea during the year
increased by 3.5% only (1% was due to sales tax changes) versus overall inflation
of 9%. The international urea prices which were around USD 400/ton CFR at the
startof the year started to decline in Q2 2013 on account of lower demand due to
bad weather in Europe and North America. Surplus production, particularly from
China further contributed to the oversupply situation and pulled the prices
downwards to around USD 300/ton. However, in Q4, urea prices started
stabilizing as world demand normalized. Currently the international urea prices
are in the rangeof USD 350/ton CFR (equivalent to local cost of Rs 2,560/bag after
including all the ancillary charges) which shows that there is a significant gap of Rs
775/bag between locally produced urea and international prices. The fertilizer
industry continues to make significant contribution to the agricultural economy
by keeping domestic prices substantially lower than international prices. In 2013,

5. the industry provided a net benefit to farmers of approximately Rs. 65,000
Million.
Urea
Additional gas availability has helped the Company to achieve record sales of
1,570 k tons versus 953 k tons in the comparative period. Q4 witnessed the
highest ever Urea sales of 494 k tons. The improved sales were a result of higher
urea demand coinciding with increased production. The Company’s share of the
urea market increased to 26% in 2013 as compared to 18% in 2012. The share of
domestically produced urea also improved to 32% compared to 23% in same
period last year.
Zarkhez
The Company’s blended fertilizers’ (Zarkhez & Engro NP) sales for the year
increased by 19% to 95 k tons compared to 80 k tons during 2012. Pakistan’s
overall potash market remained stable at 20 k tons during 2013. Our marketshare
in potash industry grew to around 50% from 40% last year. This was a result of
the Company’s focused efforts which enabled it to capitalize on opportunities for
increasing market share. Farmers were engaged through crop-focused programs,
consumer incentive schemes, seminars, field visits, demo-plots, advisory services,
and other promotional activities. Approximately 52,000 farmers were contacted
through market development activities.

6. Acquisition Of funds in year 2013
External Sources
In 2013, the Company forayed into the capital markets and tapped the financial
markets to raise the necessary capital required to fund development capex on
securing additional gas supplies along with restructuring of the balance sheet to
optimize the capital structure of the company. The IPO was a roaring success
being oversubscribed four times in the book building process whilst being
oversubscribed for three times at the time of public issue.
During the 2013 company acquired funds from external sources, the Company
increased its authorized capital by 100,000,000 ordinary shares of Rs.10 each,
authorized capital increased from 1300000000 to 1400000000. With improved
profitability, the Company decided to go for an IPO which was a huge success as it
was oversubscribed by 4 times. The Company has made an Initial Public Offer
(IPO) through issue of 75 million ordinary shares of Rs.10 each at a price of
Rs.28.25 per share determined through book building process. Out of the total
issueof 75 million ordinary shares, and company collected PKR 750 million. 56.25
million Shares were subscribed through book building by High Net worth
Individuals and institutional investors, against those shares company collected
PKR 562.5 million, whereas the remaining 18.75 million shares weresubscribed by
the general public at the face value of PKR 10. The shares have been duly allotted
subsequent to the year end. On January 17, 2014, the Karachi and Lahore Stock
Exchanges have approved the Company's application for formal listing and
quotation of shares, and company collected PKR 187.5 million during the year of
2013 company was issued total number of outstanding shares were 150 million.
Therefore the company generated PKR 1.5 billion.
Internal Sources
Engro Fertilizer disposed the property plant assets and acquired funds from
internal sources in 2013 and the details of operating assets disposed / written off
during the year are as follows:
From Sales of Plant and machinery Old Ammonia 1 plant for the amount of
Rs.50,431 thousands, form sales of Vehicles Rs.21,310 thousands, From sales

7. through bid Rs.6,171, From sales of Furniture, fixtures and equipment Rs.449
thousands, from insurance claim 2,608 thousands. Engro Fertilizer raised funds
Rs.80969 thousands from internal sources sales of fixed assets.
Utilization of Funds
During 2013 Company utilized PKR 1.47 billion in Capex increased assets with
respect to Plant and machineries, long term gas pipe lines, Furniture, fixture and
equipment. Company purchased & installed plant and machineries of PKR 1.397
billion and acquired Building and civil work including gas pipe line of PKR 66.86
million and purchased Furniture, Fixture and equipment of PKR 10.47 million
Impact of Investment in Fixed Assets
A company needs to equip its facilities; it therefore needs to invest in fixed assets,
i.e. assets (property, equipment, fixtures and fittings, etc.) which it will keep on a
long term basis. These assets are related to both the business premises and the
equipment required for business operation.
Engro Fertilizer invested plant and machinery and other productive fixed assets
for the purpose of generating sales. Therefore, the efficiency of fixed assets
should be judged in relation to sales. Generally, a high fixed assets turnover ratio
indicates efficient utilization of fixed assets in generating sales, fixed assets
investment improved company’s assets turnover ratio increased to 48% as
compared 31% in 2012, purchased plant and machinery increased in a urea
production by 60% Additional production availability has helped the Company to
achieve record sales of 1,570 k tons versus 953 k tons in 2012. The improved sales
were a result of higher urea demand coinciding with increased production. The
Company’s share of the urea market increased to 26% in 2013 as compared to
18% in 2012. The share of domestically produced urea also improved to 32%
compared to 23% in same period last year. Sales revenue for 2013 was Rs.50,129
million which was higher by 64% as compared to the corresponding period (2012:
Rs.30,627 million). Gross profit for the year 2013 was Rs.22,121 million as
compared to Rs.9,861 million for the same period.

8. Engro Fertilizer
profit and loss account
for the year ended december 31, 2013
(Amountsinthousandsexceptforearnings/(loss) per
share) 2013 2012
Note (Rupee)
Netsales 26 50,128,936 30,626,520
Cost of sales 27 (28,007,905) (20,765,773)
Gross profit 22,121,031 9,860,747
Sellinganddistributionexpenses 28 (3,511,155) (2,499,982)
Administrative expenses 29 (600,990) (582,779)
18,008,886 6,777,986
Otherincome 30 1,104,650 379,443
Otheroperatingexpenses 31 (2,060,015) (405,977)
Finance cost 32 (8,669,569) (10,703,246)
(10,729,584) (11,109,223)
Profit / (loss) before taxation 8,383,952 (3,951,794)
Taxation 33 (2,886,847) 1,017,219
Profit / (loss) for the year 5,497,105 (2,934,575)
Restated
Earnings / (loss) per share - basic
and diluted 34 4.66 (2.59)

9. Engro Fertilizer
Balance sheet
as at december 31, 2013
(Amountsinthousand)
ASSETS Note 2013 2012
Non-Current Assets (Rupee)
Property,plantandequipment 4 79,315,218 82,877,701
Intangible assets 5 138,464 161,555
Long termloansand advances 6 109,349 83,763
79,563,031 83,123,019
Current assets
Stores,sparesandloose tools 7 4,368,863 4,107,291
Stock-in-trade 8 1,381,665 1,687,072
Trade debts 9 758,253 1,046,091
Derivative financial instruments 19 130,207 545
Loans,advances,depositsandprepayments 10 625,832 395,150
Otherreceivables 11 28,177 61,0038
Taxesrecoverable 556,314 2,000,249
Short terminvestments 12 18,058,054 2,635,339
Cash andbank balances 13 4,458,391 2,449,168
30,365,756 14,381,943
TOTAL ASSETS 109,928,787 97,504,962

10. Equity & Liabilities
Note 2013 2012
Equity (Rupees)
Share capital 14 12,228,000 10,728,000
Share premium 11,144 1 1,144
Advance againstissue of shares 15 2,118,750 -
Hedgingreserve 16 (147,644) (323,880)
Remeasurementof post-employmentbenefits (20886) -
Unappropriatedprofit 10,879,868 5,382,763
12,841,232 5,070,027
Total Equity 25,069,232 15,798,027
Liabilities
Non-current liabilities
Borrowings 17 52,896,382 48,481,626
SubordinatedloanfromHoldingCompany1 18 3,000,000 3,000,000
Derivative financial instruments 19 1,531,252 497,869
Deferredliabilities 20 4,654,523 3,380,705
Retirementandotherservice benefitsobligations 21 104,053 99,029
62,186,210 55,459,229
Current liabilities
Trade andotherpayables 22 18,012,445 7,957,173
Accruedinterest/mark-up 23 1,479,667 1,788,282
Currentportionof:
- borrowings 17 2,924,299 14,896,412
- retirementandotherservice benefitsobligations 21 21 43,893 39,624
Short termborrowings 24 - 999,791
Derivative financial instruments 19 213,041 566,424
22,673,345 26,247,706
Total liabilities 84,859,555 81,706,935
ContingenciesandCommitments 25
TOTAL EQUITY & LIABILITIES 109,928,787 97,504,962

11. Required Data Set Collected from the Annual Report.
Summaryof Balance Sheet
(AmountinThousands)
No. Items Year 2013 Year 2012
01 Cash 4458391 2449168
02 Quick Assets 28984091 12694871
03 CurrentAssets 30365756 14381943
04 Account Receivable 1522647 1716300
05 Net Fixed Assets 79563031 83123019
06 AverageTotal Assets 103716875 99190978
07 CurrentLiability 22673345 26247706
08 Non-CurrentLiability 62186210 55459229
19 Total Equity 25069232 15798027
10 Total liability 84859555 81706935
11 AverageCommon Equity 20433630 17207543
12 AverageShares outstanding 1185300 1072800
13 AverageInventory 1534639 1760710
Summaryof Profit & Loss Statement
(AmountinThousands)
No. Items Year 2013 Year 2012
14 Net Sales 50128936 30626520
15 Gross profit 22121031 9860747
16 InterestExpenses 8669569 10703246
17 Net Income 5497105 (2934575)
18 EBIT 8383952 (3951794)
19 Cost of Goods Sold 28007905 20765773
Current Price of Share
20 CurrentMarket Price per Share 34.32 -

12. Financial Ratios and Their Analysis
Liquidity Ratios
1. CurrentRatio
2. Quick Ratio
3. Cash Ratio
Assets Management Ratios
4. Account Receivable
5. AverageCollection Period
6. Inventory Turnover
7. Days in Inventory
8. Total Assets turnover
Debt Management Ratios
9. Debt Ratio
10.Debt to Equity ratio
11.Times-interest Earned Ratio
Profitability Ratios
12. Gross ProfitMargin
13. Net Profit Margin
14. Return on Investment/Assets
15. Return on Equity
Market/Book Ratios
16. Earnings per Share
17. Price/Earnings Ratio
18. Book Value per Share

13. Liquidity Ratio
Current Ratio
 Formula
Current Assets
Current Liabilities
In Times
Ratio Year 2013 Year 2012
CurrentRatio 1.34 0.55
Analysis:
Year 2013 has the high ratio 1.34 than the 0.55 in 2012. Generally,
acceptable current ratio is 2. It is better to close two, since the company
improved this currentratio compare to last year, that’s mean, company faced less
financial difficulty to meant Current Liability in the 2013 year.
Acid Test /Quick Ratio
 Formula
Current Assets - Inventory
Current Liabilities
In Times
Ratio Year 2013 Year 2012
Quick Ratio 1.28 0.48
Analysis:
The Quick Ratio, higher the better. The Company improved quick ratio in
2013 to 1.28 as compare to 0.48 in 2012. The upward trend leads a better

14. position in comparison to the last year. That means the company has a better
liquidity position to paying debtors.
Cash Ratio
 Formula
Cash
Current Liabilities
In Times
Ratio Year 2013 Year 2012
Cash Ratio 0.20 0.09
Analysis:
Cash Ratio 1:1 is acceptable, in somecountries a cash ratio of not less than
0.5 is considered as acceptable. In 2013 company has improved cash ratio to 0.20.
Itis lower fromindustry average, butbetter than the last year by 0.155, itseems
the efficiency of Cash management improved than last year.
Assets Management Ratios
Account Receivable Turnover
 Formula
Net Credit Sales
Account Receivables
In Times
Ratio Year 2013 Year 2012
Account Receivable turnover 32.92 17.84

15. Analysis:
Accounts receivable turnover is indication of the quality of credit sales and
receivables. Higher efficiency is favorable from a cash flow standpoint. In 2013
Company’s A/R turnover ratio is 32.92, it is higher as compare to previous year to
17.84 times. The accounts receivable turnover ratio of 10 is good, As you can see,
Engro’s turnover is almost 33. This means that Engro collects his receivables
about 33 times in a year, the company is too restrictive in its credit and collection
policies and not extending credit to enough customers.
Accounts ReceivableTurnover in Days
 Formula
365 days
Accounts receivable turnover
In Days
Ratio Year 2013 Year 2012
AverageCollection Period 11 20
Analysis:
In this particular case, decreased in collection period form 20 days in 2012
to 11 days in 2013, it’s a better sign, the industry average collection period is
around 45 days. In 2013 ratio is much satisfactory period. Lower of collection
period represent the better credit policy and efficient collection method of
company.
Inventory Turnover
 Formula
Cost of Goods Sold
Average Inventory

16. In Times
Ratio Year 2013 Year 2012
Inventory Turnover 18.25 11.79
Analysis:
Company increased inventory turnover in 2013 to 18.25 as compared to
11.79 in year 2012. The Company showed it improving efficiency in inventory
management. The higher trend to inventory represents that, the company has
invested significant concentration to increased liquidity and profitability. This also
represents the company procurement, supplier relation and production
efficiency.
Inventory Turnover in Days
 Formula
Day in inventory (365)
Inventory Turnover
In Days
Ratio Year 2013 Year 2012
Inventory Turnover in Days 20 31
Analysis:
Inventory is an expensive for a company to keep, maintain, and store.
Companies also have to be worried about protecting inventory from theft and
obsolescence. Engro fertilizer’s Inventory turnover ratio in 2013 is 20 days which
is lower than the last year to 31 days. This ratio is lower the better, this means
that the company will turn his inventory into cash in the next 20 days. The
average days to convert inventory into cash are 45 days and lower the better.

17. Total Asset Turnover
 Formula
Net Sales
Average Total Assets
In %
Ratio Year 2013 Year 2012
Total Assets Turnover 48 31
Analysis:
Total Assets Turnover ratio shows the better development trend as
compare to last year . Company’s Total assets turnover ratio in 2013 is 48% this
ratio is improved as compared to 31% in last year .This indicates that the engro
fertilizer generates 48 paisa in net sales for every rupee invested in assets. Ratio is
not efficient with its use of assets the average ratio is 2.
Debt Management Ratios
Debt Ratio/ Total Debtsto Assets
 Formula
Total Liabilities
Total Assets
In %
Ratio Year 2013 Year 2012
Debt Ratio 77% 84%

18. Analysis:
Each industry has its own benchmarks for debt, but 35% to 40% is
reasonable ratio. The Company’s debt ratio Compare to last year is lower from
84% to 77%, lower the better position. It is higher leverage percentage from
standard but company improved debt ratio as compared to 84% in 2012. That
means, the company getting funds from other resources except debt.
Debt to Equity Ratio
 Formula
Total Debt
Stockholder’s Equity
In %
Ratio Year 2013 Year 2012
Debt to Equity Ratio 3.38 5.17
Analysis:
Lower values of debt-to-equity ratio are favorable indicating less risk.
Higher debt-to-equity ratio is unfavorable because it means that the business
relies more on external lenders thus it is at higher risk, The Engro fertilizer’s debt
to equity ratio is 3.38 which is lower as compared to 5.17 in year 2012. That
shows the company declined external lenders debt and acquired funds from
equity choice.

19. Interest Coverage Ratio (Times Interest Earned)
 Formula
EBIT
Interest Expense
In Times.
Ratio Year 2013 Year 2012
Times-InterestEarned Ratio 1 (0.37)
Analysis:
The ratio indicates how many times a company could pay the interest with
it’s before tax income, so obviously the larger ratios are considered more
favorable than smaller ratios. The Engro Fertilizer’s times-interest earned ratio is
1 in 2013 it is better as compare to (0.37) in last year. The times- interest earned
ratio in 2013 is below the industry average which is 4. Engro Fertilizer cannot
afford to pay additional interest expenses.
Profitability Ratios
Gross Profit Margin
 Formula
Gross Profit
Net Sales
In %
Ratio 2013 2012
Gross ProfitMargin 44.1 32.2
Analysis:
Higher value indicates that more paisa are earned per rupee of revenue
which is favorable because more profit will be available to cover non-production

20. costs. Engro fertilizer’s Gross profit margin is 44.13% in 2013, it is increased from
32.20% in comparative year. This is a high ratio than the industry average of 26%.
This means that after Engro Fertilizer pays off his inventory costs, company still
has 44.13 percent of his sales revenue to cover his operating costs.
Net Profit Margin (Return on Sales)
 Formula
Net Income
Net Sales
In %
Ratio 2013 2012
Net ProfitMargin 10.97 (9.58)
Analysis:
The profit margin ratio directly measures what percentage of sales is made
up of net income. The company’s net profit margin ratio is 10.97% in 2013, it is
improved as compared to (9.58%) in 2012. Company managed to convert 10.97%
of its sales into net income, it is less than the average which is 13.7% but
improved than the last year.
Return on Assets/ Investment
 Formula
Net Income
Average Total Assets
In %
Ratio 2013 2012
Return on investment 5 (3)

21. Analysis:
It only makes sense that a higher ratio is more favorable to investors
because it shows that the company is more effectively managing its assets to
produce greater amounts of net income. The current return on assets ratio is 5%
increased as compared to (3%) in previous year. Itshows theevery rupee invested
in assets during the year produces 5 paisa. It is less than the average but
improved from last year.
Return on Equity
 Formula
Net Income
Equity
In %
Ratio 2013 2012
Return on Equity 26.9 (17.1)
Analysis:
Engro fertilizer’s return on equity ratio is 26.90% it is satisfactory in terms
of value of return and also improved to (17.1%) in lastyear. This means that every
rupee of common shareholder's equity earned about 26.9 paisa in 2013. This
indicates that The Engro fertilizer is a growing company.
Market/Book Ratios
EarningsPer Share
 Formula

22. Net Income –Dividends Preferred stock
Average Common Shares Outstanding
Rs.
Ratio 2013 2012
Earnings Per Share 4.63 (2.74)
Analysis:
As you can see, Quality's EPS for the year of 2013 is 4.63. It is increased to
(2.74) in 2012. This means that , each share would receive Rs.4.63. Higher
earnings per share is always better than a lower ratio because this means the
company is more profitable and the company has more profits to distribute to its
shareholders.
Price/EarningsRatio
 Formula
Current Market Price Per Share
Earnings Per Share
In Times
Ratio 2013 2012
Price/Earnings Ratio 7.25 (12.52)
Analysis:
P/E ratio is a very useful tool for financial forecasting. It gives information
about the amount that the investors are willing to invest in the company to earn
each rupee. Engro Fertilizer’s P/E is 7.25 in 2013, this is not match to industry
average but upward to (12.52) in 2012. This shows the market is willing to pay
about Rs.7.25 for every Rupee in earnings.

23. Book Value Per Share
 Formula
Stockholders Equity- Preferred Stock
Common Shares Outstanding
Rs.
Ratio 2013 2012
Price/Earnings Ratio 19.32 14.73
Analysis:
The company’s BV is 19.32 in 2013 which is considerably lower than the
industry average, but it is higher than the previous year.