AUGUST 2010
The Pakistan Credit Rating Agency Limited
RATING REPORT
ENGRO CORPORATION
LIMITED
(FORMERLY ENGRO
CHEMICAL PAKISTAN
LIMITED)
The Pakistan Credit Rating Agency Limited
HOLDING COMPANY
August 2010 www.pacra.com
RATING REPORT CONTENTS PAGE
Summary Report
1
Detailed Report:
Ratings 2
Profile 2
Ownership 3
Governance 3
Management 5
System and Controls 6
Performance 6
Capital & Funding 9
ANNEXURES
Financials I
Glossary II
Standard Rating Scale III
ENGRO CORPORATION LIMITED
The Pakistan Credit Rating Agency Limited
HOLDING COMPANY
PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to
any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any
means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.
Tel: 92 (42) 35869504 Fax: 92 (42) 35830425 www.pacra.com
RATINGS (AUGUST 2010)
ENGRO CORPORATION LIMITED
[ECL]
* Assigned to Engro Chemical Pakistan Limited
May May June June May
2006 2007 2008 2009 2010
AA
AA-
A+
AA+
FINANCIAL DATA PKR (mln)
1H10* Dec-09* Dec-08*
Total Assets 152,699 132,105 80,802
Equity 31,942 29,344 23,548
Long Term
Borrowings 89,244 84,142 40,768
Current Borrowings 14,329 3,678 4,953
Net Turnover 33,724 58,152 40,937
EBITDA 6,898 9,018 8,072
ROE % 10.0 14.9 17.9
EBITDA Interest
Cover (X) 4.1 4.1 4.6
Total Debt/ (Total
Debt + Equity) 76.4 75.0 66.0
* Consolidated figures for Engro Group
ANALYSTS
Arsalan Ahmed
+92 42 35869504
Jhangeer Hanif
+92 42 35869504
TFCS ISSUE
ECL is in the process of issuing TFCs of
PKR 4,000mln (including a green shoe
option of PKR 2,000mln). The instrument
will have a tenor of 3 years, carrying fixed
profit rate of 14.5% p.a., paid semi
annually. The principal payment will be in
the 3rd year or early through put option. In
case put option is exercised the investor will
have to pay a service charge of 2% on the
principal. The TFC is secured by way of
first ranking floating charge over all the
present and future movable properties
(including investments) of Engro
Corporation Limited but excluding present
and future trademarks and copyrights of
ECL and excluding its shares in Engro
Energy Limited and Engro Polymer &
Chemicals Limited.
RATING RATIONALE AND KEY RATING DRIVERS
The ratings reflect ECL’s articulated corporate center mandate aimed at creating value in excess of the
sum of its parts. The salient features of this mandate include development of a central pool of executive
management capable of managing independent businesses, designation of a group CEO, strengthening
of the governance framework with independent directors, and a comprehensive framework for
monitoring the performance of subsidiaries. The ratings incorporate ECL’s diversified investment
portfolio including a stable, indeed growing, fertilizer presence, wherein business risk is low. Although
some of the company’s subsidiaries are currently in the growth phase, a sustained dividend stream from
established enterprises supplements ECL’s financial profile.
These ratings are dependent upon the company’s ability to implement a robust mechanism for providing
strategic guidance to all group companies while maintaining an effective control environment.
Moreover, timely completion of the urea expansion project without significant delays, coupled with
growth and resultant profitability in other businesses, remains important. Meanwhile, effective
management of the group’s financial risk, especially during the period prior to the planned gradual de-
leveraging, remains critical for the company’s ratings.
ASSESSMENT
Incorporated in 1965, Engro Chemicals Pakistan Limited (ECPL) was renamed as Engro Corporation
Limited (ECL) on January 01, 2010, following a demerger of the fertilizer business to Engro Fertilizer
Limited (EFL). All assets/ liabilities of the fertilizer business have been transferred to Engro Fertilizer
with Engro Corporation carrying equity investments in subsidiaries and associates at cost. Engro
Corporation is now the holding company for all strategic investments including fertilizer operations.
Engro Corporation has irrevocably and unconditionally guaranteed to each secured party, as defined
under the pertinent finance documents, punctual performance by Engro Fertilizer of all its obligations,
and undertakes that whenever Engro Fertilizer does not pay any amount when due, it must immediately,
on demand by the inter-creditor agent (National Bank of Pakistan), pay that amount as if it were the
principal obligor in respect of that amount.
As a holding enterprise, ECL aims to benefit from a more focused approach towards strategic
management and enhanced governance. The company generates a monthly MIS – Dashboard –
providing a structured breakdown of information on predetermined key indicators for each group entity.
The company has also formulated an Executive Committee (ExCom), comprising Group CEO, Group
CFO, Head Human Resource and all designated CEOs of subsidiaries/ associates. ExCom’s primary
function is to assess managerial qualities, while augmenting decision-making and consensus building.
ECL’s investment book (cost: PKR 25,352mln) include interests in companies engaged in (i) fertilizers
(Engro Fertilizer Limited – 100%), (ii) food & allied (Engro Foods Limited – 100%, (iii) power
production (Engro Energy (Pvt.) Limited – 95% and Engro Powergen (Pvt.) Limited – 100%), (iv)
commodity export/ import (Engro Eximp (Pvt.) Limited – 100%), (v) automation & controls
engineering (Avanceon Limited – 63%) (vi) PVC resins (Engro Polymer & Chemicals Limited – 56%)
and (vii) Storage (Engro Vopak Terminal Limited – 50%).
Engro Fertilizer Limited is currently the second largest producer of urea in the country (~22% as per
designed capacity). EFL, at present, is undergoing expansion (Enven 1.3), with added capacity of
1,300,000tons expected to come online, with some delay, in 4Q10. Engro Foods Limited, engaged in the
manufacture of dairy products, is currently in a growth phase and reported a loss of PKR 179mln for
1H10. Engro Energy Limited, a 217MW combined cycle power plant, initiated commercial production
in March 2010, as per the revised plan, posted a profit of PKR 379mln for 1H10. Engro Eximp (Pvt.)
Limited, engaged in commodities import/export, reported a profit of PKR 973mln in 1H10. Avanceon
Limited, acquired in 2007, provides process control solutions to industrial units and posted a loss of
PKR 94mln in 1H10. Engro Polymer & Chemicals Limited, the only listed investment, has recently re-
commissioned its VCM production (backward integration) after a lag due to fire incident in December.
The plant is expected to reach its optimum capacity by end-3Q10. The company reported a loss of PKR
449mln in 1H10. Engro Vopak Terminals Limited reported a profit of PKR 518mln in 1H10.
The company envisages continued focus on three core sectors: 1) Fertilizer, 2) Food and 3) Energy,
while diversifying into other lucrative business opportunities. The role of ECL will be limited in terms
of operational decision making but more on the lines of oversight and providing strategic direction. In
terms of profitability, the company’s income stream would stem from dividends received from its
investments and, therefore, expected to be highly correlated to the performance of group entities and
their ability to generate positive cash flows. Total subsidiary income in 2009 amounted to PKR
1,885mln (2008: 2,605mln) emanating from Engro Eximp (Pvt.) Limited (PKR 1,435mln) and Engro
Vopak Terminal Limited (PKR 450mln). Going forward, Engro Energy is expected to contribute
towards ECL’s dividend income, followed by Engro Fertilizer in 2011. Engro Polymer would follow
suit once its VCM plant is completely functional.
With the issue of TFCs of PKR 4,000mln, ECL’s standalone capital structure would experience
leveraging. This adds to financial risk profile of the group as its consolidated debt (including short term
debt)has crossed PKR 100bln mark by end-June10 with very high level of gearing. Nevertheless, mainly
with the commissioning of Enven 1.3, the debt is expected to gradually decrease over the medium term.
PROFILE
Engro Corporation Limited (formerly Engro Chemicals Pakistan Limited) is listed on all three stock
exchanges of the country. Dawood Group holds a majority stake (~48%) in ECL. ECL has a thirteen
member board. The chairman of the board is Mr. Hussain Dawood, a well known professional veteran. The
CEO, Mr. Asad Umar, an MBA with significant professional experience, has been associated with the
company for long. Apart from the CEO, there is equal representation on the board: four members from the
Dawood Group, four from the company’s management and four independent directors.
Entity NEW PREVIOUS*
Long Term AA AA
Short Term A1+ A1+
Secured
TFC I
PKR4,000mln
AA
-
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HOLDING COMPANY
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1. RATINGS
Very high credit
quality
ENTITY NEW PREVIOUS* Long Term AA AA
Short Term
TFCs PKR 4,000mln
A1+
AA
A1+
-
* Assigned to Engro Chemical Pakistan Limited.
2. PROFILE
ECPL renamed as
Engro Corporation
Limted (ECL)
A diversified
conglomerate
Significant fertilizer
presence
2.1 Incorporated in
1965, Engro Chemical
Pakistan Limited was
renamed as Engro
Corporation Limited
(ECL) on January 01,
2010, following a
demerger of the fertilizer
business to Engro
Fertilizer Limted (EFL).
ECL is listed on all the
stock exchanges of the
country. The share price
movement has been largely consistent with the market trend since the reopening of trade
in December 2008. The chart demonstrates ECL’s strong capacity to raise sizable capital
in times of any contingency, as evidenced in the company’s history as well. ECL’s head
office is located in Karachi.
2.2 ECL is a holding company mainly responsible for overseeing and managing the
performance of its subsidiaries and associates, covering business interests in fertilizers,
food and commodities, power, engineering, chemicals and storage. In order to facilitate
the transition towards the holding company structure, the company sought structural
recomendations from McKinsey & Company; a reputed management consultancy firm.
As a result of the transition, the ECL aims to seek benefit from a more focused approach
towards strategic management and enhanced governance. The chart below displays ECL’s
subsidiaries and joint venture/ associated companies along with the company’s ownership
and investment (at cost) in each:
June June April May May June June May
2003 2004 2005 2006 2007 2008 2009 2010
AA
AA-
A+
AA+
70% 30%
Engro Foods Supply Chain
(Pvt.) Ltd.
100%
(PKR 523mln)
Wh
oll
y
ow
ned
sub
sid
arie
s
Su
bsi
dar
ies
Engro Powergen Ltd.
100%
(PKR 387mln)
Engro Vopak Terminal
Ltd. (Joint Venture)
50%
(PKR 450 mln)
Engro Polymer &
Chemicals Ltd.
56%
(PKR 3,651mln)
Avanceon Ltd.
63%
(PKR 382mln)
Engro Energy Ltd.
95%
(PKR 3,040mln)
Engro Corporation Limited
as at Jun10
Engro Foods Ltd.
100%
(PKR 6,216mln)
Engro Fertilizers Ltd.
100%
(PKR 10,739mln)
Engro EXIMP Ltd.
100%
(PKR 480mln)
Engro Management
Services Ltd.
100%
(PKR 2.5mln)
-
80
160
240
320
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Pri
ce (P
KR
)
Vol
ume
(Tho
usan
ds)
Stock Price - Volume chart
Volume (L.H.S.) Closing price (R.H.S.)
KSE - 100 Linear (Closing price (R.H.S.))
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HOLDING COMPANY
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38%
10%
3%3%
18%
28%
48%
Shareholding Pattern as at Dec09
Dawood Hercules Chemicals Ltd Associated Companies
Directors & Related Parties Public Sector Corporations
Financial Institutions Others
2.3 ECL and its subsidiaries have won numerous awards from the Karachi Stock
Exchange (KSE) and the Management Association of Pakistan. In addition, the company
attained 3-Star rating in Environment Performance benchmarking carried out by British
Safety Council as well as Investor Relation Award by the CFA association of Pakistan. In
addition, Engro is ranked as the top Pakistani company for corporate social responsibility
in the first Asian Sustainability Rating 2009.
3. OWNERSHIP
Majority owned by
Dawood Group
Dawood Group – a
diversified business
group
3.1 Dawood Group (DG) holds a
majority stake in ECL through direct
and indirect shareholding. DG, a
distinguished and trusted name in
Pakistan, traces its origins back to
almost a century ago. The current
shareholding pattern of the company
is shown in the graph.
3.2 Dawood group is primarily
engaged in the business of fertilizer,
textiles, technology business and
insurance. The journey of the group
started in 1949 with the foundation
of first group company -
Lawrencepur Woollen & Textile Mills. The group made inroads into the fertilizer sector
by setting up Dawood Hercules Chemicals Limited (DAWH) in 1968. DAWH, listed on
Lahore and Karachi Stock Exchange, has a nameplate capacity of 445,500MT p.a. with
approximately 115% capacity utilization at end Dec09. The company manages one of the
highly recognized brands among fertilizer community – Bubber Sher. With the passage of
time, some other group concerns – Dawood Cotton Mills Limited, Burewala Textile Mills
Limited, Central Insurance Company, Dawood Corporation (Pvt.) Limited, and Dilon
Limited were also founded. In 2004, all the textile companies of the Dawood group were
merged in a single entity - Dawood Lawrencepur Limited. During the same year, the
group also acquired majority stake in Inbox Business Technologies (Pvt.) Limited, an
information technology firm. The group runs a small brokerage house by the name of
Elixir Securities Pakistan (Pvt.) Limited.
4. GOVERNANCE
Experienced BoD
members with
diverse professional
background
Four independent
directors
Strong committees
structure
4.1 ECL’s board of directors comprises thirteen members including the CEO. Apart
from the CEO, there is equal representation on the board: four members from the Dawood
Group, four from the company’s management and four independent directors. The
pertinent details of all board members are given as follows:
No. Name Key Experience Representative Committees
1 Mr. Hussain Dawood
[MBA – Northwestern
University, USA]
Chairman – Engro Corporation Limited
Chairman – Dawood Hercules Chemicals Limited
Chairman – Pakistan Poverty Alleviation Fund
DG
Chairman - Board
Compensation
Committee
2
Mr. Samad Dawood
[BSc – University College
London, UK]
CEO – Dawood Corporation Limited
Chairman – Central Insurance Company Limited
Director – Sui Northern Gas Pipelines Limited
DG Audit Committee
3
Mr. Shahzada Dawood
[LLB & MA Global Textile
Marketing – University of
Philadelphia, USA]
CEO – Dawood Hercules Chemicals Limited
Chairman – Dawood Lawrencepur Limited
Director – National Mines (Pvt.) Limited
Director – Sach International (Pvt.) Limited
DG Board Compensation
Committee
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4.2 The board has two committees namely Board Compensation Committee and Board
Audit Committee.
4.2.1 Board Compensation Committee, comprising four members, is headed by Mr.
Hussain Dawood. The committee is responsible for decisions relating to performance
evaluation, development and succession of CEOs and top Executives. Also, the committee
ensures human resource policies are aligned to deliver robust talent management process
across various Engro Companies while establishing group wide standards /policies.
4.2.2 Board Audit Committee, comprising four members, is headed by Mr Shabbir
Hashmi. The committee assists the board in fulfilling its oversight responsibilities,
primarily in reviewing and reporting financial and non-financial information to
shareholders, systems of internal control and risk management and the audit process. It
has access to all information from management and can consult directly with the external
auditors or their advisors as considered appropriate. The CEO and CFO attend the
meetings by invitation. The committee also privately meets with the external auditors at
least once a year. After each meeting, the chairman of the committee reports to the Board.
4 Mr. Isar Ahmed
[FCA & MA Economics]
Director Strategy and Business - Dawood Hercules
Chemicals Limited
Ex Head of Business Unit – Reckitt Benckiser
Ex MD – Haleeb Foods Limited
DG Audit Committee
5 Mr. Asad Umar
[MBA – Institute of Business
Administration]
CEO – Engro Corporation Limited
CEO – Engro Fertilizers Limited
Director State Bank of Pakistan
Director – Pakistan Institute of Corporate Governance
Employee -
6
Mr. Ruhail
Mohammad
[CFA & MBA – Institute of
Business Administration]
Group CFO
Ex CFO – Trans Gulf Finance Corporation
Ex CEO – Sigma Leasing (Pvt.) Limited
Employee -
7 Mr. Khalid Mansoor
[Chemical Engineer]
CEO – Engro Energy Limited
CEO – Engro Powergen Limited Employee -
8
Mr. Asif Qadir
[Chemical Engineer –
Columbia, USA]
CEO – Engro Polymer & Chemicals Limited
Director – Engro Powergen Limited
Director – Engro Energy Limited
Employee -
9
Mr. Khalid Subhani
[Chemical Engineer & MBA
– University of Berkley,
USA]
Designated CEO – Engro Fertilizer Limited
Director – Engro Polymer & Chemicals Limited
Director – Engro Energy Limited
Employee -
10
Mr. Shabbir Hashmi
[MBA – JF Kennedy
University, USA]
Private Equity Consultant – Actis Assets Limited Independent
Chairman – Audit Committee
Board Compensation
Committee
11
Mr. Arshad Nasar
[MA Economics & Political
Science]
Director – Pakistan Industrial Development
Corporation
Ex CEO & chairman – Oil & Gas Development Company Limited
Ex MD – Caltex Oil Pakistan
Independent Board Compensation
Committee
12
Mr. Ali Ansari
[BA Economics – Richmond
College, UK]
Director – National Clearing Company of Pakistan
CEO – Dewan Drilling Limited
Ex CEO – AKD Securities
Ex COO – Credit Lyonnais Securities
Independent Audit Committee
13
Mr. Saad Raja
[MA Management – London
Business School, UK] Asset Management – Industrial Bank of Japan Independent -
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5. MANAGEMENT
Highly professional
management
Principal operation
committees
5.1 The management of ECL lies
in the hands of five executives
namely Mr. Asad Umar (CEO), Mr.
Ruhail Muhammad (Group CFO),
Mr. Tahir Jawaid (Human Resource
& Public Affairs), Mr. Naveed
Hashmi (Corporate Affairs) and Mr.
Andalib Alavi (General Manager
Legal).
5.2 Mr. Asad Umar, CEO, an
MBA from the Institute of Business Administration, Karachi, has prior experience of over
20 years with Engro Group. He has also previously served on the boards of the Oil and
Gas Development Company, Karachi Stock Exchange and Pakistan State Oil. Currently,
he is the chairman of all Engro subsidiaries and joint ventures as well as the chairman of
the Pakistan Chemical and Energy Sector Skill Development Company. In addition, Mr.
Umar serves on the board of the State Bank of Pakistan as well as the Pakistan Business
Council. He was awarded the Marketing Association of Pakistan Corporate Award of
Excellence in March 2010. Mr. Ruhail Muhammad, CFA and a MBA in Finance (gold
medalist) from the Institute of Business Administration, is currently the group CFO as
well as a member of the boards for all Engro subsidiaries. Ruhail joined Engro Polymer
and Chemicals Limited in 1998, before which he worked for Sigma Leasing Corporation
Limited and TransGulf Finance Corporation. Mr. Tahir Jawaid is responsible for
overseeing all human resource activities across ECL as well as its subsidiaries. He holds a
Master of Science in Industrial Engineering from the University of Houston, USA and has
previously worked in the US in various capacities for system and design engineering
companies. Mr. Naveed A. Hashmi, GM Corporate Audit, joined Engro in 1985 after
having worked in the Pakistan Tobacco Company Limited. An MBA from the Institute of
Business Administration, Mr. Hashmi currently manages the internal audit function of the
company. Mr. Andalib Alavi is a Bar-at-Law from Lincolns Inn as well as an LLB from
the London School of Economics, UK. He is responsible for overseeing all legal affairs of
Engro group companies. Mr. Alavi has prior experience with Surridge & Beecheno and
Abraham & Sarwana before becoming a part of Engro as a legal advisor in 1992.
5.3 ECL’s quality of management remains its core strength, and is duly recognized for
its highly professional and long-term outlook. The top management is highly qualified and
well experienced in their respective fields. ECL has an annual appraisal process in place,
which assesses employee performance against agreed criteria and identifies training
requirements, if any, to enhance overall standard of performance. At executive level,
leadership qualities will be assessed through the Executive Committee (ExCom)
evaluations. ECL maintains its compensation packages in line with the minimum 75th
percentile in the corporate sector of Pakistan as ascertained by the annual Watson Wyatt
Compensation Survey.
5.4 The company has three principal operation committees, a) Executive Committee
(ExCom), b) Corporate Health, Safety and Environment Committee and c) Compensation,
Organization and Employee Development Committee – all headed by the Chief Executive
Officer. The following table gives an overview of the functions of these committees:
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6. SYSTEMS &
CONTROLS
Strong control
environment
SAP
6.1 ECL maintains an effective control environment with clear reporting lines and
well defined policies and procedures. The review and accountability function runs through
the entire organizational structure. The role of the company, as a holding entity, is to
provide for and sustain the activities of its investments as a whole. Therefore, to maintain
proper monitoring and thorough oversight of its strategic investments, ECL generates a
monthly MIS for its board members – Dashboard – that provides a structured breakdown
of information on predetermined key indicators for each group entity. From a holding
company perspective, this enables the management at ECL to review/ monitor the
performance of each individual subsidiary independently, in turn, facilitating decision
making at business as well as corporate level. Further, the company is planning to launch
an Enterprise wide Risk Management (ERM) initiative following the completion of the
urea expansion project in order to assess crucial firm wide risks and their sources.
6.2 ECL has SAP ERP (Systems, Applications and Products) in place. Currently, the
system covers financial, accounting and human resource applications of both ECL and
EFL. ECL is working towards enhancing the effectiveness of this system in order to fully
realize the benefits emanating from complete implementation. The technical services for
the implementation of the SAP ERP are provided by IBM Global Services whereas the
software itself has been developed by SAP AG (Malaysia – Regional Office). IBM Global
Services is responsible for ensuring the smooth transition from the existing system; the
full implementation of which is expected to be completed by the end of 2010. Going
forward, ECL intends to enhance the scope of SAP capabilities across key subsidiaries.
6.3 ECL’s in-house internal audit function is responsible for evaluating financial and
operational procedures to ensure adequacy of internal controls, reporting directly to the
audit committee for all critical issues.
7. PERFORMANCE
Significant holding
in robust fertilizer
sector
Continued focus on
three core sectors
7.1 As a holding company, the assets of ECL comprises equity stakes held at cost
price in its subsidiaries/ associates with a total investment book of PKR 23,730mln of
which PKR 10,740mln
constitutes ECL’s holding in
EFL. The main income
component for ECL is
dividends received from its
investments. A graph
illustrating historic dividend
patterns is given. The total
investment income reported
for 2009 amounted to PKR
1,885mln (2008: PKR
2,605mln) emanating from
Engro Eximp (Pvt.) Limited
(2009: PKR 1,435mln) and
Engro Vopak Terminal
Limited (2009: PKR 450mln). Dividend for 1H10 is only from Engro Vopak with other
investments yielding dividends towards the end of 2010. Meanwhile, a group-wide picture
Committee Members Functions Frequency
Executive Committee
(ExCom)
Asad Umar – CEO ECL
Ruhail Mohammad – CFO ECL
Tahir Jawaid - VP HR
All designated CEO's of subsidiaries
Ali Akbar - Secretary
Responsible for addressing appropriate operational issues plus
managerial appointments at subsidiary/ associate level. The
committee operates as an advisory body for the Group CEO, and
helps in bringing synergy amongst the various businesses within
the Group, while augmenting decision making and consensus
building.
Quarterly
Corporate Health, Safety and Environment
(HSE) Committee
Asad Umar – CEO ECL
All designated CEOs of subsidiaries
Responsible for providing leadership and strategic guidance on
Health, Safety and Environment improvement initiatives while
ensuring compliance with regulatory standards and international
benchmarks.
Quarterly
Compensation, Organization and Employee
Development (COED) committee
Asad Umar – CEO ECL
All designated CEOs of subsidiaries
Responsible for the review of Compensation, Organization and
Employee Development matters of all people excluding employee
directors and senior executives.
Quarterly
0
500
1,000
1,500
2,000
2,500
3,000
FY07 FY08 FY09 1H10
PK
R in
mln
Dividend History
Engro Vopak Terminal Ltd. Engro Polymer & Chemicals Ltd.
Engro Eximp (Pvt.) Ltd.
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of each entity’s respective revenue
and profitability for the six months
ending June10 is shown.
7.2 Going forward, the
company envisages continued focus
on three core sectors: 1) Fertilizer,
2) Food and 3) Energy, while
diversifying into other lucrative
business opportunities such as
chemicals, storage services,
business automations, import/
export of commodities. The role of
the holding company itself will be
limited in terms of operational
decision making but more on the
lines of oversight and strategic
direction. In terms of profitability,
the company’s income stream is
expected to be highly correlated to
the performance of group entities
and their ability to generate
positive cash flows. Although
some ventures of the company are
likely to remain non-earning in the
initial phase, they are expected to
develop a stable revenue stream
over the medium term; Engro
Energy is expected to contribute
towards ECL’s dividend income, followed by Engro Fertilizer in 2011. Engro Polymer
would follow suit once its VCM plant is completely functional.
SUBSIDIARY PERFORMANCE:
7.2.1 FERTILIZER: EFL, currently the second largest producer of urea in the country, is
in the business of manufacturing and marketing of fertilizers, registering a healthy bottom
line of PKR 2,012mln during 1H10. EFL markets urea under the brand name of Engro
Urea, MAP under the brand name of Zorawar, NPK under Zarkhez and DAP as Engro
DAP. EFL’s urea plant, with a capacity of 975,000tons per annum, is located at Dharki,
whereas NPK plant is situated at Port Qasim. EFL’s urea expansion project (Enven 1.3),
originally expected to commence commercial production by July 2010, has been
rescheduled to 4Q10. This is not expected to have a major impact on the budgeted project
costs, which stand at an estimated USD 1,050mln including USD 30mln impact of rupee
devaluation. However, any delay beyond Sep10 would result in shortfall of projected cash
flows depending upon the related extent. The management expects that the project would
enter commissioning phase by end-Sep10 and after satisfactory performance is achieved,
COD would be announced. At Jun10, EFL is projected to incur PKR 4,000-6,000mln
more to complete Enven1.3. This will be met through a combination of equity (profit
retention) and debt. EFL has available unutilized line of PKR 1,725mln from syndicated
facility, and cash & cash equivalent of around PKR 2,092mln. In addition, EFL has
financed its working capital at end-June10 through an amount which was taken out of loan
for the expansion project – this may be freed by utilizing committed short term credit
facility of approximately PKR 3,500mln. Meanwhile EFL, if need arises, may receive a
fresh injection from ECL after the parent completes issuance of its first TFC (PKR
4,000mln). The enhanced capacity (2,275,000 tons p.a.) is expected to increase EFL’s
market share to ~35% (currently 23%). Meanwhile, EFL would continue compensating
9,421
9,833
6,597
2,007
5,000
1,072 757
Revenues (PKR mln)
EFL
Engro Foods
EPCL
EPL/EEL
Engro Eximp
Engro Vopak
Avanceon
2,012
(179)
(449)
379
973
518
(94)
PAT (PKR mln)
EFL
Engro Foods
EPCL
EPL/EEL
Engro Eximp
Engro Vopak
Avanceon
The Pakistan Credit Rating Agency Limited
HOLDING COMPANY
ENGRO CORPORATION LIMITED (ECL) Page 8 of 10
AUGUST 2010 www.pacra.com
fall in production due to gas curtailment (currently: 7%) through price hike inline with
other industry players.
7.2.2 Engro Eximp (Pvt.) Limited (EEPL), a wholly owned subsidiary of ECL
established in 2002, is engaged in commodities export/import business. EEPL, for
marketing imported phosphatic fertilizers, would be using Engro Fertilizer Limited. This
means that EEPL would be carrying all inventories on its own books. The company
reported a profit of PKR 1,435mln in 2009 (1H2010: PKR 973mln).
7.2.3 FOODS: Engro Foods Limited, a wholly owned subsidiary established in 2005,
focuses on the dairy business. The company initially set up a processing plant in Sukkur
with milk storage capacity of 300,000 liters/day and UHT (ultra heat treatment) milk
processing capacity of 200,000 liters/day. In 2007, another plant was installed in Sahiwal
with a cost of PKR 3,000mln, having a processing capacity of 250,000 liters/day along
with capability of producing tea whitener. With the added production from this new plant,
the market share of the company in the UHT milk segment increased to 38%, making
Engro Foods the market leader in this respect (Nestle: 37%). Engro Foods has also
installed an advanced ice cream plant in Sahiwal provided by Tetra Pak Hoyer with a
production capacity of 8mln liters/annum; marketing its products under the brand name
‘Omore’. The company is currently in the growth phase and reported a loss of PKR
434mln in 2009. Subsequently, the company’s performance has improved with a total net
loss of PKR 180mln as of end June10 – with a profit of PKR 149mln posted by the dairy
segment for the same period. Engro Foods entered the juice segment in May10 with the
brand name of Olfrute initially in four flavors. The company has also made inroads into
the rice export market – exclusively focused upon basmati rice. The project, having a
capacity of 20,000mt per annum, is anticipated to commence commercial procurement
and production by November 2010, under the purview of Engro Food Supply Chain
Management (Pvt.) Limited, formed specifically for the purpose.
7.2.4 POWER: Engro Powergen (Private) Limited (EPL), a wholly owned subsidiary of
ECL, has been set up with an aim to act as a negotiation window for all initiatives of the
parent in the energy sector. The first outcome of ECL’s effort is Engro Energy Limited
(EEL), which was formed in 2006 to tap power generation opportunities. EEL has a
combined cycle power project with net output of 217 MW, based on low BTU and high
sulphur permeating gas from Qadipur gas field in Ghotki district. The project has a total
cost of USD 205mln and became operational in March 2010 as per the revised schedule.
EEL posted a profit of PKR 379mln for 1H10. Meanwhile, EPL has entered into a joint
venture with the Sindh Government, forming the Sindh Engro Coal Mining Company
(SECMC), for the mining, exploration and development of Thar Coal fields. The total
project cost (including a power plant of 1200MW) will be ~USD 3,000mln, of which
exploration cost is estimated to be around PKR 1,000mln. The exploration cost is
expected to be shared 60% by ECL and 40% by the Sindh government. A pre-feasibility
and environment impact assessment is currently underway and is expected to be
completed during 2H2010 (cost: USD 3-5mln). During Mar10, SECMC signed two MoUs
– one with Sindh Coal Authority for obtaining an exploration license and another with
PEPCO for supplying coal to PEPCO’s 1,200MW thermal power plant, subject to
availability of excess coal supply.
7.2.5 ENGINEERING: Avanceon (formerly Engro Innovative Automation &
Engineering (Pvt.) Limited) provides process control solutions to leading industrial units
in the country. In early 2007, EIAL acquired a 70% stake in Advanced Automation LP
(AALP), a company providing industrial solutions in automation controls and allied
services in the United States. To finance this transaction, ECL injected PKR 300mln. The
company reported a profit of PKR 24mln in 2009. Avanceon posted a loss of PKR 94mln
at end 1H10 though US operations were in profits (PKR 47mln).
The Pakistan Credit Rating Agency Limited
HOLDING COMPANY
ENGRO CORPORATION LIMITED (ECL) Page 9 of 10
AUGUST 2010 www.pacra.com
7.2.6 CHEMICALS: Engro Polymer and Chemicals Limited (EPCL) is mainly involved
in manufacturing, marketing and selling of PVC. EPCL carried out a USD 240mln
expansion and back integration project which came online in late 2009. The project
included setting up a new PVC plant, enhancing the manufacturing capacity to 150,000
tons per annum (current 100,000 tons per annum) and a backward integrated facility
(VCM) with a capability to produce other intermediary products and caustic soda.
Subsequent to commissioning of the project, a fire broke out in December 2009 in the
scrubber section of the company’s VCM plant, due to which it was shut down to limit the
losses. The VCM plant is currently in the commissioning phase – running at 70-80%
capacity. After installation of scrubber – expected to be done in Sep10 – the plant would
achieve full production capacity – 450tons/day (nameplate 600tons/day). EPCL, to finance
the cost overrun of ~PKR 2,500mln, made a right issue during April10 amounting PKR
1,430mln. The company reported a loss of 193mln in 2009 (1H10: loss of PKR 449mln).
7.2.7 STORAGE: Engro Vopak Terminal Limited (EVTL) is an equally owned joint
venture with Royal Vopak of the Netherlands. The facility comprises an integrated liquid
chemical jetty cum storage. The company has also set up LPG storage facility and has
exclusive rights to handle bulk liquid chemicals at Port Qasim. The company also added
Ethylene storage capacity in 1Q2009. EVTL posted a profit of PKR 917mln in 2009
(1H10: 518mln).
8. CAPITAL &
FUNDING
Assets/ liabilities
transferred to EFL
Corporate
guarantee to EFL
High quantum of
consolidated debt
TFCs in the offing
8.1 Following the demerger as
on January 01, 2010, all fertilizer
assets/ liabilities were transferred to
the balance sheet of EFL with ECL
carrying the equity investment in
subsidiaries at cost. Nevertheless,
following the demerger, un-
appropriated profits of ECPL
amounting to PKR 9,250mln, as
well as a cash & bank balance of
PKR 3,501mln at end Dec09, have
been retained on the books of ECL.
The capital structure of the
company, pre and post demerger are
given in the chart.
8.2 With the issue of TFCs of
PKR 4,000mln, ECL’s standalone capital structure would experience leveraging. The
group, with a consolidated debt (including short term borrowings) of ~PKR 103bln and a
debt-to-equity ratio of 76:24 at Jun 10 – excluding the comfort to be derived from the
ultimate parent’s (Dawood Hercules) low leveraged capital structure – remains highly
leveraged. Nevertheless, with the commissioning of Enven 1.3, the debt is expected to
gradually decrease over the medium term. In the meantime, the group’s ability to raise
requisite funding through capital and/or debt markets largely mitigates the associated
risks.
8.3 Engro Corporation has irrevocably and unconditionally guaranteed to each
secured party, as defined under the pertinent finance documents, punctual performance by
Engro Fertilizer of all its obligations and undertakes that whenever Engro Fertilizer does
not pay any amount when due, it must immediately, on demand by the inter-creditor agent
(National Bank Pakistan), pay that amount as if it were the principal obligor in respect of
that amount.
8.4 TFCs Issue: ECL is in the process of issuing TFCs of PKR 4,000mln (including
a green shoe option of PKR 2,000mln). TFCs would be primarily marketed among retail
-
25,000
50,000
75,000
100,000
125,000
150,000
Pre de-merger (consolidated) Dec 31,2009
Post de-merger (consolidated) June30, 2010
Post de-merger(stand alone)
PK
R (
mln
)
Capital Structure
Equity Borrowings
Planned
The Pakistan Credit Rating Agency Limited
HOLDING COMPANY
ENGRO CORPORATION LIMITED (ECL) Page 10 of 10
AUGUST 2010 www.pacra.com
investors and thereafter listed on the stock exchange. The proceeds of the issue are
expected to be utilized for ECL’s own working capital requirement with a major portion
being deployed in Engro Fertilizers. The salient features of the instruments are listed in
the following table.
Proposed TFCs
Issue size PKR 4,000mln (including green shoe option of PKR 2,000mln)
Tenor 3 years
Profit Rate 14.5% p.a.
Principal
Repayment
At the end of 3 years or early through Put Option. Incase the put option is exercised; the
investor has to pay service charges of 2% on the principal.
Security The TFC is secured by way of first ranking floating charge over over all the present and future movable properties (including investments) of Engro Corporation Limited but excluding
present and future trade marks and copyrights of ECL and excluding its shares in Engro
Energy Limited and Engro Polymer & Chemicals Limited.
Trustee IGI Investment Bank Limited
Analysts Arsalan Ahmed
+92 42 3586 9504
Jhangeer Hanif
+92 42 3586 9504
Disclaimer:
PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its
accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any
error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole
or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute
opinions, not recommendations to buy or to sell.
The Pakistan Credit Rating Agency Limited
Engro Corporation Limited (formerly Engro Chemical Pakistan Limited)
BALANCE SHEET (PKR in million)
For the year ending 30-Jun-10 1-Jan-10 31-Dec-09 31-Dec-08
Unaudited Split
A NON-CURRENT ASSETS
1 Operating Fixed Assets - Owned and Leasehold 86.03 54.64 69,517.51 33,395.76
2 Intangible Assets - - 122.70 122.86
3 Other Non-Current Assets - 2.79 331.69 354.89
Non-Current Assets 86.03 57.43 69,971.91 33,873.51
B INVESTMENTS
1 Associates / Subsidiaries
a. Equity 25,352.90 23,727.80 12,988.66 11,091.86
b. Debt Securities / Loans 241.86 - - -
25,594.77 23,727.80 12,988.66 11,091.86
1 Investment Property - - - -
2 Other Investments
a. Fixed Income/Money Market Funds 851.86 241.91 450.86 67.81
b. Term Deposit - - - -
851.86 241.91 450.86 67.81
Investments 26,446.63 23,969.71 13,439.51 11,159.67
C CURRENT ASSETS
1 Inventories
a. Stores and Spares - - 961.12 957.24
b. Stock-in-trade- raw material - - 303.99 1,142.83
finished goods - - 118.62 3,529.04
- - 1,383.72 5,629.11
2 Trade Receivables - - 2,514.43 261.51
3 Other Current Assets 65.67 225.08 1 2,444.52 1 7,668.66
4 Cash and Bank Balances 754.14 3,501.22 3,955.34 1,687.04
Current Assets 819.81 3,726.29 10,298.01 15,246.32
D TOTAL ASSETS (A+B+C) 27,352.47 27,753.43 93,709.44 60,279.50
E CURRENT LIABILITIES
1 Borrowings
a. Current portion of long term debt - - 830.70 94.93
b. Short term debt - 0.94 195.75 1,711.28
- 0.94 1,026.45 1,806.21
2 Trade Payables 161.44 151.53 593.37 840.72
3 Other Current Liabilities 113.82 - 4,673.55 3,034.11
5 Dividend Payable - 102.10 102.10 309.29
Current Liabilities 275.26 254.56 6,395.47 5,990.32
F NON-CURRENT LIABILITIES
1 Borrowings - - 58,565.35 27,756.71
2 Due to Associates - - - -
3 Other Non-Current Liabilities 0.66 0.90 1,860.38 3,448.39
Non-Current Liabilities 0.66 0.90 60,425.73 31,205.11
G NET ASSETS (D-E-F) 27,076.55 27,497.97 26,888.24 23,084.07
H SHAREHOLDERS' EQUITY
1 Ordinary Share Capital 3,277.37 2,979.43 2,979.43 2,128.16
2 Preference Share Capital - - - -
3 Share Premium Account 10,550.06 10,550.06 10,550.06 7,152.72
4 Revaluation Reserve
a. Fixed Assets - - - -
b. Investments - - - -
- - - -
5 Revenue Reserves 4,506.36 4,717.50 4,107.78 6,892.06
6 Unappropriated Profit 8,742.76 9,250.98 9,250.97 6,911.12
Shareholders' Equity 27,076.55 27,497.97 26,888.24 23,084.07
0.00
1 Foreign exchange forward contract
The Pakistan Credit Rating Agency Limited
Engro Corporation Limited (formerly Engro Chemical Pakistan Limited)
PROFIT & LOSS ACCOUNT (PKR in million)
For the year ending 30-Jun-10 31-Dec-09 31-Dec-08
Unaudited
A Turnover
1. UreaOwn Manufactured 16,136.46 15,508.82
2. DAPPurchased Product 14,035.06 7,808.38
- 30,171.52 23,317.20
B Operating Costs - (23,240.18) (17,120.64)
C Gross Profit - 6,931.34 6,196.56
D Operating Expenses
1 Administrative and General Expenses (80.39) - -
2 Selling and Marketing Expenses - (1,945.18) (1,657.82)
(80.39) (1,945.18) (1,657.82)
E Operating Profit / (Loss) (80.39) 4,986.17 4,538.75
F Income From Associates
1 Dividend 180.00 1,885.00 2,605.40
2 Share of Profit/(Loss) - - -
180.00 1,885.00 2,605.40
G Others
1 Profit/(Loss) on Sale of Assets - 23.60 69.30
2 Income from Investments - - -
3 Surplus / (Deficit) on revaluation - - -
4 Royalty Income * 127.74 - -
5 Other Income/ Expenses 93.32 (378.92) (520.56)
6 Exchange Gain/(Loss) - - 18.04
221.06 (355.32) (433.21)
H Profit / (Loss) before Financial Charges 320.67 6,515.85 6,710.93
I Financial Charges
1 Interest Income 147.64 19.67 2.59
2 Interest Expense (1.60) (1,320.58) (1,508.95)
146.04 (1,300.91) (1,506.35)
J Profit / (Loss) before Taxation 466.71 5,214.94 5,204.58
K Taxation (81.09) (1,257.70) (964.14)
L Net Income / (Loss) 385.62 3,957.25 4,240.43
M Unappropriated Profit/(Loss) Brought Forward 9,250.97 6,911.13 4,116.63
N Available for Appropriation 9,636.59 10,868.38 8,357.06
O Appropriations
1 Reserves - - (14.26)
2 Dividends
a. Stock (297.94) - -
b. Cash (595.89) (1,617.40) (1,431.67)
(893.83) (1,617.40) (1,431.67)
P Effect of change in Accounting Policy (+/-)
Q Unappropriated Profit Carried Forward 8,742.76 9,250.98 6,911.13
The Pakistan Credit Rating Agency Limited
Engro Corporation Limited (formerly Engro Chemical Pakistan Limited)
CASH FLOW STATEMENT (PKR in million)
For the year ending 30-Jun-10 31-Dec-09 31-Dec-08
Unaudited
A CASH FLOWS FROM OPERATING ACTIVITIES
1 Profit Before Tax 466.71 5,214.94 5,204.58
2 Adjustments for:
a. Depreciation/Amortization 7.93 672.43 653.73
b. Interest Expense/(Income) (146.04) 1,320.58 1,508.95
c. Others (+/-) - - -
(138.11) 1,993.01 2,162.68
EBITDA 328.60 7,207.95 7,367.26
3 Adjustments for other Non-Cash Charges/Items (256.52) (1,594.30) (2,474.80)
72.08 5,613.65 4,892.46
4 Changes in Working Capital
a. (Increase)/Decrease in Curent Assets (7.08) 2,466.18 (1,290.40)
b. Increase/(Decrease) in Curent Liabilities (Excl. Debt) (34.50) 695.58 (279.61)
(41.58) 3,161.76 (1,570.00)
Cash Generated from Operations 30.50 8,775.42 3,322.46
5 Financial Charges Paid (1.60) (758.95) (1,090.52)
6 Taxation Paid (41.56) (1,226.86) (574.98)
7 Others (+/-) (10.62) (250.72) (242.34)
(53.78) (2,236.53) (1,907.83)
Net Cash provided by Operating Activities (23.28) 6,538.89 1,414.62
B CASH FLOWS FROM INVESTING ACTIVITIES
1 Capital Expenditure (42.01) (36,352.36) (20,214.34)
2 Proceeds from sale of Fixed Assets 3.10 58.45 87.73
4 (Purchase)/Sale of Investments - (1,896.80) (3,327.38)
5 Income from Investments 416.51 1,973.18 2,656.88
6 Investment in Subsidiary/Associated Companies (1,625.10) - (910.00) *
7 Others - (450.00) (622.00) **
Net Cash (Used in)/Available From Investing Activities (1,247.50) (36,667.53) (22,329.11)
C Cash In/(Out) Flow Pre-Financing (1,270.78) (30,128.64) (20,914.48)
D CASH FLOWS FROM FINANCING ACTIVITIES
1 Proceeds from Issue of Ordinary Shares - 4,248.60 3,382.21
2 Dividends Paid (624.43) (1,833.62) (1,306.10)
3 Others (+/-) - 335.27 -
(624.43) 2,750.25 2,076.12
E NET DEBT (INCREASE)/DECREASE (1,895.21) (27,378.39) (18,838.37)
F OPENING NET (DEBT)/CASH 3,501.22 (27,808.08) (8,969.71)
G CLOSING NET (DEBT)/CASH 1,606.00 (55,186.47) (27,808.08)
H NET (DEBT)/CASH
1 Long-Term Loans/Finances - (58,565.35) (27,756.71)
2 Short-term Loans/Finances - (1,026.45) (1,806.21)
- (59,591.81) (29,562.92)
3 Cash & Cash Equivalents 1,606.00 4,405.34 1,754.85
1,606.00 (55,186.47) (27,808.07) *
Advance to Engro Eximp Private Limited**
Payment to Engro Foods Limited for acquisition of tax losses
The Pakistan Credit Rating Agency Limited
Engro Corporation Limited (formerly Engro Chemical Pakistan Limited)
RATIO ANALYSIS
30-Jun-10 31-Dec-09 31-Dec-08
Unaudited
A EARNINGS/PROFITABILITY
1a Own Manufactured Products Growth n.a. 4.05% 44.29%
1b Purchased Products Growth n.a. 79.74% -37.20%
2a Gross Margin- Own Manufactured n.a. 38.87% 37.63%
2b Gross Margin- Purchased Products n.a. 4.69% 4.62%
3 Operating Margin n.a. 21.60% 28.78%
4 Pre-Tax Profit Margin n.a. 17.28% 22.32%
5 Net Profit Margin n.a. 13.12% 18.19%
6 Effective Tax Rate 17.38% 24.12% 18.52%
7 Average Interest Rate n.a. 2.22% 5.10%
8 Pre-Tax Return on Equity 1.72% 19.39% 22.55%
9 Return on Equity (ROE) 1.43% 15.84% 21.84%
- Asset Turnover (Times) n.a. 7.63 0.39
- Net Profit Margin n.a. 13.12% 18.19%
- Financial Leverage (Times) 1.01 3.49 2.61
10 Return on Assets (ROA) 0.39% 5.36% 8.59%
B COVERAGE
1 Short-term Debt Payback (Years) n.a. 0.12 0.54
2 Total Debt Payback (Years) n.a. 6.79 8.90
3 Net Debt Payback (Years) (52.66) 6.29 8.37
4 Net Debt / EBITDA (4.89) 7.66 3.77
5 EBITDA Net Interest Cover (X) (2.25) 5.54 4.89
6 Net Interest Cover (X) (2.20) 5.01 4.46
C LIQUIDITY
1 Current Ratio (X) 6.07 1.68 2.55
2 Quick Ratio (X) 6.07 1.46 1.61
3 Average Inventory Held (Days) n.a. 4.77 40.86
4 Average Trade Debtors (Days) n.a. 30.42 13.07
5 Gross Cash Cycle (Days) n.a. 35.19 53.93
6 Average Trade Creditors (Days) n.a. 9.32 33.19
7 Net Cash Cycle (Days) n.a. 25.87 20.74
D FINANCIAL STRUCTURE
1 Current Debt/Total Debt n.a. 1.72% 6.11%
2 Total Debt/Equity n.a. 221.63% 128.07%
3 Net Debt/Equity -5.93% 205.24% 120.46%
4 Equity/Total Assets 98.99% 28.69% 38.30%
5 Total Debt/Adjusted Equity (Net of Rev. Surplus) -0.92% 220.70% 126.98%
6 Total Liabilities/Equity 1.02% 248.51% 161.17%
7 Total Debt/(Total Debt+Equity) n.a. 68.91% 56.15%
The Pakistan Credit Rating Agency Limited
GLOSSARY OF TERMS USED BY PACRA (INDUSTRIAL CORPORATES)
DESCRIPTION METHODOLOGY PROFITABILITY
1. Gross Profit Margin (%) (Sales less COGS) / Sales
2. Net Profit Margin (%) Profit After Tax / Sales
3. Return on equity (ROE) (%) Profit After Tax / Average Equity.
4. Return on assets (ROA) (%) Profit After Tax / Average Assets COVERAGE
1. EBITDA PKR mln Earnings before interest, tax, depreciation and amortization.
2. Total Debt Pay-Back Period Years Total debt / Cash generated from operations
3. Net Debt Pay-Back Period Years Total debt less cash / Cash generated from operations
4. Net Interest Cover (x) Net profit before interest and taxes / Net Interest Expense +
Interest Capitalized
5. Ordinary Dividend Cover (x) Net income after tax but before extraordinary items / Dividends paid and proposed
LIQUIDITY
1. Current Ratio (x) Current assets / current liabilities
2. Quick Ratio (x) Trade debtors, other debtors, liquid investments, cash and deposits / current liabilities
3. Average Inventory Held Days Average Inventory for the year (excl. stores and spares) /
cost of goods sold
4. Average Trade Debtors Held Days Average trade debtors for the year / Sales
5. Average Trade Creditors Days Average trade creditors for the year / Cost of goods sold
6. Gross Cash Cycle Days Average inventory held plus average trade debtors held
7. Net Cash Cycle Days Gross cash cycle less average trade creditors held
The Pakistan Credit Rating Agency Limited
STANDARD RATING SCALE & DEFINITIONS LONG TERM RATINGS SHORT TERM RATINGS
AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA: Very high credit quality. ‘AA’ ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A: High credit quality. ‘A’ ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB: Good credit quality. ‘BBB’ ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. BB: Speculative. ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B: Highly speculative. ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favourable business and economic environment. CCC, CC, C: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic developments. A ‘CC’ rating indicates that default of some kind appears probable. ‘C’ ratings signal imminent default.
A1+: Obligations supported by the highest capacity for timely repayment. A1:. Obligations supported by a strong capacity for timely repayment.
A2: Obligations supported by a satisfactory capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. A3: Obligations supported by an adequate capacity for timely repayment. Such capacity is more susceptible to adverse changes in business, economic, or financial conditions than for obligations in higher categories. B: Obligations for which the capacity for timely repayment is susceptible to adverse changes in business, economic, or financial conditions. C: Obligations for which there is an inadequate capacity to ensure timely repayment. D: Obligations which have a high risk of default or which are currently in default.
Notes: 1. PACRA's ratings are an assessment of the credit standing of entities in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors.
2. A plus (+) or minus (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ long-term rating category, to categories ‘CCC’ and below, or to short-term ratings.
3. PACRA's rating is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.
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