final project on engro final copy

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Submitted By:

Submitted To:

Sadiqa Kausar

Mr.Noman Moin Ud Din

Acknowledgement

We are thankful to Allah Almighty who enables me to accomplish this task with due

care.

I also want to pay tribute to our worthy teacher who are the main source of

enlighten to our mind. I am thankful to him as he prepared me for looking

practical things with open minds. This project is one of the sources of giving

me knowledge about

“Financial Management”

I am especially thankful to my honorable teacher Mr.Noman Moin Ud Din,

who provides me guidance whenever I feel some difficulty. His knowledge,

approach and professionalism have always inspired me and helped me to

understand, analyze and solve problems in a practical manner.

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Table of Contents

Topic Names PageNumber

1. Executive summary 7

2. Ratios & Analysis 9

3. Industry Benchmarking 11

4. Company Strength & Weaknesses 12

5. Recommendations 20

6. Beta of the Company 21

7. Expected Return & Standard Deviation 21

8. Required Return 22

9. Comparison of Expected & Required Return 22

10.Portfolio Beta 24

11.Scatter Diagram 25

12. Security Market Line (SML) 27

13.Expected Price 28

14. WACC (Book Value & Market Value) 31

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EXECUTIVE SUMMARY

In this project I choose the company “Engro Corporation Limited”. In this project I did

ratios analysis of the company and compare the ratios of our company with Fauji

Fertilizer Company Limited and Fauji Fertilizer Bin Qasim. After that I did industries

benchmarking of three companies and find the strength and weakness of the company. At

the end I also give recommendations for improvement. After that I also calculate the beta

of the company which I used to calculate the WAAC of the company. I also calculate

expected return and required return. I also plot the scatter diagram. After that I also find

expected price of the company by using dividend growth model and valuation model. At

the end I also calculate the book value and market value.

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INTRODUCTION OF THE COMPANY

Engro Corporation Limited is one of Pakistan’s largest conglomerates with businesses

ranging from fertilizers to power generation. In the interest of better managing and

overseeing businesses of subsidiaries and affiliates that are currently part of Engro’s

capital investments, Engro Chemical Pakistan Limited converted into a holding company

structure. As part of this process, two major changes occurred with effect from January 1,

2010; Engro Chemical was renamed as Engro Corporation Limited and it demerged and

transferred its fertilizer business into a separate wholly owned subsidiary, Engro

Fertilizers Limited. Currently Engro Corporation’s portfolio consists of seven businesses

which include chemical fertilizers, PVC resin, a bulk liquid chemical terminal, industrial

automation, foods, power generation and commodity trade. Besides providing the long

term vision for the company and overseeing performance of the subsidiaries and

affiliates, Engro Corporation Limited is also responsible for allocation of capital,

management of talent, leadership development, HR guiding policies, leadership role in

public relations and CSR activities, control structures, legal and IT support. From its

inception as Esso Pakistan Fertilizer Limited in 1965 to Engro Corporation Limited in

2010, Engro has come a long way and will continue working towards its vision of

becoming a premier Pakistani company with a global reach.

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RATIO ANALYSIS

We calculate some financial ratios of this company with the help of financial statement,

to know about the financial position of the company. When we calculate the ratio of

ENGRO FERTILIZERS, we see that over all company finance position is very strong.

Liquidity Ratio:

According the company liquidity ratio, company liquidity position is very strong. Its

means, company is able to pay the short term long with the short term assets. Company

current and Quick ratio is very good and company able to pay his liabilities. This ratio

shows that company is in very good position to pay off its debts from its current assets

that convert in next year.

Asset management ratio:

Assets management means, a company manage the assets or use the assets for generating

the sale. According to the assets management ratio, company is not a good assets

management. Because his inventory turnover is very high and assets turnover is low.

These ratios show that company doesn’t manage the assets.

Debt management ratio:

Company Debts ratio is very high. According to Debts ratios, company use debts higher

than the equity which show that company is very risky. Company has short term assets is

very strong but long term is very poor.

Profitability ratio:

Company sale is increasing every year that’s why company profitability position is very

strong. Company increase his export in every years that why company sale is increasing.

Company return on equity is very low because company net profit is low as compare to

gross due to pay of heave interest.

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We select the chemical sector, in which we chose ENGRO FERTILIZERS. Then we

calculate the ratio of the other two companies in same sector for comparison. Two

companies that we are selected FFC and FBQ. We calculate the ratios of all three

companies of year 2009 and then take the average of these ratios to make the bench mark.

With the help of this bench mark we decided our company is good or bad.

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COMPARISON OF COMPANY RATIOS

Fertilizers Industry : Summary of Financial Ratios

Industry Benchmarking

Serial# Liquidity Ratio

Engro

Corp FFBL FFC Average Comment

1 Current Ratio 1.68 1.10 0.84 1.20583 Good

2 Quick Ratio 1.38 1.03 0.83 1.07932 Good

Asset management Ratio

3 Inventory turnover 11.82 10.64 179.84 67.4328 Good

4 Day sales outstanding 30.42 4.74 2.59 12.583 Very Poor

5 Fixed asset Turnover 0.36 2.07 1.53 1.31972 Good

6 Total asset Turnover 0.32 1.01 0.94 0.75794 Good

Debt management Ratio

7 Debt ratio 0.71 0.71 0.66 0.69315 Risky

8 TIE ratio 4.95 4.81 14.82 8.19377 Risky

Profitability Ratio

10 Profit Margin on sale 13.12% 10.30%

24.40

% 16% Poor

11 BEP ratio 6.97% 19.40%

36.32

% 21% Poor

12 Return on total asset 4% 10.45%

22.89

% 13% Poor

13 Return on total Equity 15% 36% 67% 39% Poor

Market Value Ratio

14 Price Earnings Ratio 13.02 6.45 7.92 9.13 Good

16 Market book ratio 30.11 22.92 53.33 35.4533 Poor

17 Price/Cash flow Ratio 7.52 24.39 1.30 11.07 Poor

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Current Ratio:

Engro Corp FFBL FFC0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80current ratio

curre...

We calculate the current ratio of all three companies. According to the ratios our current

ratio is good rather than two other companies. That is show in the graph. This graph

shows that company is able to pay his short term debts, and strong from the other

companies.

Quick Ratio:


0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Quick Ratio

Quick Ratio

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We calculate the quick ratio of the companies. According to the ratio or graph our

company quick ratio is very strong rather than FFC and FBQ. This ratio shows that

company is in very good position to pay off its debts from its current assets that convert

in next year. The quick ratio has increased in year 2009 as compared to 2008. It means

the company used its inventories. It also means that company sale increased in year 2009

because its liabilities paid or account receivables are received.

Inventory turnover:


20.0040.0060.0080.00

100.00120.00140.00160.00180.00200.00

Inventory turnover

Inventory turnover

Engro inventory turnover is good from other two companies. It means company sale his

inventory as early as possible. That inventory effect the quick ratio because, when

inventory turnover is high quick ratio is also high. Company uses his current assets very

good and according to the market requirement.

Day sale outstanding:

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5.00

10.00

15.00

20.00

25.00

30.00

35.00

Day sale outstanding

Day sale outstand...

Company day sale outstanding is very high from companies that are not good for

company. It means that company receivable turnover is very high that is not good for

company. Because company receivable is not converting in cash as early as possible.

According to bench Mark Company day sale outstanding is very poor.

Fixed assets turnover:


0.50

1.00

1.50

2.00

2.50

Fixed Assets turnover

Fixed Assets turnover

According to ratio and graph our company fixed assets turnover is very low. Bench mark

is high from our company which shows that company cannot properly use his fixed

assets. Company cannot use its fixed assets intensively due to which production level

decreasing every year.

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Total assets turnover:


0.20

0.40

0.60

0.80

1.00

1.20

Total asset turnover

Total asset turnover

According to graph and ratio company total assets turnover is low. Engro total assets

turnover is low from bench mark. . According to this ratio company used all its assets but

that is not using effectively. In two year company has almost same turnover, company

has no progress of using its assets.

Debt Ratio:


0.64

0.65

0.66

0.67

0.68

0.69

0.70

0.71

0.72

Debt Ratio

Debt Ratio

Engro Corp has high debt ratio rather than two other companies which show that

company is very risky. Company have high debts ratio from bench mark. It means

company uses Debts and not depended on its equity.

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Time Interest Earned:

Engro Corp FFBL FFC0.002.004.006.008.00

10.0012.0014.0016.00

TIE Ratio

TIE Ratio

This ratio is less as compared to other companies which show company decreases it’s

EBIT. It indicates that company is not able to meet its interest cost for a long time. TIE

ratio is very poor ratio for other companies

Net profit ratio:

Engro Corp FFBL FFC0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Profit Margin

Profit Margin

According to the bench mark of profit margin our company have low profit margin ratio.

This ratio and graph show that company profit decrease as compared to other companies.

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It also shows that earning per share also decreases in 2009 and shareholders confidence

strengthened is decreased.

Return on total assets:


0.050

0.100

0.150

0.200

0.250

Return on total asset

Return on total asset

According to the Graph our company return on total assets is low from other companies.

It means that the company’s basic earning power is high and has good return on its assets.

Company loan is very high that why company return over is very low.

Return on equity:

Engro Corp FFBL FFC0.000.100.200.300.400.500.600.700.80

Return on Equity

Return on Equity

According to the graph and ratio our company return on equity is low from other

companies that we are choosing. Company return on equity is low due to his debts.

Because company debts are very high and pay high finance cost due to this company

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profit is low. This is bad for the company because when return on equity decreases then

the shareholders invest less money.

Market Value:

The Market Value Ratios is relates the firm’s stock price to its earnings and book value

per share. Market value ration also known as price per earnings ratio. This ratio is used

by some investors or analysts as an indicator of over- or undervaluation. Engro market

price is very high, and this is over valuation. Our company has good market value from

other two companies.

Earnings per Share:

Growth in earnings is often monitored with Earnings per Share (EPS). The EPS expresses

the earnings of a company on a "per share" basis. A high EPS in comparison to other

competing firms is desirable. EPS of our company is good rather than two companies.

The EPS is calculated as:

Earnings Available to Common Shareholders / Number of Common Shares

Outstanding

Price Earnings Ratio:

The relationship of the price of the stock in relation to EPS is expressed as the Price to

Earnings Ratio or P / E Ratio. Investors often refer to the P / E Ratio as a rough indicator

of value for a company. A high P / E Ratio would imply that investors are very optimistic

(bullish) about the future of the company since the price (which reflects market value) is

selling for well above current earnings. A low P / E Ratio would imply that investors

view the company's future as poor and thus, the price the company sells for is relatively

low when compared to its earnings. Our company have higher P/E ratio that is good for

company.

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RECOMENDATIONS

ENGRO FERTILIZERS has strong liquidity position. In liquidity position company has

strength to sale and stock out his inventory very frequently, that why sales are increasing

every year. But there is a weakness that they collect his money very late from his

receivable. We suggest that company should receive money from receivable as soon as

possible. If they received early their DOS ratio will decrease and Quick ratio will

increase which is good for company. According to our ratio analysis ENGRO

FERTILIZERS increase his efficiency. They use its assets effectively and give high

return to their shareholder. But there is a weak point in company that they don’t give any

economic value addition which is not good for company’s long run profit. Company

should added economic value to country. The beta of this company is risky then FFC and

FBQ. We suggest don’t invest money in this company.

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Calculation of Beta

BETA ENGRO Engro FFBL FFC

Regression 1.21 0.60 0.78

Slope 1.21 0.60 0.78

Calculation of expected return:

Average Engro % FFBL % FFC %

3.53% 4.52% 2.34%

Standard deviation 0.097229 0.093134 0.075104

Coefficient of variance 0.004334 0.002168 0.00281

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Calculation of Required return:

Krf 13.86%

Rpm 8%

k=krf+rpm(b) 23.53%

Comparison of expected return & required return:

Engro company market share price is very high.

It Book value is 90.63 and market value is 193.89 that over value

When we compared the expect return and required return, we see that:

The expected return which is 3.53% very less than the required return which is

23.53%.

so investor should not invest in the company

Portfolios of two companies:

Companies weight beta

ENGRO FERTILIZERS 0.5 1.21

FFC 0.5 0.78

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Portfolio Beta:

Bp w1*b1+w2*b2+w3*b3

= 0.996452753

Portfolio required return krf+rpm(b)

= 21.23162202

Expected return on portfolio:

ENGRO FERTILIZERS FFCPortfolio return

0.09 (0.06) 0.02

0.25 0.19 0.22

0.03 0.15 0.09

0.01 0.04 0.03

(0.08) (0.15) (0.12)

0.06 0.09 0.07

0.01 (0.00) 0.01

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0.28 0.10 0.19

(0.07) (0.01) (0.04)

0.10 0.03 0.07

0.01 (0.01) (0.00)

0.04 0.03 0.04

(0.05) (0.05) (0.05)

0.06 0.05 0.06

0.09 0.05 0.07

(0.14) (0.08) (0.11)

(0.01) (0.01) (0.01)

0.05 0.04 0.05

(0.10) (0.00) (0.05)

0.04 (0.03) 0.00

0.01 0.03 0.02

0.03 0.03 0.03

0.09 0.10 0.10

0.04 0.02 0.03

when we make the portfolio of Engro and FFc we see that this is good

for investment Because it expected return less than the required return

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Scattered Diagram:

-15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Series2

Linear (Series2)

Axis Title

Axis Title

Security Market Line (SML):

Bp 1.21krf 14%

Rpm 8%

Beta ki0 13.86%

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0.4 17.06%0.8 20.26%1.2 23.46%1.6 26.66%

0 0.4 0.8 1.2 1.60.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Series1

Should investor invest:

As we know if the company beta is higher than market beta it means

Company is very risky.

We should not invest because the expected return of

the company is 3.53% which is very low so it is suggested

that investor should not invest in the company.

EXPECTED PRICE (P):

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Dividend Growth Model:-

We find the growth from the dividend paid by the Engro in year 2004-09 and the projected

dividends determined by applying the weighted average method. The % change would be the

growth of Engro dividends.

Year Dividends Weight

2004 8.5 1

2005 11 2

2006 9 3

2007 7 4

2008 6 5

2009 6 6

Projected Dividends by Weight Avg method

YearDividend

s Weight Projection % change

2004 8.5 1

2005 11 2

2006 9 3

2007 7 4

2008 6 5

2009 6 6 0.00%

2010 7.21 7.21 20.24%

2011 7.01 7.01 -2.78%

2012 6.82 6.82 -2.81%

2013 6.75 6.75 -0.93%

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2014 6.78 6.78 0.34%

2015 6.82 6.82 0.60%

2016 6.83 6.83 0.23%

2017 6.81 6.81 -0.27%

2018 6.81 6.81 -0.09%

2019 4.43 6.81 -34.93%

2020 6.13 6.13 38.44%

Average Growth 1.50%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Ks= 23.53 2 3 4 5 6 7 8 9 10

7.21 7.01 6.82 6.75 6.78 6.82 6.83 6.81 6.81 4.43 6.13

P.V.1 D1/(1+i)^1

= 2.19913299

P.V.2 D2/(1+i)^2

= 4.969451418

P.V.3 D3/(1+i)^3

= 4.065669042

P.V.4 D4/(1+i)^4

= 3.401960029

P.V.5 D5/(1+i)^5

= 2.880902585

P.V.6 D6/(1+i)^6

= 2.430574782

P.V.7 D7/(1+i)^7

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= 2.040316442

P.V.8 D8/(1+i)^8

= 1.715930606

Terminalvalue

4.748186581

Po Intrinsic Value

28.45212447

P1 26.25299148

Corporate Valuation Model:-

Ks = 23.53% Do = 4.43 g = 1.50% = 28.45

= FCF/(1+WACC)= 1818867

Working for free cash flows:

Year EBIT NOPATCurrent Assets

Current Liabilities (payable

+ Accrued)

Net Fixed Assets

NOWC TOCFree Cash

flow

2004 2,232,938 1451409.7 4,602,604 2,985,149 8,582,753 1,617,455 10,034,163

2005 2,641,286 1716835.9 5,011,555 2,800,094 9,100,075 2,211,461 10,816,911 1,122,830

2006 2,755,529 1791093.9 5,684,446 3,642,415 10296370 2,042,031 12,087,464 1,960,524

2007 3,278,705 2131158.3 16,397,198 5,264,674 21759453 11,132,524 23,890,611 -6,959,335

2008 4,538,748 2950186.2 12,042,221 5,999,353 45,122,518 6,042,868 48,072,704 8,039,842

2009 4,986,168 3241009.2 10,748,871 6,395,469 82,960,567 4,353,402 86,201,576 4,930,475

1,818,867

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Terminal Value = D9

Ks - G

18.83906313

Total Return (Ks) = Dividend yield + Capital gain yield

16.84%

Calculation of WACC

Book Value of WACC:

Rs (million)

Equity 2,979,426

Total Debt 6,395,469

Total 9,374,895

Weights

Book value Common Equity 2,979,426 32%

Total Debt 6,395,469 68%

Total 9,374,895 100%

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Dividend Yield :

D1/P0 15.34%

Working

D1 = D0 (1+g)1 4.36342

Capital Gain Yield:

(P1 – P0) / P0 1.50%

Working

P1 = P0 (1+g) 28.8798

WACC=WdKd(1T)+WpKp+WcKs

Wd Kd 1-tax%WpK

p Wc Ks

68% 21% 0.65 0 32%0.2353

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WACC = 16.64%

Market Value of WACC:-

Market value of equity = Market price per share x No of shares outstanding

Weights

Market value of Equity 59,457,306 90%

Total Debt 6,395,469 10%

Total 65,852,775 100%

Wd Kd 1-tax% WpKp Wc Ks

10% 21% 0.65 0 90% 0.23533

WACC = 22.55%

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ANNEXURE / ATTACHMENTS

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final project on engro final copy

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