Topic # 5

Analyze and evaluate the business and financial performance of an

organization which has performed exceptionally well over a three-year
period with a critical analysis of the reasons for its success

ACCA Number:
Submission period: May 2022
Words: 7399 words

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Contents
Part 1 - Project Aims, Objectives and Context ........................................................................................ 4
Reason for Selection of Topic ................................................................................................................... 4
Justification of the Chosen Organization and It’s exceptional performance in last 3 years ............ 4
Research Aim and Objectives ................................................................................................................... 5
What Secondary sources used and why? ................................................................................................ 5
Justification of Financial Statements used for the Project ................................................................... 6
Ethical Issues .............................................................................................................................................. 6
Part 2 – Accounting / business models / theories and information gathering ................................. 6
Justification of methods used to collect Information and its Limitations ......................................... 6
Discussion of accounting / business models applied to the organization and its Limitations........ 7
Financial Analysis model - Ratio Analysis .............................................................................................. 7
Business Analysis model - SWOT Analysis............................................................................................. 8
Limitations of SWOT Analysis ................................................................................................................. 8
Part 3 – Analysis, Evaluation and Conclusion ....................................................................................... 8
SWOT Analysis ........................................................................................................................................... 8
Strengths ..................................................................................................................................................... 8
Visionary Leaders running the Company and Part of Management ................................................... 8
Icon of Pakistan’s Corporate Sector – Brand name recognition ......................................................... 9
Fighting Covid- 19 Effectively through robust and adaptable policy changes ................................... 9
Weakness ..................................................................................................................................................... 9
Not enough preparation for Climate change effecting demand .......................................................... 9
Expiry of Concessionary Gas and finding alternative source ............................................................... 9
Opportunity............................................................................................................................................... 10
Leveraging the existing Network for More Sales ................................................................................. 10
Urea Export Market ................................................................................................................................. 10
Deregulation of Fertilizer Sector ............................................................................................................ 10
Threat ......................................................................................................................................................... 10
Fluctuation in Exchange Rate................................................................................................................. 10
Dealer Registration in Sales Tax ............................................................................................................ 11
Subsidy....................................................................................................................................................... 11
GIDC .......................................................................................................................................................... 11
Ratio Analysis ........................................................................................................................................... 12

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Conclusion and Recommendations ....................................................................................................... 20

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Part 1 - Project Aims, Objectives and Context

Reason for Selection of Topic

It was imperative from the beginning that whatever topic I would choose from the 20 topics available, it
had to interest me otherwise there would be no motivation to complete as the project required sufficient
amount of dedication and time.

At the outset, I had career aspiration to venture into Investment Banking, so I found this topic apt for me
to work on as during the mergers and acquisitions, the primary work is to perform analysis of the target
company and assess its valuations based on financial and business performance and future projections so
this project will allow me to have hands on experience from the beginning to help kick start my career.

ACCA has three different types of Finance & Accounting specialization in their course exams, one is
budgeting which is more related to manufacturing organization another is focus on financial reporting and
third one is analysis of companies which leads towards further professional qualification of Chartered
Financial Analyst. Since the beginning and knowing my own strength, I was driven towards Financial
Ratios, Business Strategy, Macro and Micro Economics. Through this project now I have got a great
opportunity to polish my analytical skill sets on a real organization and perform deep dive research through
ratio analysis and swot models to understand the reason behind companies’ super success and how the
macro and micro economic environment of Pakistan helped achieve the company such great results and
also analyze and evaluate how past performance can lead to similar results in future.

Lastly, as I had started Internship so it was very important that I choose a topic for which the information
is publicly available on Internet as there was limited time thus primary research was out of question.

Justification of the Chosen Organization and It’s exceptional performance in

last 3 years
The rationale for choosing Engro Fertilizer Limited for this topic was that in last 3 years the company has
shown robust financial performance and each year it has surpassed its productions targets and also in 2020
it achieved highest sales and highest net profit amount in history. The industry has been consistent and its
competitor Fauji on other side has had rough times but Engro Fertilizer with aggressive marketing shrewd
management decisions has outperformed Industry averaged and competitor performance (Recorder
Report, 2021).

Engro Fertilizer Limited’s brief history is as follows; i) The organization came into being in 1965 to
manufacture and market fertilizer; ii) In 1968, urea plant started which at that time was biggest foreign
investment in Pakistan ; iii) In 1991, Exxon left Pakistan and company was renamed as Engro Corp Limited
and was bought out by employees ; iv) In 2005, production was increased to 950k tons from 850k tons ; v)
In 2007, the world’s biggest single train fertilizer plant called Enven was started which started commercial
production in 2011 (Kazmi, 2020).

Engro Fertilizer has operated with 14 reginal offices across Pakistan it has two plants located at Zarkhez
and Dharki. Total employees as at December 31, 2020 at the company were 1,362 (Engro Fertlizers Limited,
2020). It has the following business segments;

- Fertilizer
- Specialty Fertilizers
- Crop Science Division
- Agri Services.

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(Engro, 2022)

Research Aim and Objectives

Through this research and analysis report the following questions set out below would be addressed;

- Analyzing Engro Fertilizer Limited’s using ratio analysis to evaluate how the company has
performed in last 3 years?
- Analyzing the factors in the macro and micro environment of Pakistan’s economy and Fertilizer
Industry that helped propel Engro Fertilizer Limited to achieve such stupendous success?
- Analyzing and evaluating the business performance of Engro Fertilizer Limited through SWOT
analysis to know what are internal factors that company did well to achieve the growth rate?
- Linking the macro environment and evaluating how those factors will play role in future to help
company maintain the growth rate that it has maintained for past 3 years?
- Comparing Engro Fertilizer Limited’s performance with competitor Fauji Fertilizer bin Qasim
which is from same Industry to understand whether the great performance was due to shrewd
business acumen of management or just because of Industry dynamics favoring the Fertilizer
business?
- In the end forming a conclusion and providing recommendation based on evaluation of finance and
business analysis for future projections.

What Secondary sources used and why?

• Published Audited Annual Reports / Financial Reports (Quarterly, Half yearly and
Annual)

The above-mentioned reports provided to be a good assistance in initiating the research project as they
do not just provide financial data but it has director’s report in it where Director’s give commentary on
the company’s performance, Industry issues effecting the sector and company and also management’s
point of view related to what are company’s future goals and how they will overcome the issues currently
faced. Further director report in detail talks about how political, economic and legal conditions of the
country and world has had effect on Engro Fertilizer and its financial performance. Also, annual reports
have section on corporate governance of the company which also proved to be helpful in analyzing and
evaluating company’s performance and addressing research questions.

• Brokerage House Reports

Brokerage houses through their analyst cover the recent performances of the company, if there is any
local economic, political or legal development thus that is also covered and the impact such
development would have on financial performance. Brokerage houses also issue detailed report on the
company and its valuation considering industry dynamics and future prospects. They also provide a
balance and unbiased view of the company and compare it with industry averages and comparator.

JS Global Capital Limited, BMA Capital Limited, Ismail Iqbal Securities Limited, Foundation
Securities, AKD Securities Limited and other various brokerage houses reports were gathered and
thoroughly read to be cited in this research and analysis report.

• Newspapers

For this research we used prominent business newspapers such as The Dawn, Express Tribune, The News,
Business Recorder, Profit Pakistan, Startup Pakistan. We used the corporate result analysis and interviews
of CEO of Engro Fertilizer from the newspapers.

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 • Academic Textbooks

It has been a while since I studied ratio analysis and swot theoretically hence to refresh my memories to
understand both the models their use and application with some examples and also its limitation, I had to
refer ACCA text books also for ratio analysis I referred A levels books as I had taken Business Studies and
Accounts as my subject in it. These books helped me understand these models better which eventually
helped me complete the research project.

• Internet (Google search engine)

In current era be it Journals, News Papers, Blogs, Annual Reports and books, everything is digitized and
available through Internet if searched with appropriate keywords from Google. Internet was voraciously
used specially google search engine to search for data on Engro Fertilizer, Fauji Fertilizer, economy of
Pakistan and also global urea prices.

Government Issued Publications on Business & Trade

Economic Survey of Pakistan is one publication that government publishes every year to apprise the public
of government’s economic management of the company. It covers macro and micro / Industry numbers
and performance. We used the publication to benefit us on the Fertilizer Industry numbers and its dynamics
also we used State Banks web site to refer publications on Inflation, Interest rate and future projection of
GDP of the country to help us in the research project.

Justification of Financial Statements used for the Project What is this about??
Based on the Information pack for the submission period 43 & 44 i.e., 2021 November and May 2022 issued
by the Oxford Brooke’s University (Oxford Brookes University, 2021) the latest audited statements available
that complied with above rule were related to the years December 31, 2018, 2019 and 2020 for both
companies. The Financial statements for 2021 were issued in April 2022 thus were deemed not applicable.

Ethical Issues
From the start of writing the project I was informed and guided by the mentor that whatever information I
am reading and using for the project has to be used in my own words. I was informed that it is extremely
important to let the writer who has done the research be acknowledged for his work and not to show as if it
was mine. Furthermore, also I consciously ensured that nothing was copied, the paraphrasing if done was
adequate, there was no collusion for analysis and evaluation to be bias (Oxford Brookes University, 2021).
Also, to do good referencing MS word’s auto referencing tool was used to abide by OBU Info pack’s rules.
One more aspect I took care was that as secondary data was used many times the data collected was bias so
special care was taken to use it objectively and analyze it based on presented facts rather than author’s point
of view.

Part 2 – Accounting / business models / theories and information gathering

Justification of methods used to collect Information and its Limitations

To do the research and analysis project secondary source of data was used. Secondary source of data is also
often referred as desk research (BBC, 2019) whereby the data or information is readily available through
newspaper, journal, books, articles which is already published by the author for some other purpose other
than current research and analysis purpose (Business Jargons, 2017).

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Limitations of Secondary Source Data is as below;

- As the data is collected for some other purpose by the author therefore there are chances data would
be bias and impartial (Neelankavil, 2008) l.
- It took a lot of time to go through a lot of material to find out authentic source and reliable data that
can be used for the purpose of this research report and information mainly pertaining to Engro
Fertilizer Limited (Crossman, 2019).
- Due to the fact that we are doing analysis of past 3 years that too from 2018-2020 so it became
difficult to find relevant data as sometimes data is purge from the internet and also data become
outdated (Gurdev Sing, 2013).

Discussion of accounting / business models applied to the organization and

its Limitations

Financial Analysis model - Ratio Analysis

There are two types of ways one can analyze and evaluate a company’s business and financial performance
and its product market fit and competitive position with its market share. One is looking through the
quantitative data such as controls withing the organization, credentials of management, research and
development work and other aspect which are not readily available in number form (Investopedia, 2019).
Other area is analyzing the company’s performance through qualitative data and as stated above in this
report Engro Fertilizer Limited and Fauji Fertilizer bin Qasim Limited both are listed companies hence
their quarterly , half yearly and yearly financial audited statements are available which are filled with
qualitative data such as Profit and Loss , Balance Sheet , Cash Flow Statement , Changes in Equity and Notes
to the accounts also Director’s report and other disclosures provide ample qualitative data to analyze and
evaluate company’s performance. Now the data and information if looked into isolation is not meaningful
and does not tell any story thus the famous tool analyst use which we have also used is Ratio Analysis. This
tool basically calculates the numbers through ratios which is it evens out absolute numbers into percentages
which is then compared with prior year of same company or Industry averages to make sense (Corporate
Finance Institute, 2019). For example, a company can have higher Sales and Gross Profit in absolute
numbers whereas its margin could be in negative as compared to another successful company which is small
in size with lower absolute number but higher margins. Therefore, ratio analysis is used by calculating
profitability, Liquidity, Activity, Gearing and Investor’s ratio of a company (Bloomenthal, 2019).

Brief Description of Each Ratios is provided below;

- Profitability ratios basically assesses how much revenue, gross profit and net profit company
generates.
- Liquidity ratio evaluates company’s ability to finance its day-to-day operations.
- Activity ratios analyzes company’s ability to run the business and turn its working capital into cash.
- Gearing ratio checks how much debt company has taken as compared to shareholder own money
- Investors ratio shows the pay out company makes to the Investors.
(Pyke, 2007)

Limitations of Ratio Analysis

- As the data used is from the past financial statement due to current fast changing world dynamics
it is hard to predict future trends from past / historical data (Accounting Tools, 2018).

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 - Financial Statements are preparing as per International Accounting Standards. The standards
allow company to use judgements and internally developed policies to record numbers. This is one
issue where each company’s numbers can not be compared with others due to non-standardization.
Such as different depreciation percentages, different methods of valuing inventory and translation
of foreign currency (Accounting Tools, 2018).
Ratios when calculated ignore the most important element which is inflation as most of the assets
in balance sheet are recorded at cost and their values could have risen due to inflation (Pyke, 2007)
.

Business Analysis model - SWOT Analysis

There are plenty of models that business strategist uses to assess company’s competitive advantage, its
current market position understanding company’s product market fit and how all put together has
impacted the company in the past and will affect in the future to devise appropriate business strategy
(pahl & richter, 2007). SWOT is one such model where a company evaluates its Strength, Weaknesses,
Opportunities and Threats. Based on this analysis then management makes up the strategy for going
forward.

Strength and Weakness in this model is based on internal factors within the organization which are also
termed as controllable factor and those within the reach of management or are directly based on
management’s judgement. Opportunity and Threats are those elements which are based out of the company
and are inherent to local macroeconomic conditions, world economics or Industry dynamics and
management has to be vigilant to convert opportunities into strengths and avoid threats turning into
weakness (Mindtools, 2016).

Limitations of SWOT Analysis

- It is a very subjective based tool where the person analyzing can put strength into weakness and
opportunity into threat depending on how the analyzer perceives the business environment
(Nordmeyer, 2019).
- The tool lists out the Strength, Weakness, Threats and Opportunity but is of no avail when talking
about solutions or resolution of the factors identified (Nordmeyer, 2019).
- The analysis are dependent on brainstorming session to list out SWOT factors so sometimes there
are chances some elements can go unnoticed which can affect the analysis and management’s
decision as that particular factor could turn out to be game changer later (Hamel, 2019).

Part 3 – Analysis, Evaluation and Conclusion

SWOT Analysis

Strengths

Visionary Leaders running the Company and Part of Management

Tt is not a multinational company but locally it has gained reputation of having work culture and other
benefits as similar to be a Multinational Organization. The board members include Mr Ghias Khan, Mr
Nadir Salar Qureshi, Mr Abdul Samad Dawood, Mr Javed Akbar , Mr Asad Said Jaffar , MrAsim Murtaza
Khan , Mr Mazhar Hasnani. These professionals come from different background such as banker, chartered

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accountant, lawyers and engineers. It is considered a balanced board and this is one of the strengths that
has helped the company achieve such great heights in terms of success in last 5 years (Engro Fertlizer
Limited, 2019).

Icon of Pakistan’s Corporate Sector – Brand name recognition

Engro Fertilizer is considered to be one of the most trusted names for Urea and Phosphate chemicals in
Farmer community in Pakistan. The vision of the company is always to put farmers first and help them
grown which eventually will help company grow (Kazmi, 2020). The Philosophy of management is to ensure
best product and customer satisfaction at the core. Engro Fertilizer has won three prestigious awards in
2021 namely Most Innovative Fintech Solutions Provider, Best Payment Technology and Best Banking Tech
of the Year (Business Recorder, 2021).

Due to the brand recognition, it has helped Engro to retain best talent in Pakistan also it has given
confidence to its Stakeholders to trust the company and ultimately this brand value has helped reap
financial rewards in terms of record sales and net profit during 2021.

Fighting Covid- 19 Effectively through robust and adaptable policy changes

In order to maintain business continuity, the management of Engro Fertilizer was very fast to implement
changes required during Covid-19 which shows that it has one of the best human resources in Pakistan.
First, they did was Risk Identification which is understanding what risks are there to business continuity
and employee safety, Immediate answers / response was formed such as prevention measures, emergency
responses, and crisis communication. Engro’s management helped and promoted work from home
becoming first major corporate to immediately implement this policy. It leveraged the best use of
technology for business continuity. Also, isolation facilities were immediately built up at plant site (Analyst
Briefing Q1 2020, 2020).

Such an amazing response to fighting crisis like unprecedented situation, Engro’s team deserves brownie
point and that is one of the strengths of the company its nimble and adaptable human resources.

Weakness

Not enough preparation for Climate change effecting demand

Detailed study of Engro Fertilizer’s past 3-year Annual statement and also while reading through the
different sources to gather information for this project one thing that was noted that Engro Fertilizers
management and the company as a whole has not yet devised a strategy that how would company survive
and meet the demand of the farmers in case there is scarce availability of water or in case of flood destroying
cultivation land and crops (BIPLS Research, 2020). Engro should seriously think about the effects of
climate change and global warming as they will be mostly affected by it and in future will not be able sustain
the growth path if feasible policies are not devised (Analyst Briefing 4Q 2021, 2021).

Expiry of Concessionary Gas and finding alternative source

Initially when Engro Fertilizer’s Enven plant was commissioned and then in 2011 it started commercial
operation, then as per the Fertilizer policy of 2001 it was supplied concessionary gas at $ 0.7 MMBtu.
Furthermore, the new plants were also not accruing for Gas Infrastructure Development Cess (GIDC). This

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proved to be a major strength for Engro Fertilizer which helped them remain competitive in the market but
now the concessionary gas is being mulled by government to be ended. This will create pressure on margins
for Engro Fertilizer eroding its profitability thus internally now management has to work to find out ways
to remain competitive (Profit, 2021). The management enjoyed the period of lower cost gas and in
meantime it never developed an alternative source / way out and now when this threat is looming ahead
will turn into big weakness for the company.

Opportunity

Leveraging the existing Network for More Sales

Note, Engro Fertilizer company has been operating in Pakistan since long. Due to this fact it has created
one of the best supply chains in Pakistan whereby it has vast distribution network and also great
relationships with distributors and farmers who are more than happy to market and sell any product
company introduces. Engro should focus on using new technologies and helping farmer increase their yield
and introduce new products for the farmer. The cost of marketing and creating a network as it can be a
barrier for entry for any other company would not be one for Engro as it has spread out and established
existing network that will help market and sell all its new products (Engro Fertlizers Limited, 2020).

Urea Export Market

Recently due to favorable government policies the agricultural sector of Pakistan has started to perform
really well posting double digit growth in GDP every year. Crops of Wheat, and Sugarcane Increased by 59%
and 47% while Cotton is stable and Rice is showing positive trend. Furthermore, there has been increase in
area under cultivation due to favorable water conditions (Analyst Briefing 4Q 2021, 2021). This all has
helped Fertilizer Industry in producing record urea that now there is more urea in the country than the
demand. Engro Fertilizer can earn foreign exchange by exporting surplus urea to neighboring countries like
India and Afghanistan and this way another sales channel would get open from local to international. It is
estimated that country also could earn handsome amount 700 million dollar if government allows the
export of urea (Khurshid Ahmed, 2021).

Deregulation of Fertilizer Sector

At present government has to provide subsidy to the farmers and then the same is refunded back to Engro
Fertilizer. This means along with other policy that Fertilizer sector is highly regulated in terms of setting
urea prices and cost of gas is determined by government. Pakistan Fertilizer Industry can stand on its foot
and needs to be deregulated and it can thrive really well and the production would also triple from current.
Currently urea in Pakistan is sold at 30% lower than international prices as farmers are protected but if
deregulated the urea prices can go up and then government can also charge higher gas price and earn higher
tax and address the fiscal issues of the country (MettisGlobal, 2021).

Threat

Fluctuation in Exchange Rate

Fluctuation in exchange rate where PKR keeps on depreciating against the USD due to higher inflation in
the country and also Pakistan following flexible exchange rate policy. It is considered threat to the company
as prices of raw materials imported becomes costly when the rupee depreciates against the dollar. It is

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imperative that Engro Fertilizer prudently manage the procurement of inventory of raw materials in order
to have enough inventory for production and also manage the cashflow of the company (Mint, 2021).

In the audited annual reports of the Engro Fertilizer Limited there is great amount of qualitative and
quantitative information provided. Financial numbers are presented in statements of Income, Balance
Sheet, Cash Flow Statement and Statement of changes in equity whereas detailed break up of numbers is
presented in Noted to the Financial Statements (Gitman & McDaniel, 2007). Qualitative Information is
available through Director’s Report. In isolation the numbers presented in Financial Statements do not
convey any meaning nor studying them let us know how Engro Fertilizer Limited has performed in the
past and what trend would it carry forward based on past performance therefore in order to convert these
numbers into some meaningful information most widely used and easily understandable model of Ratio
Analysis is used for this report.

Dealer Registration in Sales Tax

In 2020, budget the government of Pakistan passed a law in Income Tax ordinance, through Finance Act
2020, whereby it increased the tax to be levied on person who buys fertilizer from the company and who
is unregistered in the sales tax. Fertilizer dealers who buy urea from Engro Fertilizer work on thin
margins already ranging between 2% - 3% and in case there cost of doing business is increased then the
business for them and then later passing on impact to farmer will dent the sales volume for the entire
Industry. Dealers argue that they are already registered for Income tax hence should not be forced to
register for sales tax (Dawn News, 2020).

Engro Fertilizer has asked the dealers to get registered but dealers have not shown interest in this case
Engro is liable to withhold tax from sales to dealers who are unregistered and if not charged then tax
department will penalize the company. This is acting as double edge sword as on one side there is heavy
penalty for non-compliance and if dealers get registered it increases cost of doing business (Staff Reporter
- Dawn News, 2020). Engro’s management is negotiating with government to look into the matter as it
has adversely effected supply chain and ultimately company’s business (Paracha, 2022).

Subsidy
Government of Pakistan for popular political motive and to help the farmers had announced Subsidized
Fertilizer to the farmers. Mechanism was such that Engro Fertilizer and other Urea producers were
requested to lower the prices for the end user that is farmers and then the differential would be paid by the
government to Engro Fertilizer. Since 2015, Government still owes, Rs 6.5 billion in subsidy payment to
Engro Fertilizer and Rs 20 billion to the industry. If the amount is not recovered then it will be required to
recorded as bad debts in the financial statements and this could impact the financial numbers going forward
for the company. Management is having negotiations to recover the amount as this also impacts the cash
flow of the business (Engro Fertlizer Limited, 2021).

GIDC
In accordance with the Fertilizer policy of 2001, to encourage investments in fertilizer plants, government
of Pakistan, has promised concessionary gas and also allocation of 100mmfcd gas to new plants for 20 years.
Later as there was shortage of Gas in Pakistan, in 2011, Gas Infrastructure Development Cess was imposed
on all companies that utilize gas. Engro Fertilizer is not fighting legal case in court to ensure that GIDC
which is termed as fee on gas usage is not applicable to its Enven plant which was established under new
fertilizer policy and government had given guarantee that no fee would be applicable on concessionary gas.
As the matter is still in court and if it the case turns unfavorable for Engro Fertilizer than there will be huge
cashflow blow in terms of GIDC payments (Mirza, 2020).

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Ratio Analysis
Gross Profit Margin

Engro Fertilizers GP margin was observed to be consistent through the three years as there was no
significant change. In the year 2019, the increase in GP margin was 0.2% converting this to absolute value
the increase was estimated to be 4.5 billion. The detailed analysis of the value showed that during the years
2018-2019. The EFERT’s revenue increased from 109 billion to 121 billion. This represented a 12 billion
increase in the amount and a 10% raise. The price of the product sold i.e urea depicted that it increased to
81 billion from 73.8 billion which is approximately a rise of 11%. The fundamental aspect that increased the
sales of the goods by EFERT was the significantly increased demand for urea which was calculated to be
around 6.17 million tons in the industry out of which 1,958 million tons was sold by Engro Fertilizer,
Phosphates sales stood at 546 KT as compared to 626 KT in 2018 (Dawn, 2021).

Furthermore, the price of products being sold was increased due to the inflation rate as the urea price
increased by 20% in 2019 to Rs 1,860 per bag from Rs 1,530 in 2018 (Naeem, 2020). As the company was
impacted by the increased inflation rate back in the year 2019. The inflation rate in 2018 was 3.2% while in
the year 2019 it boosted to 8.2% (News, 2019). Inflation also increased the cost to the firm as the cost of the
raw materials which is gas also rose on the upside. The company’s cost of sale enhanced to 7.9 billion
representing the increase was less compared to the surge in product sales. Thus, this resulted in a slightly
increased in the firm gross profit margin. EFERT also took advantage of the discounted rates / subsidy
offered by the government (Next Capital, 2020) with the purpose to increase the urea sale thus the cost
increased at a lower rate. These discounted rates offered by the government are not offered to other
companies in accordance to fertilizer policy only new urea plants are beneficiary of these rates on gas (News,
2021).

In 2020, the firm's GP margin does not significantly change. The GP margin decreased from 32.58%
to 32.36%. therefore, the gross profit of the firm in the year 2020 was approximately 34.2 billion. The value
was obtained by reducing the sales to 105.8 billion and a reduction in the cost of products sold to 71.59
billion in the year 2020. This presented that the cost of sales reduced to 10.2% while the overall sales
reduced by 14.65%. The reason behind the decline in the sales and gross profit of the firm was a reduction
in the DAP prices upto 69%. That was considered to be a significant decrease in the sale price (Research.,
2021). On the other hand, back in the year 2020, the prices of urea also decreased by 10% in absolute terms

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by Rs 75 to Rs 1,750 per bag due to covid-19. The underlining reason for this was to provide relief to the
farmers through which their financial needs can be eased (NFCD, 2020).

Moreover, when comparing the GP margins of the two firms, it was observed that Engro Fertilizers
GP is significantly higher compared to the GP of FFBL. This is because the cost of FFBL was higher than
EFERT. Furthermore, EFERT was also taking advantage of the government support to meet the demand
for urea production in the agriculture sector of the company. Since EFERT owns one of the largest urea
plants in the world (Fauji Fertlizer Bin Qasim Limited, 2020).

Net Profit Margin

Engro Fertilizers Ltd in the year 2019 faced a decrease in the net profit by 3.2% which was 0.52 billion. The
underlining reason was the potential increase in the finance cost of the organization by 1.88 billion. Since
the Pakistani currency faced a decline in the value against the dollar and the interest rate also boosted to
13.25% in 2019 July from 9% at the beginning of the year (The Express Tribune, 2020). On the other hand,
the distribution and selling cost of EFERT was increased by 0.72 billion. As the inflation rate was increased
in the year up to 13% (News, 2019). This increased the marketing and other expenses of the firm. While the
administrative expenses of the firm were reduced by 1 billion. This was because the firm adopted technology
and automation from traditional and manual processing (AKD Research, 2020).

In 2020, net profit in absolute terms was highest ever in history touching Rs 18.1 billion which was
higher by Rs 2 billion from 2019 (Engro Fertilizer Annual Report, 2020).

The major contributor to this rise was remeasurement gain of Rs 2 billion booked by the company on Gas
Infrastructure Development Cess Liability which was reduced in payables after the landmark judgement by
supreme court of Pakistan (The Dawn, 2020). In the year taxation decreased by Rs 7.3 billion due to
favorable adjustemtn in terms of tax credits and deferred tax booked in prior year which per tax laws was
not liable now (Kumar, 2021). On other hand other Income and Finance cost both declined by Rs @.6 billion
and Rs 650 million due to the fact, state bank of Pakistan significantly reduced the interest rate from 13.25%
in 2019 to 7.25% in 2020 on back of Covid-19 to provide relief to Industries (The News, 2020).

FFBL generated decreased GP margin as it was 18% in the year 2018 and declined to 15% back in the year
2019. The GP margin of FFBL however, increased in the year 2020 to 19%. This converted into a loss back

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in the year 2019 and converted into a profit in the year 2020 of 6.15% (Fauji Fertilizer Annual Report, 2020)
in comparison to Engro Fertilizers, the firm’s profitability has been reduced. This is because of the high
taxes and significant losses incurred by the subsidiaries. The firm reported a total loss of 3.2 billion rupees
in the year 2019’s last quarter. On the other hand, in the year 2018, the firm reported a profit of 1.3 billion
rupees for the same timeframe (Global Village Space, 2019). Furthermore, another potential reason for the
firm to face a loss in the year 2019 was the reduction in the overall sales of DAP (Diammonium Phosphate)
fertilizer and urea (Global Village Space, 2019).

ROCE for Engro rose to 35.17% in 2019 and settled at 25.75% in 2020. The primary driver for change in
ROCE was profit before tax number which was driven by gross profit number. The detailed analysis of
reasons behind rise in GP have been explained below thus not delved into detail here further in 2019 and
2020 another element of ROCE which is Assets and Liabilities both did not budge to create any impact.

FFBL’s ROCE is not showing healthy position in comparison with Engro’s numbers. The company is
suffering profitability issue which is the reason behind such bad ROCE numbers (Express Tribune,
2020).

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Current Ratio

Quick Ratio

The current ratio of the Engro Fertilizers was observed to be 1.15 in 2018 which was further reduced to 1.14
in the year 2019. The current ratio in 2020 EFERT increased to 1.24. on the other hand, the current assets
of the firm were calculated to be 44 billion in 2018. This increased 2019 to 55 billion in 2019. This made a
difference of 10 billion and about 60.8 billion in the year 2020. Thus, making a difference of 5.8 billion.
Moreover, the firm’s current liabilities were enhanced by 1.5 billion only in 2019. 1.3 billion in the year 202
(Engro Fertilizer Annual Report, 2020). While conversely, the FFBL current ratio was approximately 0.86

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in 2018, in 2019 it was 0.70. however, the current ratio of the company increased in 2020 to 1.06. The
reason for this was that FFBL’s current liabilities reduced upto 48.7% back in the year 2020. This made the
company’s liquidity better.

The year 2020 showed the strongest liquidity since the firm was taking part in short-term investments.
Thus, the short-term investment increased from being 5 million to 26.76 million in 2020 which improved
the firm’s liquidity (Engro Fertilizer Annual Report, 2020). On the other hand, the firm’s current assets
were noted to be significantly higher as compared to current liabilities in all of the three years.

Furthermore, the quick ratio eliminates the inventory from current assets. The ratio for EFERT in 2018 was
0.85. The ratio then increased in 2019 to 0.88 and further boosted to 1.09 in the year 2020. This depicted
that the firm is potentially improving in terms of liquidity. While the firm’s current assets are enough to pay
off the current liabilities in 2020 even after deducting inventory (Engro Fertilizer Annual Report, 2020).
On the other hand, FFBL quick ratio estimation in 2018 was 0.73, in 2019 it was 0.51 and in 2020 it was
0.99. In comparison based on the quick ratio, EFERT is much stronger than FFBL. This is again due to the
short-term investments that the firm made (Fauji Fertlizer Bin Qasim Limited, 2020).

Accounts Receivable Days

Accounts Payable Days

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Inventory Days

The above-presented graph highlights the payables, receivables and Inventory values of the two firms in the
last three years. The inventory graph depicted that EFERT’s inventory turnover was 57 days back in the year

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2018. The inventory turnover decreased to 55 days in the year 2019 and further declined to 38 days in the
year 2020. While the FFBL’s inventory days in comparison were 49 days in 2018 however, these increased
to 90 days and 20 days in the year 2019 and 2020 respectively. The closing inventory value was noted to be
11.5 billion in the year 2018. This boosted to 12.47 billion in the year 2019. This indicated an increase of
7.53%. The contributing factor was determined to be the cost of sales of the firm which was estimated to be
73 billion in 2018. Further increased to 81 billion in 2019 which was a rise of 9.6%. rate of inflation was also
a reason for this increase as it enhanced from 3.2% to 8.2% in the year 2019 (Dawn, 2019). This increase in
the inflation rate increased the cost for the firm since the overall prices of the raw materials increased.

The firm faced a reduction in the inventory days in 2020 and the closing inventory was
approximately 7.5 billion in 2020. This was a potential decline as compared to the year 2019 i.e. a decline
of 65%. The major reason was increased demand for urea and in the year 2020, two major plants for urea
production stopped their operations. This served as a significant opportunity for EFERT to increase their
sales. The year 2020 was noted to be better for both companies in terms of inventory days. As the pace of
the sales boosted since the urea demand increased to 6.2 million tonnes (Dawn, 2021)

The period under the study showed that both the firms followed the same trend in the context of
receivable days as shown in the graph above. The receivable days of EFERT were 30 days in 2018, this
increased in 2019 to 42 days and then decreased drastically to 10 days in the year 2020. On the other hand,
the FFBL receivable days were estimated to be 30 in 2018 further increased in 2019 to 46 and then
decreased to 11 days in the year 2020. This depicts that the FFBL movement was almost similar to EFERT.
The EFERT accounts receivables were valued at 9.1 million in 2018. This further increased to 14.17 billion
in the year 2019; in the rate term, the increase was 35%. However, in 2020 the receivables reduced to 2.9
billion; in rate term by 38%. Covid-19 was found to be the macro-economic factor that impacts the
receivables resulting in unemployment (Sareen, 2020). This made it a challenge for the debtors to pay off
their debts in the year 2019. While in the year 2020, the receivable days decreased to 11 days. This was
because the economy started to boost again this business operation also improved. EFERT also enhanced
their policies to recover debts through SAP. This automated the procedures and helped the firm to recover
the amount on time.

Gearing Ratio

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This section highlights the debt-to-equity ratio for both the firms. The Engro Fertilizers debt-to-equity ratio
was determined to be 0.73 back in the year 2018. This ratio presented a small increment in 2019 and
reached up to 0.80. conversely, in the year 2020, the ratio depicted a decrement of 0.77. therefore, it can
be concluded that the total firm equity is declining in 2019 to 43.279. while increased in 2020 to 46.7 billion.
The ratio calculation is dependent on the retained earnings that have represented the increment. However,
the increase in the total liabilities back in the year 2019 was analysed to be 83.7 billion. Moreover, in 2020,
it depicted a potential increase of 84.9 billion (Business Recorder, 2020). On the comparison of the debt-
to-equity ratio of FFBL, it was determined that the ratio was decreasing to 2.35 again in the year 2020 as
shown in the graph above.

The analysis of the ratio highlights that EFERT is far more dependent on debt as compared to be depending
on equity. The underlining reason for this is that the company’s total debt was estimated to be around 72
billion in 2018 and showed an increase to 83.7 billion. This acceleration represented the decline and the
firm was forced to be dependent more on its debts. In comparison FFBL has very high gearing ratio as it is
not performing well and needs debt for financing its subsidiaries.

Earnings Per Share

The earning per share of EFERT was analysed to be 13.04 back in the year 2018. While it was 12.64 and
13.58 back in the years 2019 and 2020 respectively. While the earning per share of FFBL was estimated to
be 1.68 back in the year 2018 that depicted negative reading of 6.51. In the year 2020, the reading becomes
positive again at 6.23. The major factor for this was that the firm has been indicating dependency on the
earnings thus the EFERT’s net income was estimated to be potentially highest back in the year 2020. This
highest showcased was due to the fact that in the year 2020 the demand for urea significantly increased as
compared to the previous years. On the other hand, the firm also showed enhanced within the financial cost
as the firm borrowed from different financial institutions that is a major macro-environmental factor. While
another aspect that was demonstrated was an increase in the global price of urea by 86%. Therefore, it
increased the EPS of EFERT (Engro, 2020).

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 Furthermore, FFBL EPS was negative in the year 2019 as the firm was suffering from multiple
losses. Moreover, the finance cost of the firm boosted to 99 billion in the year 2019 from 52 million in 2018.
EPS of FFBL also increased in 2020 as the company produced profit through the reduction in selling and
other expenses. Along with this EFERT showed good performance within the stock market by showing
profitability (Fauji Fertilizer Annual Report, 2020).

Dividend Yield

The major aim of dividend yield is to support in indicating the payout of the company. EFERT dividend
yield was evaluated to be 22% in the year 2019. This was consistent at 22% in the year 2019 and increase of
1% in 2020 to 23%. While FFBL dividend yield was analyzed to 3% in the year 2018. Thus, the increase in
the dividend yield shows that the firm is putting effort into attracting more investors and shareholders in
2019. The stock price of the firm increased to 59.33 in 2019 (Balani, 2020). This was 49.52 back in the year
2018. It is worth mentioning the Engro has best dividend yield in the Pakistan stock universe and if there
are chances economy slows and interest rate spikes Engro fertilizer would be preferred stock for investors
(Umer, 2021).

Through analysis it can be determined that FFBL is not paying dividends as it is going through tough times
with issues in profitability and cashflow, however, EFERT is focusing on developing strategies through
which they can attract the attention of the shareholders.

Conclusion and Recommendations

Engro Fertlizer has depicted exceptional performance in last 3 years. The financial ratios be it profitability
one’s that are GP Margin and NP Margin, Liquidity ratios such as Current Ratio , Gearing Ratios and
Investors ratio specially Dividend Yield all are pointing towards company’s stable position and also
cashflows are healthy which shows company can easily expand , get new technology and spend on marketing
budget to increase sales.

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Business Analysis reveal that its Strengths outweigh in weaknesses with strong management at helm weak
areas will easily be converted into strength and with stable government in place the threats would be
neutralized and opportunities in the market will turn into higher sales in future.

Overall, it shows a rosy picture for the company and only recommendation would be that management
should not sleep tight and be cognizant of the fact related to climate change which cans severely impact
them and have polciies to combat it also be aware of concessionary gas price ending and finding alternative
for the low gas price as raw material.

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