Submitted By:

Sadiqa Kausar

Submitted To:

Mr.Noman Moin Ud Din

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2
 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
Engro
Serial# Liquidity Ratio 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:

2.00
current ratio
1.50

1.00

curr…
0.50

0.00
Engro Corp FFBL FFC

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:

Quick Ratio
1.60
1.40
1.20
1.00
0.80
Quick Ratio
0.60
0.40
0.20
0.00
Engro Corp FFBL FFC

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

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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:

Inventory turnover
200.00
180.00
160.00
140.00
120.00
100.00
Inventory turnover
80.00
60.00
40.00
20.00
0.00
Engro Corp FFBL FFC

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:

35.00

30.00
Day sale outstanding
25.00

20.00

15.00
Day sale…
10.00

5.00

0.00
Engro Corp FFBL FFC

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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:

Fixed Assets turnover

2.50

2.00

1.50

Fixed Assets turnover

1.00

0.50

0.00
Engro Corp FFBL FFC

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.

Total assets turnover:

Total asset turnover

1.20
1.00
0.80
0.60
Total asset turnover
0.40
0.20
0.00
Engro Corp FFBL FFC

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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:

Debt Ratio
0.72
0.71
0.70
0.69
0.68
0.67 Debt Ratio
0.66
0.65
0.64
0.63
Engro Corp FFBL FFC

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.

Time Interest Earned:

TIE Ratio
20.00

15.00

10.00
TIE Ratio
5.00

0.00
Engro Corp FFBL FFC

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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:

Profit Margin
30.00%

25.00%

20.00%

15.00%
Profit Margin
10.00%

5.00%

0.00%
Engro Corp FFBL FFC

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.
It also shows that earning per share also decreases in 2009 and shareholders confidence
strengthened is decreased.

Return on total assets:

Return on total asset

0.250
0.200
0.150
0.100 Return on total asset
0.050
0.000
Engro Corp FFBL FFC

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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:

Return on Equity

0.80
0.70
0.60
0.50
0.40 Return on Equity
0.30
0.20
0.10
0.00
Engro Corp FFBL FFC

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
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.

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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

Calculation of Required return:

Krf 13.86%
Rpm 8%

k=krf+rpm(b) 23.53%

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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

Portfolio Beta:

Bp w1*b1+w2*b2+w3*b3
= 0.996452753

Portfolio
required
return krf+rpm(b)
= 21.23162202

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Expected return on portfolio:

Portfolio
ENGRO FERTILIZERS FFC 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
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:

30.00%

25.00%

20.00%

15.00%

10.00%
Axis Title

Series1
5.00%
Linear
(Series1)
0.00%
-15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

-5.00%

-10.00%

-15.00%

-20.00%
Axis Title

Security Market Line (SML):

Bp 1.21
krf 14%
Rpm 8%

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 Beta ki
0 13.86%
0.4 17.06%
0.8 20.26%
1.2 23.46%
1.6 26.66%

30.00%

25.00%

20.00%

15.00%
Series1

10.00%

5.00%

0.00%
0 0.4 0.8 1.2 1.6

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.

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EXPECTED PRICE (P):

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

Year Dividends 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%
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%

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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
Terminal
= 3.401960029 Value = D9
P.V.5 D5/(1+i)^5 Ks - G

= 2.880902585
18.83906313
P.V.6 D6/(1+i)^6
= 2.430574782
P.V.7 D7/(1+i)^7
= 2.040316442
P.V.8 D8/(1+i)^8
= 1.715930606
Terminal 4.748186581
value

Po Intrinsic 28.45212447
Value
P1 26.25299148

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Corporate Valuation Model:-

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

= FCF/(1+WACC)
= 1818867

Working for free cash flows:

Current
Liabilities
Current Net Fixed Free Cash
Year EBIT NOPAT (payable NOWC TOC
Assets Assets flow
+
Accrued)
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

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

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 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%

WACC=WdKd(1T)+WpKp+Wc
Ks

WpK
Wd Kd 1-tax% p Wc Ks
0.2353
68% 21% 0.65 0 32% 3

WACC = 16.64%

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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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