The Pakistan Credit Rating Agency Limited RATING REPORT ENGRO CORPORATION LIMITED (FORMERLY ENGRO CHEMICAL PAKISTAN LIMITED) AUGUST 2010 HOLDING COMPANY The Pakistan Credit Rating Agency Limited ENGRO CORPORATION LIMITED 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 August 2010 www.pacra.com OLDING OMPANY H C The Pakistan Credit Rating Agency Limited RATINGS (AUGUST 2010) RATING RATIONALE AND KEY RATING DRIVERS ENGRO CORPORATION LIMITED . The ratings reflect ECL’s articulated corporate center mandate aimed at creating value in excess of the [ECL] 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 Entity NEW PREVIOUS* of the governance framework with independent directors, and a comprehensive framework for monitoring the performance of subsidiaries. The ratings incorporate ECL’s diversified investment Long Term AA AA 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 Short Term A1+ A1+ established enterprises supplements ECL’s financial profile. Secured . These ratings are dependent upon the company’s ability to implement a robust mechanism for providing TFC I strategic guidance to all group companies while maintaining an effective control environment. PKR4,000mln AA - Moreover, timely completion of the urea expansion project without significant delays, coupled with growth and resultant profitability in other businesses, remains important. Meanwhile, effective * Assigned to Engro Chemical Pakistan Limited 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. AA+ ASSESSMENT . Incorporated in 1965, Engro Chemicals Pakistan Limited (ECPL) was renamed as Engro Corporation AA 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 AA- 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. A+ Engro Corporation has irrevocably and unconditionally guaranteed to each secured party, as defined May May June June May under the pertinent finance documents, punctual performance by Engro Fertilizer of all its obligations, 2006 2007 2008 2009 2010 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 FINANCIAL DATA principal obligor in respect of that amount. PKR (mln) . 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 – 1H10* Dec-09* Dec-08* providing a structured breakdown of information on predetermined key indicators for each group entity. Total Assets 152,699 132,105 80,802 Equity 31,942 29,344 23,548 The company has also formulated an Executive Committee (ExCom), comprising Group CEO, Group Long Term CFO, Head Human Resource and all designated CEOs of subsidiaries/ associates. ExCom’s primary 89,244 84,142 40,768 Borrowings function is to assess managerial qualities, while augmenting decision-making and consensus building. Current Borrowings 14,329 3,678 4,953 . ECL’s investment book (cost: PKR 25,352mln) include interests in companies engaged in (i) fertilizers Net Turnover 33,724 58,152 40,937 (Engro Fertilizer Limited – 100%), (ii) food & allied (Engro Foods Limited – 100%, (iii) power EBITDA 6,898 9,018 8,072 production (Engro Energy (Pvt.) Limited – 95% and Engro Powergen (Pvt.) Limited – 100%), (iv) ROE % 10.0 14.9 17.9 commodity export/ import (Engro Eximp (Pvt.) Limited – 100%), (v) automation & controls EBITDA Interest 4.1 4.1 4.6 Cover (X) engineering (Avanceon Limited – 63%) (vi) PVC resins (Engro Polymer & Chemicals Limited – 56%) Total Debt/ (Total and (vii) Storage (Engro Vopak Terminal Limited – 50%). 76.4 75.0 66.0 Debt + Equity) . 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 * Consolidated figures for Engro Group 1,300,000tons expected to come online, with some delay, in 4Q10. Engro Foods Limited, engaged in the ANALYSTS 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 Arsalan Ahmed in March 2010, as per the revised plan, posted a profit of PKR 379mln for 1H10. Engro Eximp (Pvt.) +92 42 35869504 Limited, engaged in commodities import/export, reported a profit of PKR 973mln in 1H10. Avanceon [email protected] 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- Jhangeer Hanif commissioned its VCM production (backward integration) after a lag due to fire incident in December. +92 42 35869504 The plant is expected to reach its optimum capacity by end-3Q10. The company reported a loss of PKR [email protected] 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, TFCS ISSUE while diversifying into other lucrative business opportunities. The role of ECL will be limited in terms ECL is in the process of issuing TFCs of of operational decision making but more on the lines of oversight and providing strategic direction. In PKR 4,000mln (including a green shoe terms of profitability, the company’s income stream would stem from dividends received from its option of PKR 2,000mln). The instrument investments and, therefore, expected to be highly correlated to the performance of group entities and will have a tenor of 3 years, carrying fixed their ability to generate positive cash flows. Total subsidiary income in 2009 amounted to PKR profit rate of 14.5% p.a., paid semi 1,885mln (2008: 2,605mln) emanating from Engro Eximp (Pvt.) Limited (PKR 1,435mln) and Engro annually. The principal payment will be in Vopak Terminal Limited (PKR 450mln). Going forward, Engro Energy is expected to contribute the 3rd year or early through put option. In towards ECL’s dividend income, followed by Engro Fertilizer in 2011. Engro Polymer would follow case put option is exercised the investor will suit once its VCM plant is completely functional. have to pay a service charge of 2% on the . With the issue of TFCs of PKR 4,000mln, ECL’s standalone capital structure would experience principal. The TFC is secured by way of leveraging. This adds to financial risk profile of the group as its consolidated debt (including short term first ranking floating charge over all the debt)has crossed PKR 100bln mark by end-June10 with very high level of gearing. Nevertheless, mainly present and future movable properties with the commissioning of Enven 1.3, the debt is expected to gradually decrease over the medium term. (including investments) of Engro PROFILE Corporation Limited but excluding present . Engro Corporation Limited (formerly Engro Chemicals Pakistan Limited) is listed on all three stock and future trademarks and copyrights of exchanges of the country. Dawood Group holds a majority stake (~48%) in ECL. ECL has a thirteen ECL and excluding its shares in Engro member board. The chairman of the board is Mr. Hussain Dawood, a well known professional veteran. The Energy Limited and Engro Polymer & CEO, Mr. Asad Umar, an MBA with significant professional experience, has been associated with the Chemicals Limited. 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. 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 HOLDING COMPANY The Pakistan Credit Rating Agency Limited 1. RATINGS ENTITY NEW PREVIOUS* . Very high credit Long Term AA AA Short Term quality A1+ A1+ TFCs AA - PKR 4,000mln * Assigned to Engro Chemical Pakistan Limited. AA+ AA AA- A+ June June April May May June June May 2003 2004 2005 2006 2007 2008 2009 2010 2. PROFILE 2.1 Incorporated in Stock Price - Volume chart 16,000 320 . ECPL renamed as 1965, Engro Chemical Engro Corporation Pakistan Limited was 14,000 Limted (ECL) renamed as Engro 12,000 240 10,000 . A diversified Corporation Limited conglomerate (ECL) on January 01, 8,000 160 6,000 (PKR) Price . 2010, following a Significant fertilizer Volume(Thousands) presence demerger of the fertilizer 4,000 80 business to Engro 2,000 Fertilizer Limted (EFL). - - ECL is listed on all the stock exchanges of the Volume (L.H.S.) Closing price (R.H.S.) KSE - 100 Linear (Closing price (R.H.S.)) country.