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Submitted To:

Mr.Noman Moin Ud Din

Submitted By:

Sadiqa Kausar

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.

Table of Contents

Topic Names 1. Executive summary 2. Ratios & Analysis 3. Industry Benchmarking 4. Company Strength & Weaknesses 5. Recommendations 6. Beta of the Company 7. Expected Return & Standard Deviation 8. Required Return 9. Comparison of Expected & Required Return 10.Portfolio Beta 11.Scatter Diagram 12. Security Market Line (SML) 13.Expected Price 14. WACC (Book Value & Market Value)

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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.

INTRODUCTION OF THE COMPANY


Engro Corporation Limited is one of Pakistans 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 Engros 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 Corporations 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.

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 doesnt 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 thats 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.

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.

COMPARISON OF COMPANY RATIOS


Fertilizers Industry : Summary of Financial Ratios

Industry Benchmarking Engro Serial# Liquidity Ratio 1 Current Ratio 2 Quick Ratio Asset management Ratio 3 Inventory turnover 4 Day sales outstanding 5 Fixed asset Turnover 6 Total asset Turnover Debt management Ratio 7 Debt ratio 8 TIE ratio Profitability Ratio 10 Profit Margin on sale Corp 1.68 1.38 11.82 30.42 0.36 0.32 0.71 4.95 13.12% FFBL 1.10 1.03 10.64 4.74 2.07 1.01 0.71 4.81 10.30 FFC 0.84 0.83 179.84 2.59 1.53 0.94 0.66 14.82 24.40

Averag e 1.20583 1.07932 67.4328 12.583 1.31972 0.75794 0.69315 8.19377 16%
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Comment Good Good Good Very Poor Good Good Risky Risky Poor

% 19.40 11 BEP ratio 12 Return on total asset 13 Return on total Equity Market Value Ratio 14 Price Earnings Ratio 16 Market book ratio 17 Price/Cash flow Ratio 6.97% 4% 15% 13.02 30.11 7.52 % 10.45 % 36% 6.45 22.92 24.39

% 36.32 % 22.89 % 67% 7.92 53.33 1.30 21% 13% 39% 9.13 35.4533 11.07 Poor Poor Poor Good Poor Poor

Current Ratio:

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:

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

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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: 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:

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:

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:

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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: 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:

This ratio is less as compared to other companies which show company decreases its 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:

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:

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According to the Graph our company return on total assets is low from other companies. It means that the companys 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:

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 firms 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
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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.

RECOMENDATIONS

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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 dont give any economic value addition which is not good for companys long run profit. Company should added economic value to country. The beta of this company is risky then FFC and FBQ. We suggest dont invest money in this company.

Calculation of Beta

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BETA ENGRO Regression Slope

Engro 1.21 1.21

FFBL 0.60 0.60

FFC 0.78 0.78

Calculation of expected return: Average Engro % 3.53% Standard deviation 0.097229 FFBL % 4.52% 0.093134 FFC % 2.34% 0.075104

Coefficient of variance

0.004334

0.002168

0.00281

Calculation of Required return: Krf Rpm k=krf+rpm(b) 13.86% 8% 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
ENGRO FERTILIZERS FFC

weight
0.5 0.5

beta
1.21 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 return 0.02 0.22 0.09 0.03 (0.12) 0.07 0.01 0.19 (0.04) 0.07 (0.00) 0.04 (0.05) 0.06 0.07 (0.11) 19

ENGRO FERTILIZERS 0.09 0.25 0.03 0.01 (0.08) 0.06 0.01 0.28 (0.07) 0.10 0.01 0.04 (0.05) 0.06 0.09 (0.14)

FFC (0.06) 0.19 0.15 0.04 (0.15) 0.09 (0.00) 0.10 (0.01) 0.03 (0.01) 0.03 (0.05) 0.05 0.05 (0.08)

(0.01) 0.05 (0.10) 0.04 0.01 0.03 0.09

(0.01) 0.04 (0.00) (0.03) 0.03 0.03 0.10

(0.01) 0.05 (0.05) 0.00 0.02 0.03 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

Scattered Diagram:

Security Market Line (SML):


Bp krf Rpm 1.21 14% 8%

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Beta 0 0.4 0.8 1.2 1.6

ki 13.86% 17.06% 20.26% 23.46% 26.66%

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): 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

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2004 2005 2006 2007 2008 2009 Projected Dividends by Weight Avg method Dividend s 8.5 11 9 7 6 6 7.21 7.01 6.82 6.75 6.78 6.82 6.83 6.81 6.81

8.5 11 9 7 6 6

1 2 3 4 5 6

Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Weight 1 2 3 4 5 6

Projection

% change

0.00% 7.21 7.01 6.82 6.75 6.78 6.82 6.83 6.81 6.81 20.24% -2.78% -2.81% -0.93% 0.34% 0.60% 0.23% -0.27% -0.09%

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2019 2020

4.43 6.13

6.81 6.13

-34.93% 38.44%

Average Growth

1.50%

2009

2010 Ks= 23.53 7.21

2011 2 7.01

2012 3 6.82

2013

2014 4

2015 5 6.82

2016 6 6.83

2017 7 6.81

2018 8 6.81

2019 9 4.43

2020 10 6.13

6.75

6.78

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

2.040316442

1.715930606 4.748186581

Po Intrinsic Value

28.45212447

P1

26.25299 148

Corporate Valuation Model:-

K s
=

23.53 %

Do =

4.43

g=

1.50%

28.45

= FCF/(1+WACC) = 1818867 Working for free cash flows:


Current Liabilities (payable + Accrued) 2,985,149

Terminal Value
NOWC Net Fixed Assets 1,617,455

=
TOC

D9 Ks - GCash Free
flow

Year

EBIT

NOPAT 1451409. 7

Current Assets

18.83906313
10,034,163

2004

2,232,938

4,602,604

8,582,753

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2005 2006 2007 2008 2009

2,641,286 2,755,529 3,278,705 4,538,748 4,986,168

1716835. 9 1791093. 9 2131158. 3 2950186. 2 3241009. 2

5,011,555 5,684,446 16,397,198 12,042,221 10,748,871

2,800,094 3,642,415 5,264,674 5,999,353 6,395,469

9,100,075 10296370 21759453 45,122,518 82,960,567

2,211,461 2,042,031 11,132,524 6,042,868 4,353,402

10,816,911 12,087,464 23,890,611 48,072,704 86,201,576

1,122,830 1,960,524 -6,959,335 8,039,842 4,930,475

Dividend Yield : D1/P0 15.34%

1,818,86 7

Working D1 = D0 (1+g)1 Capital Gain Yield: (P1 P0) / P0 Working P1 = P0 (1+g) 28.8798 4.3634 2

Total Return (Ks) = Dividend yield + Capital gain yield 16.84% 1.50%

Calculation of WACC

Book Value of WACC:


Rs (million)

Equity Total Debt


Total

2,979,426 6,395,469 9,374,895

Weights Book value Common Equity 2,979,426 32%


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Total Debt Total

6,395,469 9,374,895

68% 100%

WACC=WdKd(1T) +WpKp+WcKs WpK p 0

Wd 68% WACC =

Kd 21% 16.64%

1-tax% 0.65

Wc 32%

Ks 0.2353 3

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

Weights Market value of Equity Total Debt Total 59,457,306 6,395,469 65,852,775 90% 10% 100%

Wd 10%

Kd 21%

1-tax% 0.65

WpKp 0

Wc 90%

Ks 0.23533

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WACC

22.55%

ANNEXURE / ATTACHMENTS

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