The Pakistan Credit Rating Agency Limited - BIPL Direct Pakistan Credit Rating Agency Limited ......

AUGUST 2010

The Pakistan Credit Rating Agency Limited

RATING REPORT

ENGRO CORPORATION

LIMITED

(FORMERLY ENGRO

CHEMICAL PAKISTAN

LIMITED)


HOLDING COMPANY

August 2010 www.pacra.com

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

ENGRO CORPORATION LIMITED


HOLDING COMPANY

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

RATINGS (AUGUST 2010)

ENGRO CORPORATION LIMITED

[ECL]

* Assigned to Engro Chemical Pakistan Limited

May May June June May

2006 2007 2008 2009 2010

AA

AA-

A+

AA+

FINANCIAL DATA PKR (mln)

1H10* Dec-09* Dec-08*

Total Assets 152,699 132,105 80,802

Equity 31,942 29,344 23,548

Long Term

Borrowings 89,244 84,142 40,768

Current Borrowings 14,329 3,678 4,953

Net Turnover 33,724 58,152 40,937

EBITDA 6,898 9,018 8,072

ROE % 10.0 14.9 17.9

EBITDA Interest

Cover (X) 4.1 4.1 4.6

Total Debt/ (Total

Debt + Equity) 76.4 75.0 66.0

* Consolidated figures for Engro Group

ANALYSTS

Arsalan Ahmed

+92 42 35869504

[email protected]

Jhangeer Hanif

+92 42 35869504

[email protected]

TFCS ISSUE

ECL is in the process of issuing TFCs of

PKR 4,000mln (including a green shoe

option of PKR 2,000mln). The instrument

will have a tenor of 3 years, carrying fixed

profit rate of 14.5% p.a., paid semi

annually. The principal payment will be in

the 3rd year or early through put option. In

case put option is exercised the investor will

have to pay a service charge of 2% on the

principal. The TFC is secured by way of

first ranking floating charge over all the

present and future movable properties

(including investments) of Engro

Corporation Limited but excluding present

and future trademarks and copyrights of

ECL and excluding its shares in Engro

Energy Limited and Engro Polymer &

Chemicals Limited.

RATING RATIONALE AND KEY RATING DRIVERS

The ratings reflect ECL’s articulated corporate center mandate aimed at creating value in excess of the

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

of the governance framework with independent directors, and a comprehensive framework for

monitoring the performance of subsidiaries. The ratings incorporate ECL’s diversified investment

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

established enterprises supplements ECL’s financial profile.

These ratings are dependent upon the company’s ability to implement a robust mechanism for providing

strategic guidance to all group companies while maintaining an effective control environment.

Moreover, timely completion of the urea expansion project without significant delays, coupled with

growth and resultant profitability in other businesses, remains important. Meanwhile, effective

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.

ASSESSMENT

Incorporated in 1965, Engro Chemicals Pakistan Limited (ECPL) was renamed as Engro Corporation

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

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.

Engro Corporation has irrevocably and unconditionally guaranteed to each secured party, as defined

under the pertinent finance documents, punctual performance by Engro Fertilizer of all its obligations,

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

principal obligor in respect of that amount.

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 –

providing a structured breakdown of information on predetermined key indicators for each group entity.

The company has also formulated an Executive Committee (ExCom), comprising Group CEO, Group

CFO, Head Human Resource and all designated CEOs of subsidiaries/ associates. ExCom’s primary

function is to assess managerial qualities, while augmenting decision-making and consensus building.

ECL’s investment book (cost: PKR 25,352mln) include interests in companies engaged in (i) fertilizers

(Engro Fertilizer Limited – 100%), (ii) food & allied (Engro Foods Limited – 100%, (iii) power

production (Engro Energy (Pvt.) Limited – 95% and Engro Powergen (Pvt.) Limited – 100%), (iv)

commodity export/ import (Engro Eximp (Pvt.) Limited – 100%), (v) automation & controls

engineering (Avanceon Limited – 63%) (vi) PVC resins (Engro Polymer & Chemicals Limited – 56%)

and (vii) Storage (Engro Vopak Terminal Limited – 50%).

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

1,300,000tons expected to come online, with some delay, in 4Q10. Engro Foods Limited, engaged in the

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

in March 2010, as per the revised plan, posted a profit of PKR 379mln for 1H10. Engro Eximp (Pvt.)

Limited, engaged in commodities import/export, reported a profit of PKR 973mln in 1H10. Avanceon

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-

commissioned its VCM production (backward integration) after a lag due to fire incident in December.

The plant is expected to reach its optimum capacity by end-3Q10. The company reported a loss of PKR

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,

while diversifying into other lucrative business opportunities. The role of ECL will be limited in terms

of operational decision making but more on the lines of oversight and providing strategic direction. In

terms of profitability, the company’s income stream would stem from dividends received from its

investments and, therefore, expected to be highly correlated to the performance of group entities and

their ability to generate positive cash flows. Total subsidiary income in 2009 amounted to PKR

1,885mln (2008: 2,605mln) emanating from Engro Eximp (Pvt.) Limited (PKR 1,435mln) and Engro

Vopak Terminal Limited (PKR 450mln). Going forward, Engro Energy is expected to contribute

towards ECL’s dividend income, followed by Engro Fertilizer in 2011. Engro Polymer would follow

suit once its VCM plant is completely functional.

With the issue of TFCs of PKR 4,000mln, ECL’s standalone capital structure would experience

leveraging. This adds to financial risk profile of the group as its consolidated debt (including short term

debt)has crossed PKR 100bln mark by end-June10 with very high level of gearing. Nevertheless, mainly

with the commissioning of Enven 1.3, the debt is expected to gradually decrease over the medium term.

PROFILE

Engro Corporation Limited (formerly Engro Chemicals Pakistan Limited) is listed on all three stock

exchanges of the country. Dawood Group holds a majority stake (~48%) in ECL. ECL has a thirteen

member board. The chairman of the board is Mr. Hussain Dawood, a well known professional veteran. The

CEO, Mr. Asad Umar, an MBA with significant professional experience, has been associated with the

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.

Entity NEW PREVIOUS*

Long Term AA AA

Short Term A1+ A1+

Secured

TFC I

PKR4,000mln

AA

-


HOLDING COMPANY

ENGRO CORPORATION LIMITED (ECL) Page 2 of 10

AUGUST 2010 www.pacra.com

1. RATINGS

Very high credit

quality

ENTITY NEW PREVIOUS* Long Term AA AA

Short Term

TFCs PKR 4,000mln

A1+

AA

A1+

-

* Assigned to Engro Chemical Pakistan Limited.

2. PROFILE

ECPL renamed as

Engro Corporation

Limted (ECL)

A diversified

conglomerate

Significant fertilizer

presence

2.1 Incorporated in

1965, Engro Chemical

Pakistan Limited was

renamed as Engro

Corporation Limited

(ECL) on January 01,

2010, following a

demerger of the fertilizer

business to Engro

Fertilizer Limted (EFL).

ECL is listed on all the

stock exchanges of the

country. The share price

movement has been largely consistent with the market trend since the reopening of trade

in December 2008. The chart demonstrates ECL’s strong capacity to raise sizable capital

in times of any contingency, as evidenced in the company’s history as well. ECL’s head

office is located in Karachi.

2.2 ECL is a holding company mainly responsible for overseeing and managing the

performance of its subsidiaries and associates, covering business interests in fertilizers,

food and commodities, power, engineering, chemicals and storage. In order to facilitate

the transition towards the holding company structure, the company sought structural

recomendations from McKinsey & Company; a reputed management consultancy firm.

As a result of the transition, the ECL aims to seek benefit from a more focused approach

towards strategic management and enhanced governance. The chart below displays ECL’s

subsidiaries and joint venture/ associated companies along with the company’s ownership

and investment (at cost) in each:

June June April May May June June May

2003 2004 2005 2006 2007 2008 2009 2010

AA

AA-

A+

AA+

70% 30%

Engro Foods Supply Chain

(Pvt.) Ltd.

100%

(PKR 523mln)

Wh

oll

y

ow

ned

sub

sid

arie

s

Su

bsi

dar

ies

Engro Powergen Ltd.

100%

(PKR 387mln)

Engro Vopak Terminal

Ltd. (Joint Venture)

50%

(PKR 450 mln)

Engro Polymer &

Chemicals Ltd.

56%

(PKR 3,651mln)

Avanceon Ltd.

63%

(PKR 382mln)

Engro Energy Ltd.

95%

(PKR 3,040mln)

Engro Corporation Limited

as at Jun10

Engro Foods Ltd.

100%

(PKR 6,216mln)

Engro Fertilizers Ltd.

100%

(PKR 10,739mln)

Engro EXIMP Ltd.

100%

(PKR 480mln)

Engro Management

Services Ltd.

100%

(PKR 2.5mln)

-

80

160

240

320

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Pri

ce (P

KR

)

Vol

ume

(Tho

usan

ds)

Stock Price - Volume chart

Volume (L.H.S.) Closing price (R.H.S.)

KSE - 100 Linear (Closing price (R.H.S.))


HOLDING COMPANY



38%

10%

3%3%

18%

28%

48%

Shareholding Pattern as at Dec09

Dawood Hercules Chemicals Ltd Associated Companies

Directors & Related Parties Public Sector Corporations

Financial Institutions Others

2.3 ECL and its subsidiaries have won numerous awards from the Karachi Stock

Exchange (KSE) and the Management Association of Pakistan. In addition, the company

attained 3-Star rating in Environment Performance benchmarking carried out by British

Safety Council as well as Investor Relation Award by the CFA association of Pakistan. In

addition, Engro is ranked as the top Pakistani company for corporate social responsibility

in the first Asian Sustainability Rating 2009.

3. OWNERSHIP

Majority owned by

Dawood Group

Dawood Group – a

diversified business

group

3.1 Dawood Group (DG) holds a

majority stake in ECL through direct

and indirect shareholding. DG, a

distinguished and trusted name in

Pakistan, traces its origins back to

almost a century ago. The current

shareholding pattern of the company

is shown in the graph.

3.2 Dawood group is primarily

engaged in the business of fertilizer,

textiles, technology business and

insurance. The journey of the group

started in 1949 with the foundation

of first group company -

Lawrencepur Woollen & Textile Mills. The group made inroads into the fertilizer sector

by setting up Dawood Hercules Chemicals Limited (DAWH) in 1968. DAWH, listed on

Lahore and Karachi Stock Exchange, has a nameplate capacity of 445,500MT p.a. with

approximately 115% capacity utilization at end Dec09. The company manages one of the

highly recognized brands among fertilizer community – Bubber Sher. With the passage of

time, some other group concerns – Dawood Cotton Mills Limited, Burewala Textile Mills

Limited, Central Insurance Company, Dawood Corporation (Pvt.) Limited, and Dilon

Limited were also founded. In 2004, all the textile companies of the Dawood group were

merged in a single entity - Dawood Lawrencepur Limited. During the same year, the

group also acquired majority stake in Inbox Business Technologies (Pvt.) Limited, an

information technology firm. The group runs a small brokerage house by the name of

Elixir Securities Pakistan (Pvt.) Limited.

4. GOVERNANCE

Experienced BoD

members with

diverse professional

background

Four independent

directors

Strong committees

structure

4.1 ECL’s board of directors comprises thirteen members including the CEO. 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. The

pertinent details of all board members are given as follows:

No. Name Key Experience Representative Committees

1 Mr. Hussain Dawood

[MBA – Northwestern

University, USA]

Chairman – Engro Corporation Limited

Chairman – Dawood Hercules Chemicals Limited

Chairman – Pakistan Poverty Alleviation Fund

DG

Chairman - Board

Compensation

Committee

2

Mr. Samad Dawood

[BSc – University College

London, UK]

CEO – Dawood Corporation Limited

Chairman – Central Insurance Company Limited

Director – Sui Northern Gas Pipelines Limited

DG Audit Committee

3

Mr. Shahzada Dawood

[LLB & MA Global Textile

Marketing – University of

Philadelphia, USA]

CEO – Dawood Hercules Chemicals Limited

Chairman – Dawood Lawrencepur Limited

Director – National Mines (Pvt.) Limited

Director – Sach International (Pvt.) Limited

DG Board Compensation

Committee


HOLDING COMPANY



4.2 The board has two committees namely Board Compensation Committee and Board

Audit Committee.

4.2.1 Board Compensation Committee, comprising four members, is headed by Mr.

Hussain Dawood. The committee is responsible for decisions relating to performance

evaluation, development and succession of CEOs and top Executives. Also, the committee

ensures human resource policies are aligned to deliver robust talent management process

across various Engro Companies while establishing group wide standards /policies.

4.2.2 Board Audit Committee, comprising four members, is headed by Mr Shabbir

Hashmi. The committee assists the board in fulfilling its oversight responsibilities,

primarily in reviewing and reporting financial and non-financial information to

shareholders, systems of internal control and risk management and the audit process. It

has access to all information from management and can consult directly with the external

auditors or their advisors as considered appropriate. The CEO and CFO attend the

meetings by invitation. The committee also privately meets with the external auditors at

least once a year. After each meeting, the chairman of the committee reports to the Board.

4 Mr. Isar Ahmed

[FCA & MA Economics]

Director Strategy and Business - Dawood Hercules

Chemicals Limited

Ex Head of Business Unit – Reckitt Benckiser

Ex MD – Haleeb Foods Limited

DG Audit Committee

5 Mr. Asad Umar

[MBA – Institute of Business

Administration]

CEO – Engro Corporation Limited

CEO – Engro Fertilizers Limited

Director State Bank of Pakistan

Director – Pakistan Institute of Corporate Governance

Employee -

6

Mr. Ruhail

Mohammad

[CFA & MBA – Institute of

Business Administration]

Group CFO

Ex CFO – Trans Gulf Finance Corporation

Ex CEO – Sigma Leasing (Pvt.) Limited

Employee -

7 Mr. Khalid Mansoor

[Chemical Engineer]

CEO – Engro Energy Limited

CEO – Engro Powergen Limited Employee -

8

Mr. Asif Qadir

[Chemical Engineer –

Columbia, USA]

CEO – Engro Polymer & Chemicals Limited

Director – Engro Powergen Limited

Director – Engro Energy Limited

Employee -

9

Mr. Khalid Subhani

[Chemical Engineer & MBA

– University of Berkley,

USA]

Designated CEO – Engro Fertilizer Limited

Director – Engro Polymer & Chemicals Limited

Director – Engro Energy Limited

Employee -

10

Mr. Shabbir Hashmi

[MBA – JF Kennedy

University, USA]

Private Equity Consultant – Actis Assets Limited Independent

Chairman – Audit Committee

Board Compensation

Committee

11

Mr. Arshad Nasar

[MA Economics & Political

Science]

Director – Pakistan Industrial Development

Corporation

Ex CEO & chairman – Oil & Gas Development Company Limited

Ex MD – Caltex Oil Pakistan

Independent Board Compensation

Committee

12

Mr. Ali Ansari

[BA Economics – Richmond

College, UK]

Director – National Clearing Company of Pakistan

CEO – Dewan Drilling Limited

Ex CEO – AKD Securities

Ex COO – Credit Lyonnais Securities

Independent Audit Committee

13

Mr. Saad Raja

[MA Management – London

Business School, UK] Asset Management – Industrial Bank of Japan Independent -


HOLDING COMPANY



5. MANAGEMENT

Highly professional

management

Principal operation

committees

5.1 The management of ECL lies

in the hands of five executives

namely Mr. Asad Umar (CEO), Mr.

Ruhail Muhammad (Group CFO),

Mr. Tahir Jawaid (Human Resource

& Public Affairs), Mr. Naveed

Hashmi (Corporate Affairs) and Mr.

Andalib Alavi (General Manager

Legal).

5.2 Mr. Asad Umar, CEO, an

MBA from the Institute of Business Administration, Karachi, has prior experience of over

20 years with Engro Group. He has also previously served on the boards of the Oil and

Gas Development Company, Karachi Stock Exchange and Pakistan State Oil. Currently,

he is the chairman of all Engro subsidiaries and joint ventures as well as the chairman of

the Pakistan Chemical and Energy Sector Skill Development Company. In addition, Mr.

Umar serves on the board of the State Bank of Pakistan as well as the Pakistan Business

Council. He was awarded the Marketing Association of Pakistan Corporate Award of

Excellence in March 2010. Mr. Ruhail Muhammad, CFA and a MBA in Finance (gold

medalist) from the Institute of Business Administration, is currently the group CFO as

well as a member of the boards for all Engro subsidiaries. Ruhail joined Engro Polymer

and Chemicals Limited in 1998, before which he worked for Sigma Leasing Corporation

Limited and TransGulf Finance Corporation. Mr. Tahir Jawaid is responsible for

overseeing all human resource activities across ECL as well as its subsidiaries. He holds a

Master of Science in Industrial Engineering from the University of Houston, USA and has

previously worked in the US in various capacities for system and design engineering

companies. Mr. Naveed A. Hashmi, GM Corporate Audit, joined Engro in 1985 after

having worked in the Pakistan Tobacco Company Limited. An MBA from the Institute of

Business Administration, Mr. Hashmi currently manages the internal audit function of the

company. Mr. Andalib Alavi is a Bar-at-Law from Lincolns Inn as well as an LLB from

the London School of Economics, UK. He is responsible for overseeing all legal affairs of

Engro group companies. Mr. Alavi has prior experience with Surridge & Beecheno and

Abraham & Sarwana before becoming a part of Engro as a legal advisor in 1992.

5.3 ECL’s quality of management remains its core strength, and is duly recognized for

its highly professional and long-term outlook. The top management is highly qualified and

well experienced in their respective fields. ECL has an annual appraisal process in place,

which assesses employee performance against agreed criteria and identifies training

requirements, if any, to enhance overall standard of performance. At executive level,

leadership qualities will be assessed through the Executive Committee (ExCom)

evaluations. ECL maintains its compensation packages in line with the minimum 75th

percentile in the corporate sector of Pakistan as ascertained by the annual Watson Wyatt

Compensation Survey.

5.4 The company has three principal operation committees, a) Executive Committee

(ExCom), b) Corporate Health, Safety and Environment Committee and c) Compensation,

Organization and Employee Development Committee – all headed by the Chief Executive

Officer. The following table gives an overview of the functions of these committees:


HOLDING COMPANY



6. SYSTEMS &

CONTROLS

Strong control

environment

SAP

6.1 ECL maintains an effective control environment with clear reporting lines and

well defined policies and procedures. The review and accountability function runs through

the entire organizational structure. The role of the company, as a holding entity, is to

provide for and sustain the activities of its investments as a whole. Therefore, to maintain

proper monitoring and thorough oversight of its strategic investments, ECL generates a

monthly MIS for its board members – Dashboard – that provides a structured breakdown

of information on predetermined key indicators for each group entity. From a holding

company perspective, this enables the management at ECL to review/ monitor the

performance of each individual subsidiary independently, in turn, facilitating decision

making at business as well as corporate level. Further, the company is planning to launch

an Enterprise wide Risk Management (ERM) initiative following the completion of the

urea expansion project in order to assess crucial firm wide risks and their sources.

6.2 ECL has SAP ERP (Systems, Applications and Products) in place. Currently, the

system covers financial, accounting and human resource applications of both ECL and

EFL. ECL is working towards enhancing the effectiveness of this system in order to fully

realize the benefits emanating from complete implementation. The technical services for

the implementation of the SAP ERP are provided by IBM Global Services whereas the

software itself has been developed by SAP AG (Malaysia – Regional Office). IBM Global

Services is responsible for ensuring the smooth transition from the existing system; the

full implementation of which is expected to be completed by the end of 2010. Going

forward, ECL intends to enhance the scope of SAP capabilities across key subsidiaries.

6.3 ECL’s in-house internal audit function is responsible for evaluating financial and

operational procedures to ensure adequacy of internal controls, reporting directly to the

audit committee for all critical issues.

7. PERFORMANCE

Significant holding

in robust fertilizer

sector

Continued focus on

three core sectors

7.1 As a holding company, the assets of ECL comprises equity stakes held at cost

price in its subsidiaries/ associates with a total investment book of PKR 23,730mln of

which PKR 10,740mln

constitutes ECL’s holding in

EFL. The main income

component for ECL is

dividends received from its

investments. A graph

illustrating historic dividend

patterns is given. The total

investment income reported

for 2009 amounted to PKR

1,885mln (2008: PKR

2,605mln) emanating from

Engro Eximp (Pvt.) Limited

(2009: PKR 1,435mln) and

Engro Vopak Terminal

Limited (2009: PKR 450mln). Dividend for 1H10 is only from Engro Vopak with other

investments yielding dividends towards the end of 2010. Meanwhile, a group-wide picture

Committee Members Functions Frequency

Executive Committee

(ExCom)

Asad Umar – CEO ECL

Ruhail Mohammad – CFO ECL

Tahir Jawaid - VP HR

All designated CEO's of subsidiaries

Ali Akbar - Secretary

Responsible for addressing appropriate operational issues plus

managerial appointments at subsidiary/ associate level. The

committee operates as an advisory body for the Group CEO, and

helps in bringing synergy amongst the various businesses within

the Group, while augmenting decision making and consensus

building.

Quarterly

Corporate Health, Safety and Environment

(HSE) Committee


All designated CEOs of subsidiaries

Responsible for providing leadership and strategic guidance on

Health, Safety and Environment improvement initiatives while

ensuring compliance with regulatory standards and international

benchmarks.

Quarterly

Compensation, Organization and Employee

Development (COED) committee


All designated CEOs of subsidiaries

Responsible for the review of Compensation, Organization and

Employee Development matters of all people excluding employee

directors and senior executives.

Quarterly

0

500

1,000

1,500

2,000

2,500

3,000

FY07 FY08 FY09 1H10

PK

R in

mln

Dividend History

Engro Vopak Terminal Ltd. Engro Polymer & Chemicals Ltd.

Engro Eximp (Pvt.) Ltd.


HOLDING COMPANY



of each entity’s respective revenue

and profitability for the six months

ending June10 is shown.

7.2 Going forward, the

company envisages continued focus

on three core sectors: 1) Fertilizer,

2) Food and 3) Energy, while

diversifying into other lucrative

business opportunities such as

chemicals, storage services,

business automations, import/

export of commodities. The role of

the holding company itself will be

limited in terms of operational

decision making but more on the

lines of oversight and strategic

direction. In terms of profitability,

the company’s income stream is

expected to be highly correlated to

the performance of group entities

and their ability to generate

positive cash flows. Although

some ventures of the company are

likely to remain non-earning in the

initial phase, they are expected to

develop a stable revenue stream

over the medium term; Engro

Energy is expected to contribute

towards ECL’s dividend income, followed by Engro Fertilizer in 2011. Engro Polymer

would follow suit once its VCM plant is completely functional.

SUBSIDIARY PERFORMANCE:

7.2.1 FERTILIZER: EFL, currently the second largest producer of urea in the country, is

in the business of manufacturing and marketing of fertilizers, registering a healthy bottom

line of PKR 2,012mln during 1H10. EFL markets urea under the brand name of Engro

Urea, MAP under the brand name of Zorawar, NPK under Zarkhez and DAP as Engro

DAP. EFL’s urea plant, with a capacity of 975,000tons per annum, is located at Dharki,

whereas NPK plant is situated at Port Qasim. EFL’s urea expansion project (Enven 1.3),

originally expected to commence commercial production by July 2010, has been

rescheduled to 4Q10. This is not expected to have a major impact on the budgeted project

costs, which stand at an estimated USD 1,050mln including USD 30mln impact of rupee

devaluation. However, any delay beyond Sep10 would result in shortfall of projected cash

flows depending upon the related extent. The management expects that the project would

enter commissioning phase by end-Sep10 and after satisfactory performance is achieved,

COD would be announced. At Jun10, EFL is projected to incur PKR 4,000-6,000mln

more to complete Enven1.3. This will be met through a combination of equity (profit

retention) and debt. EFL has available unutilized line of PKR 1,725mln from syndicated

facility, and cash & cash equivalent of around PKR 2,092mln. In addition, EFL has

financed its working capital at end-June10 through an amount which was taken out of loan

for the expansion project – this may be freed by utilizing committed short term credit

facility of approximately PKR 3,500mln. Meanwhile EFL, if need arises, may receive a

fresh injection from ECL after the parent completes issuance of its first TFC (PKR

4,000mln). The enhanced capacity (2,275,000 tons p.a.) is expected to increase EFL’s

market share to ~35% (currently 23%). Meanwhile, EFL would continue compensating

9,421

9,833

6,597

2,007

5,000

1,072 757

Revenues (PKR mln)

EFL

Engro Foods

EPCL

EPL/EEL

Engro Eximp

Engro Vopak

Avanceon

2,012

(179)

(449)

379

973

518

(94)

PAT (PKR mln)

EFL

Engro Foods

EPCL

EPL/EEL

Engro Eximp

Engro Vopak

Avanceon


HOLDING COMPANY



fall in production due to gas curtailment (currently: 7%) through price hike inline with

other industry players.

7.2.2 Engro Eximp (Pvt.) Limited (EEPL), a wholly owned subsidiary of ECL

established in 2002, is engaged in commodities export/import business. EEPL, for

marketing imported phosphatic fertilizers, would be using Engro Fertilizer Limited. This

means that EEPL would be carrying all inventories on its own books. The company

reported a profit of PKR 1,435mln in 2009 (1H2010: PKR 973mln).

7.2.3 FOODS: Engro Foods Limited, a wholly owned subsidiary established in 2005,

focuses on the dairy business. The company initially set up a processing plant in Sukkur

with milk storage capacity of 300,000 liters/day and UHT (ultra heat treatment) milk

processing capacity of 200,000 liters/day. In 2007, another plant was installed in Sahiwal

with a cost of PKR 3,000mln, having a processing capacity of 250,000 liters/day along

with capability of producing tea whitener. With the added production from this new plant,

the market share of the company in the UHT milk segment increased to 38%, making

Engro Foods the market leader in this respect (Nestle: 37%). Engro Foods has also

installed an advanced ice cream plant in Sahiwal provided by Tetra Pak Hoyer with a

production capacity of 8mln liters/annum; marketing its products under the brand name

‘Omore’. The company is currently in the growth phase and reported a loss of PKR

434mln in 2009. Subsequently, the company’s performance has improved with a total net

loss of PKR 180mln as of end June10 – with a profit of PKR 149mln posted by the dairy

segment for the same period. Engro Foods entered the juice segment in May10 with the

brand name of Olfrute initially in four flavors. The company has also made inroads into

the rice export market – exclusively focused upon basmati rice. The project, having a

capacity of 20,000mt per annum, is anticipated to commence commercial procurement

and production by November 2010, under the purview of Engro Food Supply Chain

Management (Pvt.) Limited, formed specifically for the purpose.

7.2.4 POWER: Engro Powergen (Private) Limited (EPL), a wholly owned subsidiary of

ECL, has been set up with an aim to act as a negotiation window for all initiatives of the

parent in the energy sector. The first outcome of ECL’s effort is Engro Energy Limited

(EEL), which was formed in 2006 to tap power generation opportunities. EEL has a

combined cycle power project with net output of 217 MW, based on low BTU and high

sulphur permeating gas from Qadipur gas field in Ghotki district. The project has a total

cost of USD 205mln and became operational in March 2010 as per the revised schedule.

EEL posted a profit of PKR 379mln for 1H10. Meanwhile, EPL has entered into a joint

venture with the Sindh Government, forming the Sindh Engro Coal Mining Company

(SECMC), for the mining, exploration and development of Thar Coal fields. The total

project cost (including a power plant of 1200MW) will be ~USD 3,000mln, of which

exploration cost is estimated to be around PKR 1,000mln. The exploration cost is

expected to be shared 60% by ECL and 40% by the Sindh government. A pre-feasibility

and environment impact assessment is currently underway and is expected to be

completed during 2H2010 (cost: USD 3-5mln). During Mar10, SECMC signed two MoUs

– one with Sindh Coal Authority for obtaining an exploration license and another with

PEPCO for supplying coal to PEPCO’s 1,200MW thermal power plant, subject to

availability of excess coal supply.

7.2.5 ENGINEERING: Avanceon (formerly Engro Innovative Automation &

Engineering (Pvt.) Limited) provides process control solutions to leading industrial units

in the country. In early 2007, EIAL acquired a 70% stake in Advanced Automation LP

(AALP), a company providing industrial solutions in automation controls and allied

services in the United States. To finance this transaction, ECL injected PKR 300mln. The

company reported a profit of PKR 24mln in 2009. Avanceon posted a loss of PKR 94mln

at end 1H10 though US operations were in profits (PKR 47mln).


HOLDING COMPANY



7.2.6 CHEMICALS: Engro Polymer and Chemicals Limited (EPCL) is mainly involved

in manufacturing, marketing and selling of PVC. EPCL carried out a USD 240mln

expansion and back integration project which came online in late 2009. The project

included setting up a new PVC plant, enhancing the manufacturing capacity to 150,000

tons per annum (current 100,000 tons per annum) and a backward integrated facility

(VCM) with a capability to produce other intermediary products and caustic soda.

Subsequent to commissioning of the project, a fire broke out in December 2009 in the

scrubber section of the company’s VCM plant, due to which it was shut down to limit the

losses. The VCM plant is currently in the commissioning phase – running at 70-80%

capacity. After installation of scrubber – expected to be done in Sep10 – the plant would

achieve full production capacity – 450tons/day (nameplate 600tons/day). EPCL, to finance

the cost overrun of ~PKR 2,500mln, made a right issue during April10 amounting PKR

1,430mln. The company reported a loss of 193mln in 2009 (1H10: loss of PKR 449mln).

7.2.7 STORAGE: Engro Vopak Terminal Limited (EVTL) is an equally owned joint

venture with Royal Vopak of the Netherlands. The facility comprises an integrated liquid

chemical jetty cum storage. The company has also set up LPG storage facility and has

exclusive rights to handle bulk liquid chemicals at Port Qasim. The company also added

Ethylene storage capacity in 1Q2009. EVTL posted a profit of PKR 917mln in 2009

(1H10: 518mln).

8. CAPITAL &

FUNDING

Assets/ liabilities

transferred to EFL

Corporate

guarantee to EFL

High quantum of

consolidated debt

TFCs in the offing

8.1 Following the demerger as

on January 01, 2010, all fertilizer

assets/ liabilities were transferred to

the balance sheet of EFL with ECL

carrying the equity investment in

subsidiaries at cost. Nevertheless,

following the demerger, un-

appropriated profits of ECPL

amounting to PKR 9,250mln, as

well as a cash & bank balance of

PKR 3,501mln at end Dec09, have

been retained on the books of ECL.

The capital structure of the

company, pre and post demerger are

given in the chart.

8.2 With the issue of TFCs of

PKR 4,000mln, ECL’s standalone capital structure would experience leveraging. The

group, with a consolidated debt (including short term borrowings) of ~PKR 103bln and a

debt-to-equity ratio of 76:24 at Jun 10 – excluding the comfort to be derived from the

ultimate parent’s (Dawood Hercules) low leveraged capital structure – remains highly

leveraged. Nevertheless, with the commissioning of Enven 1.3, the debt is expected to

gradually decrease over the medium term. In the meantime, the group’s ability to raise

requisite funding through capital and/or debt markets largely mitigates the associated

risks.

8.3 Engro Corporation has irrevocably and unconditionally guaranteed to each

secured party, as defined under the pertinent finance documents, punctual performance by

Engro Fertilizer of all its obligations 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 Pakistan), pay that amount as if it were the principal obligor in respect of

that amount.

8.4 TFCs Issue: ECL is in the process of issuing TFCs of PKR 4,000mln (including

a green shoe option of PKR 2,000mln). TFCs would be primarily marketed among retail

-

25,000

50,000

75,000

100,000

125,000

150,000

Pre de-merger (consolidated) Dec 31,2009

Post de-merger (consolidated) June30, 2010

Post de-merger(stand alone)

PK

R (

mln

)

Capital Structure

Equity Borrowings

Planned


HOLDING COMPANY



investors and thereafter listed on the stock exchange. The proceeds of the issue are

expected to be utilized for ECL’s own working capital requirement with a major portion

being deployed in Engro Fertilizers. The salient features of the instruments are listed in

the following table.

Proposed TFCs

Issue size PKR 4,000mln (including green shoe option of PKR 2,000mln)

Tenor 3 years

Profit Rate 14.5% p.a.

Principal

Repayment

At the end of 3 years or early through Put Option. Incase the put option is exercised; the

investor has to pay service charges of 2% on the principal.

Security The TFC is secured by way of first ranking floating charge over over all the present and future movable properties (including investments) of Engro Corporation Limited but excluding

present and future trade marks and copyrights of ECL and excluding its shares in Engro

Energy Limited and Engro Polymer & Chemicals Limited.

Trustee IGI Investment Bank Limited

Analysts Arsalan Ahmed

+92 42 3586 9504

[email protected]

Jhangeer Hanif

+92 42 3586 9504

[email protected]

Disclaimer:

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.


Engro Corporation Limited (formerly Engro Chemical Pakistan Limited)

BALANCE SHEET (PKR in million)

For the year ending 30-Jun-10 1-Jan-10 31-Dec-09 31-Dec-08

Unaudited Split

A NON-CURRENT ASSETS

1 Operating Fixed Assets - Owned and Leasehold 86.03 54.64 69,517.51 33,395.76

2 Intangible Assets - - 122.70 122.86

3 Other Non-Current Assets - 2.79 331.69 354.89

Non-Current Assets 86.03 57.43 69,971.91 33,873.51

B INVESTMENTS

1 Associates / Subsidiaries

a. Equity 25,352.90 23,727.80 12,988.66 11,091.86

b. Debt Securities / Loans 241.86 - - -

25,594.77 23,727.80 12,988.66 11,091.86

1 Investment Property - - - -

2 Other Investments

a. Fixed Income/Money Market Funds 851.86 241.91 450.86 67.81

b. Term Deposit - - - -

851.86 241.91 450.86 67.81

Investments 26,446.63 23,969.71 13,439.51 11,159.67

C CURRENT ASSETS

1 Inventories

a. Stores and Spares - - 961.12 957.24

b. Stock-in-trade- raw material - - 303.99 1,142.83

finished goods - - 118.62 3,529.04

- - 1,383.72 5,629.11

2 Trade Receivables - - 2,514.43 261.51

3 Other Current Assets 65.67 225.08 1 2,444.52 1 7,668.66

4 Cash and Bank Balances 754.14 3,501.22 3,955.34 1,687.04

Current Assets 819.81 3,726.29 10,298.01 15,246.32

D TOTAL ASSETS (A+B+C) 27,352.47 27,753.43 93,709.44 60,279.50

E CURRENT LIABILITIES

1 Borrowings

a. Current portion of long term debt - - 830.70 94.93

b. Short term debt - 0.94 195.75 1,711.28

- 0.94 1,026.45 1,806.21

2 Trade Payables 161.44 151.53 593.37 840.72

3 Other Current Liabilities 113.82 - 4,673.55 3,034.11

5 Dividend Payable - 102.10 102.10 309.29

Current Liabilities 275.26 254.56 6,395.47 5,990.32

F NON-CURRENT LIABILITIES

1 Borrowings - - 58,565.35 27,756.71

2 Due to Associates - - - -

3 Other Non-Current Liabilities 0.66 0.90 1,860.38 3,448.39

Non-Current Liabilities 0.66 0.90 60,425.73 31,205.11

G NET ASSETS (D-E-F) 27,076.55 27,497.97 26,888.24 23,084.07

H SHAREHOLDERS' EQUITY

1 Ordinary Share Capital 3,277.37 2,979.43 2,979.43 2,128.16

2 Preference Share Capital - - - -

3 Share Premium Account 10,550.06 10,550.06 10,550.06 7,152.72

4 Revaluation Reserve

a. Fixed Assets - - - -

b. Investments - - - -

- - - -

5 Revenue Reserves 4,506.36 4,717.50 4,107.78 6,892.06

6 Unappropriated Profit 8,742.76 9,250.98 9,250.97 6,911.12

Shareholders' Equity 27,076.55 27,497.97 26,888.24 23,084.07

0.00

1 Foreign exchange forward contract



PROFIT & LOSS ACCOUNT (PKR in million)

For the year ending 30-Jun-10 31-Dec-09 31-Dec-08

Unaudited

A Turnover

1. UreaOwn Manufactured 16,136.46 15,508.82

2. DAPPurchased Product 14,035.06 7,808.38

- 30,171.52 23,317.20

B Operating Costs - (23,240.18) (17,120.64)

C Gross Profit - 6,931.34 6,196.56

D Operating Expenses

1 Administrative and General Expenses (80.39) - -

2 Selling and Marketing Expenses - (1,945.18) (1,657.82)

(80.39) (1,945.18) (1,657.82)

E Operating Profit / (Loss) (80.39) 4,986.17 4,538.75

F Income From Associates

1 Dividend 180.00 1,885.00 2,605.40

2 Share of Profit/(Loss) - - -

180.00 1,885.00 2,605.40

G Others

1 Profit/(Loss) on Sale of Assets - 23.60 69.30

2 Income from Investments - - -

3 Surplus / (Deficit) on revaluation - - -

4 Royalty Income * 127.74 - -

5 Other Income/ Expenses 93.32 (378.92) (520.56)

6 Exchange Gain/(Loss) - - 18.04

221.06 (355.32) (433.21)

H Profit / (Loss) before Financial Charges 320.67 6,515.85 6,710.93

I Financial Charges

1 Interest Income 147.64 19.67 2.59

2 Interest Expense (1.60) (1,320.58) (1,508.95)

146.04 (1,300.91) (1,506.35)

J Profit / (Loss) before Taxation 466.71 5,214.94 5,204.58

K Taxation (81.09) (1,257.70) (964.14)

L Net Income / (Loss) 385.62 3,957.25 4,240.43

M Unappropriated Profit/(Loss) Brought Forward 9,250.97 6,911.13 4,116.63

N Available for Appropriation 9,636.59 10,868.38 8,357.06

O Appropriations

1 Reserves - - (14.26)

2 Dividends

a. Stock (297.94) - -

b. Cash (595.89) (1,617.40) (1,431.67)

(893.83) (1,617.40) (1,431.67)

P Effect of change in Accounting Policy (+/-)

Q Unappropriated Profit Carried Forward 8,742.76 9,250.98 6,911.13



CASH FLOW STATEMENT (PKR in million)

For the year ending 30-Jun-10 31-Dec-09 31-Dec-08

Unaudited

A CASH FLOWS FROM OPERATING ACTIVITIES

1 Profit Before Tax 466.71 5,214.94 5,204.58

2 Adjustments for:

a. Depreciation/Amortization 7.93 672.43 653.73

b. Interest Expense/(Income) (146.04) 1,320.58 1,508.95

c. Others (+/-) - - -

(138.11) 1,993.01 2,162.68

EBITDA 328.60 7,207.95 7,367.26

3 Adjustments for other Non-Cash Charges/Items (256.52) (1,594.30) (2,474.80)

72.08 5,613.65 4,892.46

4 Changes in Working Capital

a. (Increase)/Decrease in Curent Assets (7.08) 2,466.18 (1,290.40)

b. Increase/(Decrease) in Curent Liabilities (Excl. Debt) (34.50) 695.58 (279.61)

(41.58) 3,161.76 (1,570.00)

Cash Generated from Operations 30.50 8,775.42 3,322.46

5 Financial Charges Paid (1.60) (758.95) (1,090.52)

6 Taxation Paid (41.56) (1,226.86) (574.98)

7 Others (+/-) (10.62) (250.72) (242.34)

(53.78) (2,236.53) (1,907.83)

Net Cash provided by Operating Activities (23.28) 6,538.89 1,414.62

B CASH FLOWS FROM INVESTING ACTIVITIES

1 Capital Expenditure (42.01) (36,352.36) (20,214.34)

2 Proceeds from sale of Fixed Assets 3.10 58.45 87.73

4 (Purchase)/Sale of Investments - (1,896.80) (3,327.38)

5 Income from Investments 416.51 1,973.18 2,656.88

6 Investment in Subsidiary/Associated Companies (1,625.10) - (910.00) *

7 Others - (450.00) (622.00) **

Net Cash (Used in)/Available From Investing Activities (1,247.50) (36,667.53) (22,329.11)

C Cash In/(Out) Flow Pre-Financing (1,270.78) (30,128.64) (20,914.48)

D CASH FLOWS FROM FINANCING ACTIVITIES

1 Proceeds from Issue of Ordinary Shares - 4,248.60 3,382.21

2 Dividends Paid (624.43) (1,833.62) (1,306.10)

3 Others (+/-) - 335.27 -

(624.43) 2,750.25 2,076.12

E NET DEBT (INCREASE)/DECREASE (1,895.21) (27,378.39) (18,838.37)

F OPENING NET (DEBT)/CASH 3,501.22 (27,808.08) (8,969.71)

G CLOSING NET (DEBT)/CASH 1,606.00 (55,186.47) (27,808.08)

H NET (DEBT)/CASH

1 Long-Term Loans/Finances - (58,565.35) (27,756.71)

2 Short-term Loans/Finances - (1,026.45) (1,806.21)

- (59,591.81) (29,562.92)

3 Cash & Cash Equivalents 1,606.00 4,405.34 1,754.85

1,606.00 (55,186.47) (27,808.07) *

Advance to Engro Eximp Private Limited**

Payment to Engro Foods Limited for acquisition of tax losses



RATIO ANALYSIS

30-Jun-10 31-Dec-09 31-Dec-08

Unaudited

A EARNINGS/PROFITABILITY

1a Own Manufactured Products Growth n.a. 4.05% 44.29%

1b Purchased Products Growth n.a. 79.74% -37.20%

2a Gross Margin- Own Manufactured n.a. 38.87% 37.63%

2b Gross Margin- Purchased Products n.a. 4.69% 4.62%

3 Operating Margin n.a. 21.60% 28.78%

4 Pre-Tax Profit Margin n.a. 17.28% 22.32%

5 Net Profit Margin n.a. 13.12% 18.19%

6 Effective Tax Rate 17.38% 24.12% 18.52%

7 Average Interest Rate n.a. 2.22% 5.10%

8 Pre-Tax Return on Equity 1.72% 19.39% 22.55%

9 Return on Equity (ROE) 1.43% 15.84% 21.84%

- Asset Turnover (Times) n.a. 7.63 0.39

- Net Profit Margin n.a. 13.12% 18.19%

- Financial Leverage (Times) 1.01 3.49 2.61

10 Return on Assets (ROA) 0.39% 5.36% 8.59%

B COVERAGE

1 Short-term Debt Payback (Years) n.a. 0.12 0.54

2 Total Debt Payback (Years) n.a. 6.79 8.90

3 Net Debt Payback (Years) (52.66) 6.29 8.37

4 Net Debt / EBITDA (4.89) 7.66 3.77

5 EBITDA Net Interest Cover (X) (2.25) 5.54 4.89

6 Net Interest Cover (X) (2.20) 5.01 4.46

C LIQUIDITY

1 Current Ratio (X) 6.07 1.68 2.55

2 Quick Ratio (X) 6.07 1.46 1.61

3 Average Inventory Held (Days) n.a. 4.77 40.86

4 Average Trade Debtors (Days) n.a. 30.42 13.07

5 Gross Cash Cycle (Days) n.a. 35.19 53.93

6 Average Trade Creditors (Days) n.a. 9.32 33.19

7 Net Cash Cycle (Days) n.a. 25.87 20.74

D FINANCIAL STRUCTURE

1 Current Debt/Total Debt n.a. 1.72% 6.11%

2 Total Debt/Equity n.a. 221.63% 128.07%

3 Net Debt/Equity -5.93% 205.24% 120.46%

4 Equity/Total Assets 98.99% 28.69% 38.30%

5 Total Debt/Adjusted Equity (Net of Rev. Surplus) -0.92% 220.70% 126.98%

6 Total Liabilities/Equity 1.02% 248.51% 161.17%

7 Total Debt/(Total Debt+Equity) n.a. 68.91% 56.15%


GLOSSARY OF TERMS USED BY PACRA (INDUSTRIAL CORPORATES)

DESCRIPTION METHODOLOGY PROFITABILITY

1. Gross Profit Margin (%) (Sales less COGS) / Sales

2. Net Profit Margin (%) Profit After Tax / Sales

3. Return on equity (ROE) (%) Profit After Tax / Average Equity.

4. Return on assets (ROA) (%) Profit After Tax / Average Assets COVERAGE

1. EBITDA PKR mln Earnings before interest, tax, depreciation and amortization.

2. Total Debt Pay-Back Period Years Total debt / Cash generated from operations

3. Net Debt Pay-Back Period Years Total debt less cash / Cash generated from operations

4. Net Interest Cover (x) Net profit before interest and taxes / Net Interest Expense +

Interest Capitalized

5. Ordinary Dividend Cover (x) Net income after tax but before extraordinary items / Dividends paid and proposed

LIQUIDITY

1. Current Ratio (x) Current assets / current liabilities

2. Quick Ratio (x) Trade debtors, other debtors, liquid investments, cash and deposits / current liabilities

3. Average Inventory Held Days Average Inventory for the year (excl. stores and spares) /

cost of goods sold

4. Average Trade Debtors Held Days Average trade debtors for the year / Sales

5. Average Trade Creditors Days Average trade creditors for the year / Cost of goods sold

6. Gross Cash Cycle Days Average inventory held plus average trade debtors held

7. Net Cash Cycle Days Gross cash cycle less average trade creditors held


STANDARD RATING SCALE & DEFINITIONS LONG TERM RATINGS SHORT TERM RATINGS

AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA: Very high credit quality. ‘AA’ ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A: High credit quality. ‘A’ ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB: Good credit quality. ‘BBB’ ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category. BB: Speculative. ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B: Highly speculative. ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favourable business and economic environment. CCC, CC, C: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic developments. A ‘CC’ rating indicates that default of some kind appears probable. ‘C’ ratings signal imminent default.

A1+: Obligations supported by the highest capacity for timely repayment. A1:. Obligations supported by a strong capacity for timely repayment.

A2: Obligations supported by a satisfactory capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. A3: Obligations supported by an adequate capacity for timely repayment. Such capacity is more susceptible to adverse changes in business, economic, or financial conditions than for obligations in higher categories. B: Obligations for which the capacity for timely repayment is susceptible to adverse changes in business, economic, or financial conditions. C: Obligations for which there is an inadequate capacity to ensure timely repayment. D: Obligations which have a high risk of default or which are currently in default.

Notes: 1. PACRA's ratings are an assessment of the credit standing of entities in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors.

2. A plus (+) or minus (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ long-term rating category, to categories ‘CCC’ and below, or to short-term ratings.

3. PACRA's rating is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.

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