LAHORE: Early on Thursday morning, Pakistan’s largest conglomerate announced that they were releasing an interim cash dividend for the first quarter of the financial year ending on the 31st of March 2023 at Rs 40 per share — a return of 400% on the share’s par value. The total amount of dividends released by Engro come out to Rs 23 billion.
And while minority shareholders have been buoyed by the payout, the dividend marks both a point of frustration and resignation from the management at Engro. For at least the past five years, Engro has been sitting on a significant pile of liquid cash worth over $700 million earned through the sale of its subsidiary Engro Foods to a Dutch company, and the sale of nearly one-third of its fertiliser subsidiary Engro Fertilizer in 2016.
And in the time since Engro cashed out on these businesses, they have been trying to look up and down all over Pakistan for investment opportunities to try and expand their footprint. Whenever a company makes such sales they have two options. The first is to immediately disburse the proceeds to their shareholders as a dividend, or otherwise. The other option is to sit on the cash, earn interest off it, keep it on the company’s books, and look for opportunities to invest the money in and expand their business. This is assuming the company’s management hasn’t finalised better business opportunities prior to the sale.
Engro went for the latter. Since 2016, the company has explored the logistics business, they have taken a very serious look at entering the telecom infrastructure sector, the healthcare sector, and have done feasibility studies and research on a number of other fields. None of them have proven to be worth their while. All of this raises the question: Has Engro finally had enough?
“The paying of this dividend is essentially Engro saying ‘hey we give up there is nowhere to invest in Pakistan’ so here is your money,” explains Farooq Tirmizi, former Managing Editor of Profit. “It comes down to the fact that Engro as a company is too big for Pakistan’s stunted economy to handle.”
And that is where the other reason behind the paying of this dividend comes in. Pakistan’s current macroeconomic conditions have put almost every investable industry in the country to torch. In a press release explaining the board’s decision to pay the dividend, Engro stated that prohibitive cost of capital and import restrictions on things like machinery meant that investment was difficult.
“It seems like they have that much cash in their books and don’t have anything better to do with it right now. All the restrictions and expansion plans are on hold. Engro has actively been looking to do a project but the macroeconomy seems to have pushed them into paying out the dividend,” says the head of a major securities brokerage firm in Pakistan.
In these conditions, is it any wonder that Engro decided to pay off their shareholders instead of sitting on a pile of cash in a country where there is very little incentive to invest that money? Yet because of its sheer size and inertia, Engro cannot quite quit Pakistan. In its press release, the company claimed that “this decision will not have a significant impact on the long-term investment program of the Company which will continue to be funded by retaining future dividends and/or capital reallocation.” Essentially, they are saying if things get better we will go back on track. But how did Engro get to this point, and what could the future hold?
Let’s take a step back. In 2001, Engro’s main line of business was fertiliser and they were willing to put their money where their mouth was. That is why the company went ahead and built the Enven Plant in Daharki, Sindh. At 125 metres (410 feet) in height, it is the second tallest structure in Pakistan. It is the largest single-train urea manufacturing facility in the world, and cost $1.1 billion to build: the single largest private sector investment in Pakistan ever.
And it would also prove to be one of Engro’s biggest blunders. The story of how and why this blunder happened is long and winding and has been covered by Profit before. What is important to understand is that back then the government of Pakistan had given a guarantee to Engro that it would provide an uninterrupted supply of gas to the Enven Plant for at least 20 years. Then the government of Pakistan did what it has done repeatedly since — it proved to be a bad business partner that did not come through on its promise.
This is where things started getting messy. Engro got to work almost immediately on the plant and was able to get the plant up and ready for production in December 2010. It was at that point that it became painfully obvious that the Government of Pakistan had been making promises it had no intention to keep: the country was facing a massive shortage of natural gas and fertiliser was much further down the food chain of the government’s list of natural gas users, behind urban middle class household needs and the gas required by export oriented industries.
For much of 2011 and 2012, Engro Fertilisers’ shiny new plant effectively limped along. “During the Zardari administration the management at Engro started becoming sick and tired. I spoke to people at Engro back and they told me that 70% of the CEO’s time was focused on trying to get gas for the Enven plant. They wanted to stay in the fertiliser business but it was becoming too much of a headache to bear all the time,” explains Tirmizi.
“And then there was the other issue — Engro was too big for Pakistan’s economy. Rumour had it that Engro had effectively exhausted its counterparty limits with most banks, which is why it turned to borrowing from foreign investors and even issuing the first ever corporate bond directly marketed to retail investors.”
Long story short, Engro wanted out. The Enven gamble meant Engro was in debt. At the end of 2006, Engro had just over Rs3.7 billion in total long term debt. By the end of 2010, when construction of Enven was finally completed, that number had risen to Rs 105 billion. Selling meant that money was bound to come in, and that is where the story leading to today starts.
Engro’s big, fat, pile of cash
In 2016, Engro made two massive sales. The first to go was Engro Foods. Dutch company FrieslandCampina Pakistan BV (FC Pakistan) completed its acquisition of a majority stake in Engro Foods at an estimated price of $446.81 million.
The Netherlands-based dairy company acquired 51% stake at Rs120 ($1.14) per share in Engro Foods. It acquired 47.1% (or 361.29 million shares) from Engro Corporation, the parent company of Engro Foods, and another 3.9% (or 29.66 million shares) from the general public.
“Engro Foods ran into a typical problem — whenever a company is launched in Pakistan they have this impression that Pakistan is a country of 220 million consumers. Sure, that’s the population but that isn’t really the amount of possible customers. You’re actually usually looking at 5-15 million people depending on what line of business you’re entering,” Farooq Tirmizi says on the Engro Foods transaction. “Engro Foods was hit with a scaling problem when they started taking loans to build the Enven Plant.”
The next to go was Engro Fertilisers — at least a big chunk of it. For a while, it looked as though Engro’s investment in Enven had been touch-and-go, but would ultimately be worth the massive risk the company took. But on June 7, 2016, Engro announced that it was selling a 28% stake in Engro Fertilisers in a private placement transaction that raised $185 million. The announcement was not entirely surprising to analysts who have been following Engro and its major shareholder Hussain Dawood, who was very keen on moving Engro towards the energy business. Even there, however, Engro would run into the problem that the very unreliable government was a monopoly client. That immediately raised the question, what would Engro do with all that money?
Is this Engro giving up?
For years, Engro put their head down and started working on finding avenues to invest in. Engro had divested from food and Enven after realising that the next phase of their growth required investing in something no one else was in. An expansion hinged on Pakistan’s urban retail markets expanding without which the market would remain small and stagnant. Since that wasn’t happening, Engro would have to expand through their product.
Initially, the company did veer towards energy but very quickly realised that they ran the risk of once again being at the mercy of the federal government. Wanting to avoid that unenviable position, Engro very quickly started looking at other opportunities.
“Credit where credit is due, Engro really gave it a go. Somewhere in the Engro computer system is a thorough analysis of every business. They realised there were some very interesting options like logistics but they ran into issues with the nature of the industry and its competitiveness. How do you grow and become profitable?” says Tirmizi. “They looked deep into healthcare because it is a cash absorbent business but got scared of the risk. Hospitals are places of life and death and Engro has never had to deal with that kind of risk. Essentially, they realised they are an industrial player and the infrastructural integrity of industrial Pakistan is so bad that there are no real opportunities.”
“Engro has been looking for opportunities to invest, that much is clear. There was the chemical plant they were looking to set up as well but they can’t really do anything right now even if they found a great project to go for they could not import the basic machinery for it,” explains another analyst at a securities company. “That said, I do think the company means what it says that this will not stop its expansion plans. It is a company that makes cash very quickly and will be back in a position to invest next year. Given the macroeconomic environment this year, it only made sense to pay dividends and give shareholders something to be happy about in these tough times.”
“Essentially, this is the end of a 10 year conversation between Engro and its minority shareholders. They have been saying either give us our cash back or invest somewhere else. Engro has finally said here is your money back. Engro earns in rupees, they make money, and they get the best deposit rates from every single bank. The money hasn’t just been sitting there and there hasn’t been a loss even in dollar terms, but this does seem to be Engro at its wits end,” says Tirmizi. “They tried hard, to be fair to them. They hired very talented people at very good money but at the end of it they found themselves up against the limitations of Pakistan.”