First quarter 2003 report to the shareholders: Engro Chemical Pakistan Limited

Economic Review, March, 2003

On behalf of the Board of Directors of Engro Chemical Pakistan Limited, we are pleased to present the un-audited accounts for the first quarter ended March 31, 2003.

The overall market demand for urea during the first quarter declined by 21% compared to the same period last year mainly on account of pre-stocking by the dealers in December 2002. The Company's urea sales, however, for the quarter was up 8% to 167,000 tonnes. The operating performance of Daharki urea plant remained excellent. The production at 240,500 tonnes is an all time record for any quarter.

The Company sold 31,000 tonnes of other fertilizers of which 19,000tonnes are its own produced NPK fertilizers. The NPK plant produced 19,000 tonnes during the quarter representing a capacity utilization of 77%.

The net profit for the first quarter 2003 was Rs.234 million compared to Rs.140 million recorded in the corresponding period last year. The increase in earnings is mainly attributable to higher urea sales volume, efficiencies in fuel gas consumption and lower financial charges. These were however partially offset by recognition of presumptive tax on imported product as against normal tax in first quarter 2002. The loss on NPK operations for the first quarter was Rs.4 million compared to loss of Rs.30 million for same period last year. The Seeds business incurred a loss of Rs.6 million for the quarter as against Rs.9 million for first quarter 2002.

During the quarter, the Company made further progress with the Large Tax Payers Unit in resolving issues relating to all the reopened tax assessments. A rectification application has been filed to correct some anomalies and it is expected that the revised final orders will be issued soon, reflecting the understanding reached and without demand for any additional tax.

The operations at both of our joint ventures, Engro Vopak Terminal Ltd. and Engro Asahi Polymer & Chemicals were satisfactory. The first quarter profit after tax at Engro Vopak is expected to be Rs.72 million versus Rs.68 million for the same period last year. In case of Engro Asahi the expected net profit is Rs.34 million compared to Rs.239 million attained in first quarter 2002. It will be recalled that Engro Asahi had benefited from a favourable deferred tax adjustment of Rs. 140 million last year. The further decline in profitability is due to volatility in the PVCNCM margin on account of current tensions in the Middle East.

The feasibility study for construction of 860,000 tonnes per annum urea complex in Oman is progressing and is expected to be completed in the second half of 2003. It may be recalled that this project when approved will be a joint venture between Engro Chemical Pakistan Limited and Oman Oil Company of Sultanate of Oman.

The Company has signed an agreement to acquire 51% interest in the Automation and Controls Division of Innovative (Private) Limited, a Lahore based company that provides industrial solutions in the knowledge based services sector. The acquisition offers good business growth and expansion prospects in Pakistan and international markets.

Urea sales for the second quarter is expected to remain slow with modest recovery in volume on year to date basis. However, the outlook on irrigation water availability looks promising and this is likely to keep the fertilizer demand strong as the year progresses. The earnings are expected to come under pressure if the fertilizer industry is made to implement the Government desire to lower the price of urea.