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Chemicals: ENGRO POLYMER AND CHEMICALS LIMITED - Financial Year 2006-1Q 10

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Highlights - Corporate News

OVERVIEW : Engro was incorporated in 1965 and was formerly called Exxon Chemical Pakistan Limited until 1991when Exxon decided to divest their fertilizer business on a global basis and sold off its equity of 75% shares in the company.

The Group s principal activities are to manufacture, purchase and market fertilizers and it is the second largest urea producer in Pakistan with a market share of 19% which will reach 35% after its capacity comes online in 2010. Engro has a number of subsidiaries which include Engro Foods Limited (EFL), Engro Vopak Terminal Limited (EVTL), Engro Energy Limited (EEL), Avanceon, Engro Polymer and Chemicals Limited (EPCL) and Engro Energy Limited (EEL).Engro operates through four segments namely, Fertilizers, Polymer, Food and Other operations. Fertilizer segments: manufactures, purchases and markets fertilizers, Polymer segments: Manufactures, markets and sells Poly Vinyl Chloride, PVC compounds and related chemicals, Food segment: manufactures, process and sells dairy food products and Other operations segment includes independent power projects and engineering and automation business. The Group operates solely in Pakistan.

Engro Polymer and Chemicals Limited

Engro Polymer and Chemicals Limited (EPCL) is involved in the manufacturing, marketing and distribution of Poly Vinyl Chloride (PVC). The Company was established in 1997, and went into commercial production in December 1999. Engro Polymer and Chemicals Limited (EPCL) was formerly known as Engro Asahi Polymer & Chemicals Limited (EAPCL).

Engro Asahi Chemical with an investment of US $80 million set-up 100,000 tons PVC plant at Port Qasim, (EAPCL) at the time of its formation was the only PVC manufacturer in the country. Engro Polymer & Chemicals Ltd (EPCL) has invested $250 million for enhancing its PVC production capacity by 50,000 metric tons through backward integration to 150,000 MT per annum by March 2009.

The company is currently the market leader in PVC production and has a 76% market share which is expected to increase when the company s additional capacity comes online by the end of the second quarter of 2009. The company s major shareholding is with Engro Chemical Pakistan which has a shareholding of 56%, followed by International Finance Corporation which has a 14.6% shareholding and than by Mitsubishi Corporation which has a 11% shareholding.

Recent Results 1Q 10: Sales were recorded At Rs 3221 million as compared to Rs 2388 million in 1Q 09. Gross profit was recorded at Rs 146 million as compared to Rs 93 million in 1Q 09. Despite these positives, all other costs like administrative, marketing, distribution and financial increased quite rapidly pushing the company in the red.

Company incurred a loss after tax of Rs 207 M during the quarter as compared to a loss after tax of Rs 75 M in 1Q 2009. LPS was recorded at Rs 0.4 as compared to Rs 0.14 in 1Q 10. Primary reason for the loss was delay in VCM plant start-up which resulted in lower PVC-VCM margin.

Poly Vinyl Chloride (PVC) production during the quarter was 20K tons as compared to 26K tons in 1Q 2009. Post the incident in December 2009, efforts were made to procure VCM on spot basis, but as VCM supply in the international market was limited, only 15K tons of VCM could be procured. This combined with previous inventory resulted in PVC production of 20K tons.

Domestic PVC sales for 1Q 2010 was 22K tons as compared to sale of 38K tons same period last year. While domestic demand remained strong, decline in sales was due to production constraints. There were no PVC exports in 1Q 2010. International PVC prices firmed up and went well over $1,000 during the quarter however; tight availability of VCM reduced the PVC-VCM margin for the quarter to $135 per ton as compared to $165 per ton in 4Q 2009.

Caustic soda production during the quarter was 19K tons. The plant operated at 73% operating rate. Low production was caused by operational problems at Ethylene Di Chloride (EDC) plant. Domestic demand for Caustic soda also remained strong and Company sold 16K tons. A total of 19K tons of EDC was produced in 1Q 2010 out of which the Company exported 14K tons through its subsidiary. Company also sold 5K tons of Sodium Hypochlorite in the domestic market. Surplus power of 7MW (average) was sold to Karachi Electric Supply Corporation (KESC) during the quarter.

Financial Performance January 06 - December 09 The sales revenue of Engro Polymer has increased by 47% over last year. This increase in sales revenues is mainly attributed to growth of PVC sales and successful launch of caustic soda by the Company in 2009. During the year, 116K tons of PVC was produced against nameplate capacity of 150K tons per annum.

Capacity utilisation of PVC plants remained low due to limited availability of Vinyl Chloride Monomer (VCM - a raw material in PVC production) as a result of delayed in-house production. VCM shortfall was partially fulfilled by procuring on spot basis from international market, however, given the tight demand supply balance in the region, at times, VCM could not be timely arranged resulting in lower operating rate of the PVC plants.

Nevertheless, domestic PVC sales of 119K tons in 2009 were the highest ever since the inception of the Company. This growth of more than 20% in domestic sales, over last year, was mainly attributable to the strong demand coming out of Government projects, increased usage of PVC pipes in agricultural sector and export of pipes and fittings to
Afghanistan. The Company also exported 10K tons of PVC during the year through its subsidiary, Engro Polymer Trading (Pvt) Limited.

Another reason for higher sales revenue in 2009 was an increase in international PVC prices. PVC and VCM prices increased due to a surge in price of Ethylene attributable to high crude oil prices, coupled with a demand-supply gap in the region. The Company s chlor-alkali plant came into commercial operation from
August 1, 2009, which enabled production and successful launch of caustic soda by EPCL.

A total of 32K tons was sold in the domestic market whereas 2K tons was exported through its subsidiary. Successful launch of Caustic soda was mainly attributable to high product quality supported by competitive pricing and an efficient distribution system.

During 2009 the profitability of EPCL showed an overall decreasing trend. The Company made a loss after tax of Rs 232 million as compared to a profit after tax of Rs 353 million last year. The consolidated loss after tax was Rs 194 million as compared to consolidated profit after tax of Rs 350 million last year.

The main reasons for the loss are attributable to incremental costs related to depreciation, financial charges and other fixed costs on account of expansion and back integration whereas full economic benefits of the integrated facility could not be attained as VCM plant had not come into commercial production.

In particular, expansion projects included completion of 50 K ton PVC expansion project on
January 1, 2009 and commencement of commercial operations of Chlor-alkali, Ethylene Di Chloride & Power plants on August 1, 2009. The gross profit margin of the Company was 30.7% lower than last year. This was mainly due to a 47.45% increase in net sales as compared to just a 1.79% increase in gross profit. The profit margin of EPCL experienced a 144.5% declined mainly attributable to the loss experienced to the loss experienced by the Company during 2009.

Return on Assets and Return of Equity ratios of the Company also declined by 153% and 168%, respectively, during the year 2009. ROA decreased for two reasons - loss experienced, and a 23.4% increase in total asset base as a result of capacity expansion.

The current ratio of the EPCL fell by 9.7%; whereas, the quick ratio increased by 5.44% in 2009 as compared to last year. From this trend we can conclude that the liquidity of the company shows a mixed trend.

This drop in current ratio of the company is attributed to a 73.03% increase in current liabilities during the year as compared to a 56% increase in current assets. While a decline in current ratio may predict deterioration of the short-term solvency of the company, the improvement of the Company s quick ratio suggests that EPCL s short-term creditors are adequately covered by current assets other than inventory.

EPCL s asset management ratios depict a mixed trend in 2009. The total assets of the Company increased by Rs 4,277 million during the year mainly due to the expansion and back integration project. This 23.4% increase in total assets translated into a 47% increase in sales for the year 2009 and showed that the Company generated sufficient business given its investment in total assets.

For similar reasons, the fixed assets turnover ratio of the Company also exhibited a 22.5% increase, showing that EPCL has started utilizing its fixed assets more intensively. The inventory turnover of the company has reduced by 14% from 57 to 49 days. This means that EPCL s inventory is turned over fewer times in 2009 as compared to 2008, which would suggest that the company is holding excessive stocks of inventory.

Similarly, the increase in EPCL s days sales outstanding from
4.8 to 5.4 days shows that the Company s ability to collect its credit sales in a timely manner has somewhat reduced. However, the Company s operating cycle has improved by 35.32%.

EPCL s debt management ratios have declined in 2009. During the year, the Company entered into interest rate swap agreements with banks to hedge its interest rate exposure on floating rate borrowing from International Finance Corporation (IFC) for an amount of US $40 million. The swaps are effective for the period starting from
December 15, 2008 and ending on June 15, 2017.

The fair value of the interest rate swaps as at
December 31, 2009 amounted to Rs 20 million. The Company also entered into a Syndicate Term Finance Agreement with a consortium of local banks for Rs 1,500,000. As a result the total debt of the Company increased by 38.3% over last year and the debt-to-asset ratio of the company increased by 12.06% over last year.

This shows that the Company has increased its use of debt financing. The interest coverage ratio of EPCL has decreased by 94.3% from 25.32 to 1.44. This shows that EPCL is covering its interest charges by a low margin of safety, and the extent to which its operating income can decline before it is unable to meet its annual interest costs has greatly reduced. The long-term debt-to-equity ratio of the Company has also risen by 16.4% from 0.55 to 0.64 over last year.

Engro Polymer s market value ratios showed an overall decline during 2009. The Company earnings per share, price/earnings ratio, dividend per share and book value per share all declined by 166%, 154%, 100%, and 3.14%, respectively. One of the reasons for this decrease is that loss per share for the year was Rs 0.45 whereas earning per share for last year was Rs 0.68.

In view of the loss made by the Company during the year and delay in VCM plant start-up, the Board of Directors did not announce any dividend. Decline in EPCL s market ratios can have a dampening effect on investor confidence. The Company needs to take action to correct its asset management problems and improve its leverage position, in order to strengthen investor confidence and improve all its financial ratios.

Future Outlook PVC domestic sales are expected to show a growth in 2010 due to expected scrap conversion and continuation of Government sponsored projects. PVC-VCM margin is also expected to improve now that the VCM plant has come into commercial operation in first quarter 2010. High oil prices and supply demand gap in Ethylene are expected to maintain high Ethylene prices during first half of 2010.

However, additional capacities are scheduled to come on line in second half which should ease off some pressure and Ethylene prices may decrease. This will have a trickle down effect on the PVC and VCM prices.

Demand for Caustic soda is expected to be strong and the Company is determined to capture maximum market share by offering value for money in terms of product quality and customer services. EPCL plans to continue to sell surplus power to KESC. The Company s strategy would continue to maintain focus on domestic market and export any surplus available product.




PROFITABILITY            2009   2008   2007   2006


Gross profit margin         9.96%   14.4%   15.9%   19.0%

Profit margin           -2.00%   4.5%   7.0%   7.3%

Return on Common Equity      -3.64%   5.4%   8.1%   18.6%

Return on Assets          -1.03%   1.9%   4.5%   8.9%


LIQUIDITY RATIO           2009   2008   2007   2006


Curent Ratio             0.66   0.73   3.06   1.00

Quick Ratio             0.32    0.30   2.45   0.43


DEBT MANAGEMENT           2009   2008   2007   2006


Debt to Asset            0.72   0.64   0.34   0.52

Interest Coverage Ratio       1.44   25.32   22.25   14.3

Long Term Debt to Equity       0.64   0.55   0.21   0.10


MARKET VALUE             2009   2008   2007   2006


Earning per share          -0.45   0.68   1.64   2.14

Price earning ratio         -2.51   4.66     -     -

Dividend per share           0   0.54   2.10   1.85

Book value             12.23   12.63   14.03   11.50

Number of shares issued(in 000) 520,000  520,000  444,000  178,000


ASSET MANAGEMENT           2009   2008   2007   2006


Inventory Turnover (Days)      48.43   56.32   69.05   55.74

Days Sales Outstanding        5.37   4.77   8.15   15.07

Operating Cycle           7.18   11.10   6.20   5.60

Fixed Asset Turnover         0.60   0.49   1.29   2.16

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].


Courtesy: Business Recorder


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