Shares of Lotte Pakistan PTA are among the most traded equities at the Karachi Stock Exchange of late, with trading volumes averaging about 15 percent of benchmark index volume. The company is a world-class supplier of purified terephthalic acid (PTA), an essential raw material used in the polyester industry. A very significant use of PTA is in the manufacturing of polyester staple fibre (PSF) which is used as a substitute for cotton.
The company was previously known as Pakistan PTA (PPTA), but was changed to Lotte Pakistan PTA Ltd when Lotte, a South Korean conglomerate, acquired majority shareholding of the company in September 2009.
IMPORTED PTA Lotte is the sole PTA manufacturer in Pakistan, but faces competition from imported PTA. The company currently produces about 500,000 tons of PTA, while local demand hovers around 600,000 tons. The shortfall is met through imported PTA, on which an import tariff of three percent is levied.
Lotte Pakistan has been pressing for a higher tariff, since the current rate is very low compared to regional players China and India where applied tariffs are 6.5 percent and five percent respectively. Local PTA prices follow international prices and hence, prices of imported PTA have a significant impact on the price of domestic PTA produce.
PROFITABILITY With the price bonanza seen in cotton prices last year, the popularity of PSF, and thus of PTA witnessed an appreciable boost. A critical factor in evaluating the company's profitability is the PTA-Px margin.
PTA prices had headed northward for most of 2010 and 1QCY11, owing mainly to the spike in cotton prices which heightened demand and hence prices of PSF. At the same time, prices of Paraxylene (Px), a raw material used to manufacture PTA, also witnessed a hike, particularly in 1QCY11 due to rising crude oil prices and the shutdown of Px manufacturing facilities in Japan.
Though the rise in Px prices put a strain on PTA-Px margins for Lotte; buoyant PTA prices meant that the company's margins were helped tremendously. According to a recent JS Research note, "Realised PTA-Px margins for the company in 1QCY11 escalated to $412 per ton during the quarter (while they were) US $283 per ton in 1Q2010."
The improved PTA-Px margins were reflected in the company's improved revenues, which were mainly price-based rather than volume-based in CY10, as, according to the company's annual report 2010, "Sales and production volumes for the year...were marginally lower than last year."
Sales revenues increased year-on-year by 12 percent in CY10, while the rise was above 70 percent in 1QCY11, compared to the same period last year. The net effect was carried forward in the company's gross margins, which improved by about 10 percentage points in 1QCY11 relative to the same period last year; and by about a percentage point in CY10 relative to CY09.
Sales to international markets were lower in 2010 compared to 2009. This was mirrored in lower distribution and selling expenses for the company, which declined in 2010 over the last year despite an increase in revenues. At the same time, the company's profitability was helped by higher finance income in 2010 - which increased to over three times that in 2009 - and by reduced finance costs which were Rs 525 million lower in 2010 relative to 2009.
Company reports said that the reduction in finance costs was "mainly due to the reduction in exchange loss on account of the relative stability in the USD/PKR parity during 2010, strong cash flows from improved trading conditions, little or no utilisation of financing facilities from banks, and partial prepayment of $23 million on the foreign currency loan from the parent company." Overall, the after-tax profits of the company improved by a whopping 170 percent in 1QCY11 relative to 1QCY10, and by about 27 percent in CY10 relative to the previous year.
LEVERAGE Lotte's leverage position improved in 2010 relative to the last year. From 1.97 in 2009, the debt-to-equity ratio was reduced to 1.38 in 2010. The repayment of loans worth $23 million accounts for a majority of this decline. This also helped prop up the interest coverage ratio, due to a reduction in finance costs of the company.
INVESTMENT AND VALUATION In 2QCY11, cotton prices saw a sharp slump. Its close substitute, PSF, also followed suit and consequently, prices of PTA fell. The decline in PTA prices was greater than the fall in prices of Px and, according to Topline Securities, "this forced PTA primary margins to shrink to its lowest in last six quarters to $235 per ton down 40 percent compared to all-time high margins of $366 per ton seen in 1Q2011."
As a result, profitability and EPS of the company for 2QCY11 is expected to slump. The local bourse seems to have priced in this change in margins, with the price of the scrip plunging down since April this year. But even that appears to be insufficient, as a report by brokerage KASB Securities published earlier in July says, "Although the stock has corrected 17 percent from its high achieved on 27th April, it is yet to fully adjust for the recent plunge in PTA-Px margins, dried-up demand in the domestic market and the ensuing sequential weakness in earnings."
"The stock currently trades at a 2011PE of 4.2x," said a report by JS Research in July. However, brokerage house reports indicate that lately PTA prices, and thus PTA-Px margins have started going up owing to rising PTA demand in China, with expectations of it going up further in the near future in anticipation of increased demand for textiles during Christmas.
OUTLOOK Going forward, improvement in PTA prices due to increase in demand from China is likely to give some boost to Lotte's earnings in 2011. Lotte also announced plans of setting up a $50 million private subsidiary for a cogeneration power plant project. This will be beneficial for the company in reducing its power costs.
Further, the parent company of Lotte - KP Chemical Corporation - is also planning to set up a new PTA plant at port Qasim, having a capacity of 0.8-1 million tons. This plan is contingent upon discussions between KP Chemicals, LOTPTA and the government regarding an increase in import tariffs in PTA from the current three percent. Overall, the new developments send positive signals about the company, which are likely to keep investors' interest buoyed up.
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LOTTE PAKISTAN - KEY PERFORMANCE INDICATORS
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CY10 CY09
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Profitability
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Gross profit to sales % 17 16
Net profit after tax to sales % 11 9
Return on equity after tax % 47 61
Return on capital employed % 34 31
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Leverage
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Debt: Equity ratio times 1.4 1.97
Interest coverage ratio times 26.4 6.91
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Operations
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No of days in inventory days 20 14
No of days in payables days 35 30
Operating cycle days 6 -2
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Investment/ valuation
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EPS Rs 3.0 2.36
P/E Rs 4.6 3.32
Cash dividend per share Rs 0.5 0.5
Dividend yield % 3.7 6.39
Dividend payout % 16.7 21.19
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Source: Company accounts
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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].
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