Polyester Fibres: PAKISTAN PTA LIMITED - Analysis of Financial Statements Financial Year 2003 - Q203-2007
Pakistan PTA is a world-class supplier and manufacturer of pure terephthalic acid (PTA), an essential white powder used in the textiles industry as raw material for making polyester fibres.
Taking over the PTA business from ICI Pakistan Limited on 1 October 2000, Pakistan PTA Limited remains a member of the ICI Worldwide Group and retains close links with ICI Pakistan Limited. Its shares are quoted on all the three stock exchanges of the country.
Until the Pakistan PTA Limited started its production, polyester producers in Pakistan, hitherto were entirely dependent on costly imports of PTA. Being the sole producer of PTA in Pakistan, it provides the benefits of local supply, with shorter lead times, consistent quality and payment in local currency. Production of polyester in Pakistan has grown strongly and usage of the raw material, PTA, now exceeds 600,000 tons per year. The company exports PTA regularly to its customers in Asia and Europe.
Apart from making this important economic contribution, PPTAL is also adding value to the local textiles and packaging industry. In recent years the trend has been to blend cotton with polyester and other man-made fibres. Garments made from cotton/polyester blends not only find favour with customers, but they also allow increased production, and lesser dependence on cotton. Another major use of polyester is as a plastic, in food packaging, particularly bottles for soft drinks and mineral water. Polyester (PET) bottles not only benefit the consumer due to light and less fragile, but also saves on distribution costs, keeping the prices low.
Since its very inception PPTAL has been a major investor in the future of the chemical industry.
PPTA completed plant upgradation during plant shutdown in May 2005 for the debottlenecking project, which increased the plant manufacturing capacity by 17k tpa to 492k tpa (59tph) from 475k tpa (57tph) earlier.
The Port Qasim PTA plant, operated satisfactorily in the year 2006, taking full benefit from the 59 tonnes per hour up rate project completed in 2005. Production of 473,528 tonnes was higher than 2005 despite some interruptions in power supply and the reduced rate plant operation in December 2006 due to depressed market conditions. Continued focus on implementation of energy conservation plans and annual technical development projects resulted in further improvement in conversion efficiencies, particularly electricity consumption and acetic acid conversion.
However, sales volume for 2006 at 471,779 tonnes was marginally lower than last year, mainly due to lower exports. The domestic sales volume of 406,880 tonnes was, however, 11% higher than last year mainly due to strong marketing focus on the local industry. As a result,
domestic sales accounted for 86% of total volume as compared to 77% in 2005.
Additional domestic sales of PTA in Q4 of 2006 could not materialise due to unplanned delays in the start-up of a customer's new Polyethylene Terephthalate (PET) manufacturing facility. PPTAL exported 64,899 tonnes of PTA in 2006.
Overall, net sales for Q3'07 were 2% lower than corresponding quarter last year, despite higher volume sold, mainly due to lower PTA prices, which resulted in lower PTA margin. PTA margin over paraxylene during the quarter was 25% lower than the corresponding quarter last year.
The impact of lower margin over paraxylene and relatively higher conversion costs resulted in gross profit of Rs 548 million for the quarter as compared to Rs 924 million in the corresponding quarter last year.
This recession in the profit can be justified on account of high paraxylene prices in the market. The increase in PSF prices and the resulting lower demand in the downstream sector, coupled with the extended shut down of the Chinese market in February (for the Chinese New Year), led to a reduction in PTA demand.
As a result, the overall profitability was on decline mainly due to higher paraxylene (Px) prices. Both gross and net profit margins showed a negative trend.
The higher distribution, selling and administrative expenses, mainly due to no exports and a severance payment further added to this decline. Apart from these, other factors like insurance claims, higher exchange losses, higher financial and tax charges were also responsible for this overall decline.
The ROA and ROE also followed the negative trend of the profit margin. They both continue to remain well below the industry average. The liquidity position shows an increasing trend. Its current assets are increasing more than the proportionate increase in its current liabilities. In FY06 the current ratio at 0.56 was, however, still less than 1.0 mandated by the prudential regulations, for which appropriate waivers have been obtained from all the concerned local lenders. It still hovered around 0.58 in Q3'07.
The company's inventory turnover has declined slightly in FY05 but rose again in FY06 and Q3'07, which can be again attributed to the high paraxylene prices in the market which somewhat lowered the sale of PTA. Even though net sales increased, the rise in inventory outweighted it, thereby increasing the ITO slightly.
Also the days sales outstanding and operating cycle showed a slight decline in FY06 indicating company's efficient credit policy and marketing endeavours, but rose sharply in 3Q'07 mainly due to easy credit policy. The TATO and sales/equity ratios have shown a rising trend till 2006 due to a considerably higher rise in the net sales than that in assets and equity respectively but reversed in Q3 2007 due to lower sales.
PPTAL's D/A and D/E ratios clearly show that it has relied mostly on debt financing in the past. However, long term debt to equity ratio shows us that now PPTAL is relying more on its short term financing. The cash generated during the FY06 enabled the company to retire debt of Rs 1,350 million and pay dividend amounting to Rs 186 million for the year ended 31 December 2005. Net debt as at 31 December 2006 was Rs 6,738 million (31 December 2005: Rs 7,649 million).
After subordination of the parent company's debt (mortar loans) to the local lenders in September 2005, PPTAL's debt to equity ratio as at 31 December 2006 was comfortably placed well within the requirements of prudential regulations ie fund based exposure does not exceed 4 times of its equity.
However, the TIE ratio shows a declining trend, owing to lower EBIT and considerably higher financial charges. Financial charges were higher in FY06 mainly due to the higher utilization of running finance facilities. Financial charges were 23% lower in 3Q'07 than last year mainly due to lower discounting of sales LCs, since customers preferred to lift product against cash payment. However, lower EBIT declined the overall TIE ratio.
The book value showed a positive trend from FY03 till FY05, but then onwards it declined, owing to the decline in common stockholders equity mainly due to larger accumulated losses in FY06.
FUTURE OUTLOOK: PX prices are likely to continue to remain under pressure due to excess capacity in the Asian region while Px prices may increase on the back of higher crude oil prices, thereby resulting in lower PTA margins. In addition, volatility in crude oil prices will also affect PX prices. The demand from the local PET industry is expected to increase with the start-up of a new PET facility in early November.
PTA prices will continue to be strongly influenced by the demand/supply balance in the PTA industry ie new PTA capacity expansions and downstream polyester demand will influence PTA prices. In the domestic market PSF demand will be influenced by the cotton/PSF blend economics.
The domestic PSF market continues to face uncertainty due to weakness in the downstream textile industry. In light of above-mentioned scenario, it can be hoped that PPTAL's financials will be far more positive in the upcoming years.
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PAK PTAL - FINANCIALS
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Income Statement FY'03 FY'04 FY'05 FY'06 Q3'07
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Total Revenue 20,629,505 26,953,240 28,424,844 30,815,350 22,801,115
Cost of Goods Sold 15,784,553 18,688,921 23,171,139 26,325,613 19,960,435
Gross Profit 533,836 3,313,054 2,780,790 2,236,326 948,394
Selling & Distribution Expenses -130,698 -90,423 -183,083 -215,572 -469
General & Administrative Expenses -222,748 -214,211 -173,145 -180,002 -116,705
Operating Profit (EBIT) 196,670 2,267,351 2,562,589 1,635,496 978,468
Financial Charges -724,477 -864,970 -1,096,436 -1,270,819 -850,305
Net Income Before Taxes -527,807 1,402,381 1,466,153 364,677 128,163
Net Income After Taxes -5,864,560 1,357,838 1,084,925 -120,353 -55,663
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Balance Sheet FY'03 FY'04 FY'05 FY'06 Q3'07
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Stores and Spares 776,533 574,291 539,847 528,687 579,069
Stock-in-trade 2,206,842 4,030,551 2,835,633 3,703,077 2,792,779
Trade Debts 335,340 165,270 1,118,691 804,809 2,200,882
Loans and advances 40,960 40,682 30,505 29,605 33,300
Deposits and short term prepayments 320,489 154,169 242,550 170,171 230,501
Other receivables 133,009 99,006 235,184 695,964 608,231
Taxation Recoverable 226,463 120,822 36,521
Cash and bank balances 320,621 21,620 32,153 57,703 16,206
Total Current Assets 4,360,257 5,206,411 5,034,563 5,990,016 6,497,489
Property, plant,and equipment 15,110,265 13,842,955 12,757,340 11,704,801 10,942,771
Long term loans and advances 20,677 22,885 27,508 30,581 36,477
Long Term Deposits and Prepayments 118,370 108,377 74,221 40,662 40,675
deferred Tax Asset - net 141,617 207,091 159,214 149,764 104,687
Total Non Current Assets 15,390,929 14,181,308 13,018,283 11,925,808 11,124,610
Total Assets 19,751,186 19,387,719 18,052,846 17,915,824 17,622,099
Total Current Liabilities 55,213,922 52,978,366 49,156,128 47,815,159 11,276,001
Total Non Current Liabilities 5,593,382 3,353,938 2,518,893 1,223,717 515,095
Total Liabilities 15,721,372 14,000,067 11,856,627 12,029,158 11,791,096
Total Equity 76,528,676 70,332,371 63,531,648 61,068,034 5,831,003
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PROFITABILITY FY'03 FY'04 FY'05 FY'06 Q3'07
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Gross profit margin 3.27% 15.06% 10.72% 7.83% 4.54%
Profit margin -35.94% 6.17% 4.18% -0.42% -0.27%
Return on Asset -29.69% 7.00% 6.01% -0.67% -0.32%
Return on Common Equity -145.53% 25.20% 17.51% -2.04% -0.95%
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LIQUIDITY RATIO FY'03 FY'04 FY'05 FY'06 Q3'07
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Current Ratio 0.43 0.49 0.54 0.55 0.58
Quick Ratio 0.14 0.06 0.18 0.16 0.28
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 Q3'07
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Inventory Turnover(Days) 65.82 75.35 46.82 53.34 43.54
Day Sales Outstanding (Days) 7.40 2.70 15.52 10.14 28.42
Operating cycle (Days) 73.21 78.05 62.34 63.48 71.96
Total Asset turnover 0.83 1.13 1.44 1.59 1.19
Sales/Equity 4.05 4.08 4.19 4.85 3.59
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 Q3'07
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Debt to Asset(%) 79.60 72.21 65.68 67.14 66.91
Debt/Equity (Times) 3.90 2.60 1.91 2.04 2.02
Times Interest Earned (Times) 0.27 2.62 2.34 1.29 1.15
Long Term Debt to Equity(%) 138.80 62.25 40.65 20.79 8.83
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PER SHARE FY'03 FY'04 FY'05 FY'06 Q3'07
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Earning per share -3.80 0.90 0.72 -0.08 -0.04
Price earning ratio -2.84 17.20 15.97 -85.50 -124.63
Dividend per share - - - 0.00
Book value 2.66 3.56 4.09 3.89 3.85
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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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