PAKISTAN PTA LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 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 World-wide Group and retains close links with ICI Pakistan Limited.
Following the acquisition of ICI Plc UK by Akzo Nobel on 2nd January, 2008, Pakistan PTA Limited continues to be a direct subsidiary of ICI Omricon B.V., with Akzo Nobel being the ultimate holding company. It is listed on all the three stock exchanges of the country.
Until 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, PPTAL provides the benefits of local supply, with short 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. Pakistan PTA Limited also exports PTA regularly to customers in both Asia and Europe.
Apart from making the important economic contribution, PPTAL is 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 also allow increased production, and lesser dependence on cotton.
Another major use of polyester is in shape of plastic, in food packaging, particularly bottles for soft drinks and mineral water. Polyester (PET) bottles not only benefit the consumers being the lighter and less fragile, but also save the distribution costs, keeping the prices low.
Since its inception, PPTAL has been a major investor in future of the chemical industry. PPTA completed plant upgradation during the plant shutdown in May'05 for the debottlenecking project, which increased the plant manufacturing capacity by 17k tpa to 492k tpa (59tph) from 475k tpa (57tph) earlier. Later, in 2007, a Supplementary Process Air Compresor (SPAC) worth USD 2 million was installed and commissioned adding further 6,000 tpa to plant capacity and enhancing the conversion efficiencies.
RECENT RESULTS (FY03-FY07)The Port Qasim plant operated dismally, especially in the first half of 2007, mainly due to weak downstream demand, which in turn was affected by the industry's poor performance. However, in the second half, when the demand picked up, it took full benefit from the 60 tonnes per hour up rate project completed in February 2007.
FY07 production of 456,099 tonnes was lower than 473,528 tonnes in 2006, driven mainly by the reduced rate plant operation in H1'07 due to depressed downstream market conditions. Continued focus on implementation of energy conservation plans and annual technical development projects resulted in sustained conversion efficiencies, particularly the electricity consumption and acetic acid conversion.
Overall sales volume for 2007 at 468,516 tonnes was 7.62% lower than the last year's 471,779 tonnes, due to lower exports and domestic industry slowdown. However, due to strong marketing focus on the local industry along with capitalising on opportunities resulting from new Polyethylene Terephthalate (PET) manufacturing facility, the domestic sales volume of 460,486 tonnes was 13% higher than the last year thus accounting for 98% of total volume compared to 86% of last year.
The flat figures of net sales in FY07 compared to corresponding period last year were satisfactory keeping in view the lower volume sold and lower PTA prices, which resulted in 20% lower PTA margin over Px, which continued to rise due to high crude oil prices.
These escalating Px prices with strengthening of downstream demand in mid-2007, the spot PTA prices shot up but depicted a declining trend till year end due to increased PTA supply augmented by the new PTA capacity expansions. Among the conversion costs, the major driver was increase in repairs and maintenance with Rs 150 million from the planned plant overhaul.
The impact of lower margin over Px and relatively higher conversion costs resulted in gross profit of Rs 1.3 billion compared to Rs 2.2 billion in the corresponding period last year. The lower distribution, selling and administrative expenses were mainly due to lower exports and partial reversal of Rs 50 million from the provision of Rs 90 million trade related contingency made in FY06.
A severance payment further added to this decline. Apart from these, other factors like the insurance claims resulted in a higher other operating income along with a lower other operating expenses mainly lower exchange losses on foreign currency loans, finance lease and trade related transactions. This justifies a slight improvement in the loss made by the company in FY07. Lower financial and tax charges were also responsible for this slight improvement.
With ratio analysis the picture doesn't seem to be rosy in FY07. Both gross and net profit margins showed a negative trend. The ROA and ROE also followed the negative trend of the profit margin. Both continue to remain below the industry average.
The liquidity position shows an increasing trend. In FY07 the current ratio at 0.9 was, however, marginally less than 1.0 mandated by the Prudential Regulations, for which appropriate waivers have been obtained from all the concerned local lenders. Its sudden jump from 0.56 to 0.9 is mainly attributable to decline in current liabilities in addition an increase in current assets.
Decline in CLs is due to conversion of PPTAL's short-term loans amounting USD 63 million (PKR 3.8 billion), from a group company Mortar Investments International Limited into long-term loans maturing in five years. The company's inventory turnover has declined slightly in FY05, rose in FY06 and declined again FY07, which can be again attributed to the high Px prices in the market which somewhat lowered the sale of PTA.
With flat net sales and decline in inventory, the ITO declined considerably. Despite this, the overall operating cycle showed an increase of 13 days in FY07 on the back of 26 days higher days sales outstanding. This increased by significant amount mainly due 2.5 times higher trade debts in FY07 than the previous year's level.
Trade debts include aggregate amount of Rs 1,197.091 million (2006: Rs 168.974 million) due from ICI Pakistan Limited. This indicates company's lax credit policy and marketing endeavours.
The TATO and sales/equity ratios have shown a positive rising trend till 2006 due to a considerably higher rise in the net sales than that in assets and equity respectively but trend reversed in FY07 due to comparatively lower sales.
PPTAL's D/A and D/E ratios clearly show that it has relied mostly on debt financing in the past. Previously long term debt to equity ratio showed us that the company was relying on its short term financing.
However, the deviant situation in FY07 is mainly due to conversion of short-term loans from Mortar Investments International Limited, amounting to Rs 3.8 billion into long-term loans of five years maturity in FY07.
After subordination of the parent company's debt (Mortar loans) to the local lenders in September 2005, its debt to equity ratio has been comfortably placed well within the requirements of the Prudential Regulations ie fund based exposure does not exceed 4 times of its equity. The cash generated during the FY07 enabled PPTAL to retire debt amounting to Rs 1,366 million. Net debt as at 31 December 2007 amounted to Rs 5.873 billion from Rs 6,738 billion in FY06, depicting a declining trend.
However, the TIE ratio shows a declining trend, owing to lower EBIT and considerably higher financial charges in past few years. Financial charges were higher in FY06 mainly due to higher utilisation of running finance facilities. Financial charges were 19% lower in FY07 than last year mainly due to lower discounting of sales LoCs, since customers preferred to lift product against cash payment. Hence, the major culprit for decline in the overall TIE ratio in FY07 is lower EBIT.
The EPS was positive in just 2 years (FY04 and FY05) and continued to be negative for the rest of the years the reason being the loss incurred in the respective years. As a result P/E ratio was also negative in the respective years even though the average market year-end price remained stable.
On comparison with the 100-index, we see an overall bearish trend in the company's stock price. 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 and FY07.
FUTURE OUTLOOK: The demand from the local PET industry is expected to increase with the start-up of a new PET facility. Px prices are likely to remain under pressure due to volatility in crude oil and naphtha prices. Px prices may increase on the back of higher crude oil prices, thereby resulting in lower PTA margins.
PTA prices will continue to be strongly influenced by the demand supply balance in the PTA industry ie the sluggish downstream polyester demand aggravated by excess capacity in the Asian region with continued investments by China and India. 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.
While the budget and trade policy for FY09 envisage various measures for enhancing the textile exports such as technology upgradation and human resource development, discontinuation of R&D subsidy on the other hand would hurt textile companies directly. Unless the condition of local textile industry improves significantly, outlook for PSF sector remains dull.
Adding fuel to fire, the recent reduction of customs duty for imported Pure Terephthalic Acid (PPTA) from 15% to 7.5% would reduce selling price of PTA by 7.5%. This reduction in the top-line would hurt the margins and translate directly into an after-tax reduction of 4.875% (7.5% x 65%) in the bottom line of local PTA manufacturers including Pakistan PTA.
It also renders the local PTA manufacturers at a disadvantage vis-à-vis their regional competitors India and China, which are protected by their high tariff regime. In light of above-mentioned scenario, PPTAL's financials will not be depicting a very rosy picture in the near future amidst country's political instability.
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PAK PTAL - FINANCIALS
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Income Statement (PKR in '000) FY'03 FY'04 FY'05 FY'06 FY'07
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Total Revenue 20,629,505 26,953,240 28,424,844 30,815,350 28,467,346
Cost of Goods Sold (15,784,553) (18,688,921) (23,171,139) (26,325,613) (27,117,299)
Gross Profit 533,836 3,313,054 2,780,790 2,236,326 1,350,047
Selling & Distribution Expenses (130,698) (90,423) (183,083) (215,572) (16,588)
General & Administrative Expenses (222,748) (214,211) (173,145) (180,002) (160,907)
Operating Profit (EBIT) 196,670 2,267,351 2,562,589 1,635,496 1,232,680
Financial Charges (724,477) (864,970) (1,096,436) (1,270,819) (1,033,269)
Net Income Before Taxes (527,807) 1,402,381 1,466,153 364,677 199,411
Net Income (Loss) After Taxes (5,864,560) 1,357,838 1,084,925 (120,353) (59,066)
485,030 258,477
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Balance Sheet (PKR in '000) FY'03 FY'04 FY'05 FY'06 FY'07
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Stores and Spares 776,533 574,291 539,847 528,687 584,917
Stock-in-trade 2,206,842 4,030,551 2,835,633 3,703,077 2,344,637
Trade Debts 335,340 165,270 1,118,691 804,809 2,818,667
Loans and advances 40,960 40,682 30,505 29,605 37,769
Deposits and short term prepayments 320,489 154,169 242,550 170,171 166,240
Other receivables 133,009 99,006 235,184 695,964 359,040
Taxation Recoverable 226,463 120,822 8,003
Cash and bank balances 320,621 21,620 32,153 57,703 74,186
Total Current Assets 4,360,257 5,206,411 5,034,563 5,990,016 6,393,459
Property, plant,and equipment 15,110,265 13,842,955 12,757,340 11,704,801 10,745,850
Long term loans and advances 20,677 22,885 27,508 30,581 38,431
Long Term Deposits and Prepayments 118,370 108,377 74,221 40,662 40,624
deferred Tax Asset - net 141,617 207,091 159,214 149,764 96,467
Total Non Current Assets 15,390,929 14,181,308 13,018,283 11,925,808 10,921,372
Total Assets 19,751,186 19,387,719 18,052,846 17,915,824 17,314,831
Total Current Liabilities 10,127,990 10,646,129 9,337,734 10,805,441 7,103,252
Total Non Current Liabilities 5,593,382 3,353,938 2,518,893 1,223,717 4,383,979
Total Liabilities 15,721,372 14,000,067 11,856,627 12,029,158 11,487,231
Total Equity 4,029,814 5,387,652 6,196,219 5,886,666 5,827,600
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PROFITABILITY FY'03 FY'04 FY'05 FY'06 FY'07
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Gross profit margin 2.59% 12.29% 9.78% 7.26% 4.74%
Profit margin -28.43% 5.04% 3.82% -0.39% -0.21%
Return on Asset -29.69% 7.00% 6.01% -0.67% -0.34%
Return on Common Equity -145.53% 25.20% 17.51% -2.04% -1.01%
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LIQUIDITY RATIO FY'03 FY'04 FY'05 FY'06 FY'07
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Current Ratio 0.43 0.49 0.54 0.55 0.90
Cash Ratio 0.03 0.00 0.00 0.01 0.01
Quick Ratio 0.21 0.11 0.24 0.21 0.57
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ASSET MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07
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Inventory Turnover(Days) 38.51 53.83 35.91 43.26 29.65
Day Sales Outstanding (Days) 5.85 2.21 14.17 9.40 35.65
Operating cycle (Days) 44.36 56.04 50.08 52.66 65.30
Total Asset turnover 1.04 1.39 1.57 1.72 1.64
Sales/Equity 5.12 5.00 4.59 5.23 4.88
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07
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Debt to Asset(%) 0.80 0.72 0.66 0.67 0.66
Debt/Equity (Times) 3.90 2.60 1.91 2.04 1.97
Times Interest Earned (Times) 0.27 2.62 2.34 1.29 1.19
Long Term Debt to Equity(%) 0.28 0.17 0.14 0.07 0.25
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PER SHARE FY'03 FY'04 FY'05 FY'06 FY'07
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Book value 2.66 3.56 4.09 3.89 3.85
Market Price (Average) 10.78 15.48 11.5 6.84 5.05
Earning per share -3.80 0.90 0.72 -0.08 -0.04
Price earning ratio -2.84 17.20 15.97 -85.50 -126.25
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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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