Chemical: LOTTE PAKISTAN PTA LIMITED - Analysis of Financial Statements C Year 2004 - Half Year 1 2010

Lotte Pakistan PTA which was known as Pakistan PTA before September 2009 when it was taken over (75% stake) by KP Chemical Corporation which is a subsidiary of the South Korean conglomerate LOTTE.
LPTA 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 fibers. Taking over the PTA business from ICI Pakistan Limited on 1 October 2000, Pakistan PTA Limited was a member of the ICI World-wide Group and retained close links with ICI Pakistan Limited. Following the acquisition of ICI Plc UK by Akzo Nobel on 2nd January, 2008, Pakistan PTA Limited was a direct subsidiary of ICI Omricon B.V., with Akzo Nobel being the ultimate holding company. PPTAL's shares are quoted on the Karachi, Lahore and Islamabad Stock Exchanges.
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 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 fibers. Garments made from cotton/polyester blends not only find favour with customers, but they also allow increased production, and lesser dependence 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 by being lighter and less fragile, but also save on distribution costs, keeping shop prices low.

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Six months ended 30 June

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                                          2010           2009

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Turnover                            21,689,116     17,642,599       19%

Price Settlements and discounts       (892,948)    (1,508,264)     -69%

Net Sales                           20,796,168     16,134,335       22%

Cost of Sales                      (17,511,307)   (14,126,622)      19%

Gross profit                         3,284,861      2,007,713       39%

Distribution and selling expenses      (55,431)       (36,650)      34%

Administration expenses               (124,889)      (102,625)      18%

Other operating income                 451,799          52170       88%

Other operating expenses              (197,179)      (337,249)     -71%

                                        74,300        424,354     -471%

                                     3,359,161      1,583,359       53%

Financial Charges                     (129,212)      (179,400)     -39%

Profit before taxation               3,229,949      1,403,959       57%

Taxation                            (1,053,870)      (195,375)      81%

Profit after taxation                2,176,079      1,208,584       44%

EPS-basic and diluted                     1.44           0.80       44%

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RECENT PERFORMANCE-HY1'10
The recent performance in HY1'10 shows that the turnover was 19 % higher than in the same period in CY'09, the major market being domestic. The main reason for the increase in Turnover was that in Q2 the company had better positioning of the product which led to an increase in demand for domestic than imported product.
However, the net sales were 22 % higher owing to a reduction in price settlements and discounts given.
The cost of sales were also 19% higher in HY1'10 as compared to HY1'09 due to the overall increase in the turnover due to volume. Hence, the overall result in gross profit was in increase of 39 % than in the same period last year mainly due to better PTA margins over Px. Paraxylene (Px) prices largely followed the crude oil trend during Q2 2010 and remained depressed. The market continued to be well supplied in the region with new capacities in Kuwait and China running at full rates and most end users remaining comfortably covered with contract volumes. The spot Px price averaged US $975 per tonne CFR China for the quarter with a high of US $1,075 per tonne CFR China in May and a low of US $880 per tonne CFR China in June.
PTA spot prices also increased to a high of US $1,000 per tonne CFR China levels earlier in April but retreated to US $800 per tonne CFR China by the end of June. PTA demand was closely linked with downstream conditions in China as lower sales volumes in the polyester market and the Chinese government's decision to slow down the flow of credit mid way through the quarter, exerted downward pressure on PTA prices, which averaged US $918 per tonne CFR China during the quarter. However, the margins remained positive, yielding a higher GPM for the company.
With respect to the distribution and selling expenses, there was an increase of 34 % because of the additional freight charges attributable to rise in exports. Administrative expenses increased by 18 % because of annual increase in wages and salaries and because of rising inflation impact. There was, however, an 88% rise in other operating income because of interest income earned from surplus cash from operations and exchange gain of Rs 80 million due to appreciation of Rupee vs. Dollar. Other operating expenses fell by 71% due to a reduction in exchange losses with better stability in rupee vs. dollar. Hence, after taking into account taxation, there was an increase of 44% in H1'10 in the Profit after taxation.
OPERATIONS
Sales volume for CY'09 at 505,687 tons was the highest ever achieved by the company since its inception. This included 39,160 tons of PTA exports to China, India and Oman. Although the country's largest PSF producer remained completely shut down during the year due to financial problems, overall domestic sales volume remained at the same level as last year mainly due to higher PTA off-take by the other PSF producers as well as the PTA sector.
Production volume in CY'09 was registered at the best ever daily, monthly and quarterly levels in the year Moreover plant capacity utilisation and energy consumption showed the highest efficiency levels this year. Production for the year at 506,750 tons was 14% higher than 2008 and 7% higher than 2006 levels. The record production level was achieved despite of frequent electricity outages, and 5 day non availability of raw material; hydrogen and nitrogen as the supplier's plant was shut down due to fire.
PROFITABILITY
As a result of the favourable trading conditions throughout the year, the company recorded it highest ever profit for any calendar year. Net sales was 14.7% higher compared to 2008 mainly due to highest ever volumes and higher ever PTA prices.
The cost of sales to turnover ratio improved from 89% in CY08 to 83% in CY09 mainly due to the PTA margin over Px being 49% higher than last year.
Distribution and selling expenses were higher than last year mainly due to outward freight and handing charges on account of exports to various countries, compared to their being no exports in 2008.
Moreover LPPTA also earned Rs 261 million as other income mainly on account of interest on bank deposits and insurance claim of Rs 178 million received in lieu of the lost profit that occurred because one of the suppliers of hydrogen and nitrogen to LPPTA couldn't honour its commitment due to fire.
In addition to that profits became more favourable due to an Rs 425 million reduction in other operating expenses from last year on account of lower exchange losses as USD was relatively stable in the year 2009.
Furthermore the financial charges were lesser from last year as the company did not need to utilise the bank financing because a much better cash flow position for the company.
As a result of all these factors the profit before taxation for the year was recorded at Rs 4.7 billion compared to a loss of Rs 1.6 billion in 2008.
Analysing CY07 performance the profits were low as the Port Qasim PTA plant, operated dismally especially in the first half of 2007, mainly due to weak downstream demand which in turn was affected by industry's poor performance. However, in the second half when the demand picked up, it took full benefit from the 60 tons per hour up rate project completed in Feb, 2007. CY'07 Production of 456,099 tons was lower than 473,528 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 electricity consumption and acetic acid conversion.
Overall sales volume for 2007 at 468,516 tons was 7.62% lower than last year's 471,779 tons, mainly 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 tons was 13% higher than CY06 thus accounting for 98% of total volume as compared to 86% CY06.
LIQUIDITY
The company generated strong cash flows from operations and was able to meet its financial and capital expenditure requirements during the year. The current ratio as at 31st December stood at 1.66 compared to 0.91in 2008, which is well above the Prudential Regulations requirement of 1 time.
Moreover the improvement of quick ratio reassures the good health of the company in terms of cash flow, standing at 1.40 which is nearly equal to the current ratio itself, hinting that the stock levels were low, which was achieved because of efficiency in operations and also sustained demand throughout the year.
Even in earlier years the liquidity position shows an increasing trend. In CY '07 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 in from 0.56 to 0.9 is mainly attributable to decline in current liabilities in addition increase in current assets. Decline in CLs is due to conversion of PPTALs 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.
OPERATING CYCLE
The operating cycle of negative 22.4 days bolsters the applaudable cash flow results discuused earlier. Although the operating cycle has kept on improving ftom the last 5 years, the results in 2009 clearly signal how the creditor confidence on LPPTA.
As you can see from the chart the inventory turnover and debtor turnover have kept on improving over the years and the creditor turnover has remained at a very high level due to the company's good reputation.
Looking more closely tthe company's inventory turnover has declined slightly in CY 05, rose in CY 06 and decline again CY'07, 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 CY '07 on the back of the 26 days higher Days sales outstanding. This increased by significant amount mainly due 2.5 times higher trade debts in CY'07 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.
ASSET MANAGEMENT
Talking about efficiency, LPPTA did not lag back in making the most of its resources given the much better earning opportunities presented to the company in CY09.
Especially the fixed turnover showed a very solid result standing at 3.8 times compared to 3.1 times last year. The TATO and Sales/Equity ratios have shown a positive rising trend till '06 due to a considerably higher rise in the net sales than that in assets and equity respectively but trend reversed in CY07 due to comparatively lower sales.
SOLVENCY
The CY09 has been no less than exceptional on many counts, and to gauge the companies financial strength a very useful measure is its equity strength compared to the debt it has amassed. LPPTA managed to reduce its levels of debt to the lowest level since its inception to 1.54 times and more incredibly it brought it down from the highest level of 2.72 times recorded last year.
More astonishing was the interest cover which was 17 times in the CY09 compared to negative 1 time last year. This was a result of a much higher profitability and lower utilisation of bank financing.
In previous years however, the interest cover shows a declining trend, owing to lower EBIT and considerably higher financial charges in past few years. Financial charges were higher in CY '06 mainly due to the higher utilisation of running finance facilities. Financial charges were 19% lower in CY'07 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 CY'07is lower EBIT.
However in the past PPTAL's D/E ratios clearly showed that it has relied mostly on debt financing. Previously long term debt to equity ratio showed us that PPTAL was relying more on its short term financing. However, the deviant situation in CY'07 is mainly due to conversion of short-term loans from Mortar Investments International Limited amounting to PKR 3.8 billion into long-term loans of five years maturity, in CY'07.
After subordination of the parent company's debt (Mortar loans) to the local lenders in September 2005, PPTAL's debt to equity ratio has been comfortably placed well within the requirements of prudential regulations .e. fund based exposure does not exceed 4 times of its equity. The cash generated during the CY '07 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 CY'06, depicting a declining trend.
MARKET VALUE
The level of improvement in financial results is evident from the measure of ROE and ROCE, which have elevated to a respectable level after an equally devastating levels sustained in 2008.
Given the poor financial position the share price painted a dull picture as the perception of potential performance of the company was marred by the consistent bad performance of the compay since 2006. Nonetheless the decrease of the share price to such low levels had much to do with the decline in the index levels. However now the investor confidence seems to be coming back with the EPS at the best level over the company's history and thus the share price increasing from Rs 1.59 in CY08 to Rs 7.83 in CY09.
FUTURE OUTLOOK
Px prices are expected to remain under pressure during most of HY2'10 and therefore, in order to balance the market, there will be production cut downs by Px manufacturers. PTA will follow this trend therefore the margins are not expected to increase.
The company continues to face tough competition from foreign producers, particularly Thailand producers since the anti dumping duties have been imposed by Chinese government on Thai and Korean producers. The company is trying its best to rectify the import duty of mere 3% on imports from the Government of Pakistan since all other countries in the region are trying to increase the duties from 6-8 %
Sales to the local PET sector could also be adversely affected by the elimination of the zero rating mechanism with effect from 1 July 2010.
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].
Copyright Business Recorder, 2010