Chemicals: ENGRO POLYMER AND CHEMICAL LIMITED - Analysis of Financial Statements - Financial Year 2006 - Financial Year 2010

Engro Polymer and Chemicals Limited (EPCL) is a subsidiary of one of the large conglomerate of Pakistan, Engro Corporation Limited. It is involved in manufacturing, marketing and distribution of Poly Vinyl Chloride (PVC). It 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 and Chemicals Limited (EAPCL). It was established with an investment of US$80 million set-up 100,000 tons PVC plant at Port Qasim, and was the only PVC manufacturer in the country at that time. Engro Polymer and Chemicals Limited is Pakistan's leading manufacturer and marketer of PVC (polyvinyl chloride) resin, with an annual PVC production of 150,000 tons. The company markets its products under the brand name of SABZ.
This segment of the market remained neglected till now. The company is investing significant amount to tap the domestic as well as foreign market of PVC, caustic soda and EDC. Engro Polymer and Chemicals Limited's new PVC plant came into commercial production from January 1, 2009, enhancing the capacity to 150,000 tons. EDC and caustic soda plants were also commissioned during 2009. However the commencement of its new VCM plant, which was expected to come online by first quarter 2010, was delayed till September 2010, because its scrubbers were damaged in a fire accident. The event significantly affected the profitability of the company.
INTERNATIONAL PRICE TREND
International PVC prices increased from USD 900/ton at the beginning of the year to USD 1,000/ton by March 2010. During the second quarter, prices decreased due to reduced demand and falling feedstock prices. The prices started to pick up from the third quarter on account of limited production and increase in raw material prices. Ethylene prices decreased from USD 1,340/ton in January to USD 1,090/ton in December 2010. Prices decreased as new Ethylene capacities came online during the year.
RECENT RESULTS
The net revenue of the company during the year remained 14.62 billion rupees compared to 11.57 billion rupees of last year, showing a growth of 26.4% over the year. However, the demand of one of its main product PVC has actually declined due to low government spending on infrastructure and liquidity crunch in the market. The sales revenue of PVC declined from 119 thousand tons to 97 thousand tons during the period. The supply side also remained disturbed due to delay in the operation of its PVC plant. The increase in the sale volume resulted because of the strong demand of other products of the company. The sales of the caustic soda have increased from 27 thousand tons compared to 80 thousand tons last year. Export of power to Karachi Electric Supply Company (KESC) was discontinued from August 26, 2010 due to sharp frequency fluctuations at KESC grid.
Despite the 26.4% increase in sales volume, the gross profit of the company has increased by only by 3% because of the high import cost of PVC. The company imported PVC to meet the demand of its existing clientele, because of the delay of the operation of its PVC project due to fire accident.
The company incurred a loss of Rs 813 million during the period as compared to a loss of Rs 231 million last year. All of the expenses of the company have increased significantly during the period. The distribution expenses increased by 30%, the administrative expenses increased by 51%, and other operating expenses increased by 26%. All these expenses rose largely because of the fire accident and as a result the shift of the company's operation to a modified plant arrangement and to some extent due to the rising level of business cost in the country. The other operating income of the company has also showed a downward trend. The other operating income has declined from 100 million rupees to 22 million showing a decrease of 78% during the period. The performance of the KSE indices have improved in 2010 but the income earned by the company by holding securities has decreased which means that other income of the Engro Polymer was as a result of poor management of the fund of the company. The interest expense of the company has also remained high during the period because of the huge short-term borrowing by the company during the period and surge in interest rate by banks due to huge government borrowing at the higher interest rate.
The gross profit margin ratio has decreased from 10% to 8%, because of the comparatively high import cost of PVC. The company has imported PVC in order to meet the demand of its clientele. The profit margin ratio has further worsened during the period. It went to -5.6% compared to -2% of the last year. As a result of unprofitable operation, both the return to community and return to asset ratio have deteriorated further during the year. The return to common equity further decreased from -3.6% to -11.8% and return to assets ratio decreased from -1% to -3.4%.
The liquidity position of the company has improved over the period under review. Current ratio of the company has increased from 0.66 times to 0.73 times and the quick ratio of the company has increased from 0.32 times to 0.4 times, because of company's increase in stores spares and equipment and tax recoverable asset. The investment of company in stores spares and equipment and stock-in trade of the company has increased because of the expected commencement of new plant in first quarter of 2010, which unfortunately was not started because of fire accident. The store spares and equipment asset value has increased from 192.7 million rupees to 633.8 million rupees, and the tax recoverable asset value has increased because of the higher tax amount paid by the company compared to the liabilities incurred. The short term debt of the company has increased during the period, however the increase in the short term borrowing was much less than the increased investment in current asset; the company has also raised the fund from other avenues. The quick ratio has also improved over the year because significant amount of increase in current asset was not as a result of increase in stock-in-trade.
During the year, the company has raised significant amount of money from different modes to finance the commencement of its new plant. Both the short-term and long-term borrowing of the company had increased significantly during the period. The short-term borrowing has increased from 394 million rupees to 1.58 billion rupees. The company has also taken a long-term loan of Rs 950 million from banks. The terms of the agreement include that the repayment of the loan will be either in instalments or cash or in the shape of equity injection, which will be decided by the banks. As a result of borrowing funds from different sources, the debt to asset ratio has raised to 0.72 times to 1.17 times. The interest coverage ratio has further deteriorated significantly during the period. It decreased from 1.44 times to -11.53 times, because of the unprofitable business operational during the period and due to heavy borrowing of the company to finance its expansion plans. Despite of significant borrowing from banks, the long-term debt to equity ratio has decreased from 0.64 times to 0.61 times. This happened because many of the long-term borrowings of the company become due in the current period and was paid off by the company.
The inventory turnover ratio has increased from 48.4 days to 49.73 days. This happened because of the increased investment in stock-in trade to finance the extra inventory needs of new project, which unfortunately delayed due to fire accident. The days sales outstanding have almost doubled from 5.37 days to 9.83 days which shows that the company faced overall difficulty in collecting its payment from its debtors. The operating cycle of the company has gone negative during the period, from 7.18 days to -1.18 days. This happened because of the significant increase in credit turnover ratio of the company, which has increased from 46.6 days to 60.74 days. The negative operating cycle ratio shows that the company is able to delay the payment of its creditors more days than it herself has delayed the payment of its debtors. The company did not need any cash to finance the working capital requirements of its operation cycle but actually it was generating funds from its working capital management. This sound fantastic in the short run but in the long run, this may affect the ability of the company to purchase its raw material on credit. The fixed asset turnover ratio has increased from the 0.6 times to 0.76 times revealing the increased efficiency of the company to utilise its fixed assets.
The earnings per share ratio, price to earnings ratio and book value ratio, all decreased due to unsuccessful business operation of the company during the year. The company suffered a loss amounting to rupees 813 million rupees during the period. The price to earnings ratio has becomes meaningless in this case. The earnings per share ratio has decreased from -0.45 rupees to -1.29 rupees and the book value per shares has decreased from 12.23 rupees to 10.41 rupees. Due to negative operation, the company paid do not paid any dividend during the period, however to keep its shareholders satisfied the company issued rights to buy shares at 10 rupees.
The beta of the Engro Polymer and Chemical remained 1.14 during the period, which shows that the company's stock is a bit more risky than the market. This means that based on calculated trend analysis, the stock of the Engro Polymer is going to move in the same direction as the market bit with slight more magnitude.
FUTURE OUTLOOK
The year 2010 was one of the gloomy years in Engro Polymer's history. The fire incident during the year profoundly affected the business operation of the company. The company suffered a loss of Rs 813 million over the year. However, the future of the company does not seem bleak; the company has showed a sign of recovery after September 2010. Loss earned would have been much greater if the company has not operated well in the last quarter and this was actually translated into the share price of Engro Chemical which has risen continuously after that. The commencement of its new PVC plant has started in September 2010, and it is expected to increase the profit margin of the company. The demand of the PVC is also expected to increase in the next year due to huge damage of infrastructure due to flood. The demand of caustic soda is also showing a positive upward trend. Keeping in view the above-mentioned factors, the future of the Engro Polymer and Chemical seems bright.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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