Lotte Chemical Pakistan Limited

Lotte Chemical Pakistan Limited (PSX: LOTCHEM) is a manufacturer and supplier of Purified Terephthalic Acid (PTA). With its state-of-the-art manufacturing capacity located at Port Qasim, Karachi, LOTCHEM has the capacity to deliver over 500,000 tons of PTA annually. LOTCHEM is the core supplier of the domestic Polyester and PTA industries besides exporting to Asia and Middle-east region. It was incorporated in Pakistan in 1998. Its parent company LOTTE is Korea’s one of largest conglomerate with over 20 businesses in 30 countries across the globe.

Pattern of Shareholding

As of December 31, 2021, LOTCHEM has outstanding share capital of 1.5 billion shares which are held by 15,254 shareholders. Associated companies, undertakings and related parties form the largest shareholders of the company with an ownership over 75 percent shares. This is followed by local general public holding 12.36 percent shares. Modarba and Mutual funds account for 2.09 percent of LOTCHEM’s shareholding. Insurance companies own 0.65 percent shares of the company. The remaining shares are held by other categories of shareholders including Banks, DFIs and NBFIs, NIT and ICP, Directors, CEO, their spouse and minor children etc.

Financial Performance (2018-2022)

There is nothing that could stop LOTCHEM’s topline from expanding in the last few years except COVID-19, as evident from the financial statements of the company. Since, 2016, the revenue of LOTCHEM has been rising except for a 36 percent year-on-year drop in 2020 – the reason is obvious to all. The decelerated economic activity due to lockdown imposed during across the globe owing to global pandemic in 2020 took its toll on the PTA demand which showed a downward trajectory throughout 2020 with international prices falling to a 20-year low level. Same was the case is the domestic market where demand arrest caused the company to shut down its plant for over 54 days during 2020. Production and sales volumes were also 14 percent and 12 percent lesser than that in 2019. Gross profit fell by 67 percent year-on-year with GP margin clocking in at 6.8 percent against 13 percent in the previous year. Admin and distribution expense also grew in line with inflation; however, other expense fell owing to low workers’ profit participation fund on account of low profit. Other income grew on the back of discounting of GIDC provision, however, OP margin dropped from 13 percent in 2019 to 8 percent in 2020. Finance cost significantly dropped during 2020 on the back of net exchange gain during the year. LOTCHEM’s capital structure is highly backed by equity with a debt-to-equity ratio of 19:81 in 2020. The bottom line of LOTCHEM plunged by 60 percent year-on-year in 2020 with NP margin clocking in at 5.45 percent as against 8.9 percent in 2019.

The misfortune that hit LOTCHEM in 2020 proved to be short-lived as the company made a massive topline growth of 72 percent year-on-year in 2021 with bottom line magnifying by 118 percent. The production and sales volume of 520,047 tons 519,079 tons respectively achieved by the company in 2021 were the highest since the commencement of its operations in 1998. Production and sales volume boasted a year-on-year growth of 25 percent and 21 percent respectively. Resurgence in demand coupled with better prices in the domestic PTA market led the company achieve a GP margin of 11 percent during the year. Other expenses massively grew during the year owing to higher workers’ profit participation and workers’ welfare fund on account of greater profit. Other income shrank on account of the unwinding of GIDC provision during the year. Despite low discount rate during the year, finance cost of LOTCHEM grew by over 5 times due to exorbitant foreign exchange loss during the year. This somehow diluted the bottom line growth which otherwise would’ve grown by much greater proportion. NP for the year stood at 6.9 percent.

2022 was another year of good fortunes for LOTCHEM as its topline boasted a growth of 49 percent year-on-year. Robust demand coupled with improved pricing culminated into a GP margin of 17.8 percent, never witnessed by the company before. Distribution and admin expense followed an overall inflationary trend; however other expense grew extraordinarily on the back of greater workers’ profit participation and welfare fund owing to high profits during the year. Other income proved to be gracious enough to grow by 86 percent year-on-year on the back of interest income on financial assets. High discount rate helped LOTCHEM mint its financial assets during the year. Finance costs presented an ugly picture and grew by over 100 percent during 2022 on the back of significant exchange losses incurred by the company during the year. Then imposition of super tax also nibbled away some of the gains. Yet, the company was able to bag an NP margin of 10 percent, the highest ever achieved by the company.

Future Outlook

The sales volume of LOTCHEM started coming under pressure during 4QCY22 and are expected to further tighten due to weak demand from Textile and PET sector as inventories of raw materials and finished goods have piled up lately due to decline in export orders from Europe coupled with energy crisis in Pakistan which is forcing them to adopt a cautious approach in capacity utilization. This coupled with lower international PTA prices will constrict the margins of LOTCHEM in 2023. Moreover, curtailed supply of utilities, inflationary pressure and exchange losses owing to sharp depreciation of Pak Rupee will also play their due role in suppressing the bottomline of LOTCHEM.