‘Engro Polymer evaluating investment as big as $800 million’

An interview with Imran Anwer, CEO, Engro Polymer & Chemicals Limited

Imran Anwer is the Chief Executive Officer of Engro Polymer & Chemicals since 2015. Prior to this he was serving as the Chief Financial Officer in Engro Fertilizers.

Imran has achieved significant milestones during his career with Engro. He has proven his leadership skills and displayed strong business acumen and commercial sense whilst handling a major role in Engro Foods such as acquisition and listing of Engro Foods Limited.

Imran worked with Deloitte in 1994, up until 2002 as Manager Corporate Finance. He then joined Fuchs Petroleum, and served as the Chief Financial Officer from 2002 to 2005. Imran joined Engro (then Engro Chemicals Pakistan Limited) as Manager, General Accounting in 2005. He was then moved to Engro Foods in 2007 where as the CFO he was instrumental in deploying SAP system throughout the Company ultimately allowing the business to emerge as a market leader in dairy liquids. Thereon, he also served as the CFO of Engro Fertilizers before moving on to becoming the CEO of the petrochemicals business.

BR Research recently had a discussion with Imran regarding the future of petrochemical industry in Pakistan, the challenges faced by the industry currently and the company’s plans going forward. Below is an edited excerpt of the conversation.

BR Research: How has your business grown in the recent past?

Imran Anwer: We have two distinct businesses within Engro Polymer. One is caustic soda and the allied products, which generally goes to the textile sector. The other business line is the PVC, where we are the only local provider in the country.

We have around one-third of market share in caustic business. In terms of our business, the contribution from caustic hovers around 15-20 percent of the top line, but more than half to the bottom-line. Over the last four years, demand for caustic soda was more or less flat, as the demand from textile sector remained sluggish.

On the other hand, as the construction sector was doing rather well over the last three to four years, and our own marketing efforts resulting in new products introduced in the market, the PVC demand has grown. The PVC demand has surpassed our own capacity. That is where we announced expansion of $125 million.

BRR: Take us through the details and timelines of the expansion plan.

IA: We plan to expand the existing capacity by 50 percent, from 200,000 tons to 300,000 tons per annum. We are coming into caustic flakes and hydrogen peroxide as well. We have the LCs ready for more than half the businesses. The funding has been arranged from the shareholders; Engro and Mitsubishi. Other than that, we have taken a loan from the IFC, amounting to $35 million, as the State Bank of Pakistan demands foreign funding for opening the LCs.

BRR: From the time of announcing the expansion till today – a lot has changed, especially in terms of currency valuation. How much has that affected your business plan?

IA: Surely, a lot has changed in the last 15 months in Pakistan. The rupee was valued at 105 per dollar when we had announced the expansion, today it is 140. Yes, the market was expecting the rupee to depreciate, but we were thinking around 120-125, certainly not 140. You can imagine the dent it has caused, as our cost has been inflated by Rs3-3.5 billion.

Gas prices have also increased for captive power, and being in the process industry, we cannot afford to be dependent on the grid. We produced around 55 MW of power, and that is now pricier. Our business model is not one that allows passing on the cost to customers as we work on import parity. Then, there is this increase in interest rates, which has inflated the interest cost of the loan portfolio of around Rs9 billion.

And it does not end here, as the government is now asking to pay the GIDC charges, which we never charged our customers. To top that off, the duty on PVC was deceased by 2 percent all of a sudden, without even informing or discussing with us. Our annual cost, at the EBITDA level will be up by Rs2.8 billion, due to these factors.

Our margins will stay volatile because of the increased gas price and I do not see the caustic margins improving this year. When it comes to PVC, it will all depend on global situation, as we maintain international price parity.

BRR: Did you not see this coming though? Given the bitter experience in Engro Fertilizer’s case, should you not have built in a bit more on the contingency side on your business models?

IA: As I said, we were anticipating rupee at 120-125, but honestly, no one thought it would be 140 in such a short span of time. Having said that, these are measures that the institutions such as the IFC also understand as it is applicable for the entire country, and not specific to our company. But when there is a policy change out of the blue, it surely shakes the entire confidence.

Not many companies are putting in $125 million in investments in Pakistan. We are going abroad to fund the investments. Imagine what image have we portrayed to the likes of Mitsubishi and the IFC by taking such abrupt policy changes. Consistency of policy is a must for every industry.

BRR: What is the rationale that the government has given for the abrupt change in the duty structure?

IA: We have not been given any specific reason, but we are hopeful that the decision will be reversed soon, as communicated to us by the authorities.

BRR: How big a worry is the duty? What are the annual PVC imports?

IA: The demand for PVC is around 250,000 tons, of which we produce around 205,000 tons. And we will expand it to 300,000 tons by the first quarter of 2020. Once that happens, we will be able to export the 50,000 tons surplus.

BRR: But how price competitive is your PVC, given that a slight reduction in duty has been flagged as a major issue by you?

IA: Gas is priced much cheaper in PVC producing countries than it is in Pakistan. Around 75 percent of the total cost is energy related in the caustic soda business. In the PVC business, 16 percent is energy cost, and the rest is raw material which is primarily imported.

It is a very challenging industry. There a very few suppliers in the world who supply ethylene, and that is imported in special vessels and stored in specialised tanks. Undoubtedly, there is growth in this industry. A year or two might be tough, but Pakistan eventually has to grow in the longer run. We are optimistic on Pakistan. We are the only petrochemical complex in the country. It is unfortunate that we do not have a single integrated petrochemical complex in the country.

I have always maintained that we should not be viewed as an asset of Engro; we should be treated as an asset of Pakistan. When you have a unique asset in the country, it needs to be cherished. When the environment was only slightly conducive, we decided to invest $125 million, which goes on to show the commitment.

We are currently eyeing an investment that could be as big as $800 million, but is currently at an evaluation stage. Pakistan imports roughly around $3 billion of petrochemical products, of which $2 billion is liquid. Moving liquid is not viable, and is best to be produced in the country. That is a big dream, and requires an investment to the tune of $8-10 billion.

BRR: Are you talking about the Naphtha cracking business?

IA: I am talking about the entire cracking business, not just Naphtha. It is a very big chain. The notion that non hydrocarbon countries cannot have a petrochemical chain is baseless. Look no further than Reliance in India, or Shell in Singapore – they are not oil producing countries.

BRR: Does the private sector in Pakistan have the pocket to finance an investment of this scale?

IA: I think that is doable. Look at Thar for instance, it will all be done by Pakistanis, and the investment size will run in billions of dollars.

BRR: What is the gas rate for PVC makers in the region that makes them competitive?

IA: PVC is mainly produced in China, Europe and the USA. In China, the gas cost is less than $2/mmbtu, and in Pakistan it is around $8/mmbtu. In such a scenario, government support is a must. The major challenge that any industry faces in Pakistan is the consistency in policies. I appreciate the Commence Ministry for putting in an effort.

BRR: Is the duty after 10 percent reduction is not sufficient enough for you to stay competitive?

IA: Do you know how much duty protection do the steel, cement, sulphuric acid, ceramics etc have? I do not think 10 percent is enough. Our business is extremely volatile; it needs to be treated likewise. You must have seen what happened with the LNG a couple of months ago. There was a slight delay and it was a mess. They need to be treated as the assets of Pakistan, not assets of business groups.

BRR: But the LNG example you have give, takes us back to the same old inefficiency story. The crisis happened because Pakistan had to procure furnace oil from the inefficient local refineries, which have been protected since ages.

IA: By this definition, there will not be a single industry left in the country. Just add up the benefits given to the textile sector, and that comes around 20-25 percent of sales. That is their protection. If they are earning dollars, then we are saving them. Earning a dollar is as good as saving one. We have to treat the import substitution on the same levels as the export industry.

When you export, you are competing with the world. Import substitution, on the other hand is relatively easier, as the market is available. You need to promote manufacturing, which in turn will revive dozens of allied industries as well. The value of our net import substation is $115 million. Once the expansion is done, the import substitution plus export would be $180 million. These are large sums for a country like Pakistan.

BRR: Is the relevant ministry any more responsive than the previous tenure, given an ever growing influence of the PBC in policymaking?

IA: I would not call it an influence. I would say we have very sensible people there who know business, having done business their entire lives. All I urge for is consistency of policy, and brining the most important stakeholders in consultation before such decisions. In cases such as ours, where international companies and funding agencies are involved, such abrupt decisions do not give a very good reputation. We have been assured that the decision will be rationalised in the upcoming budget, which is a fair call. We can live with it for three months.

BRR: How do you see the growth in the textile sector going forward?

IA: I think textile will grow, but it will not be immediate. Lots of people, who had withdrawn money from the textile sector, will have to first gain confidence and earn before reinvesting. For that, you will have to wait 12 to 18 months. There is surely positivist in the market, as evident from Interloop’s recent IPO which was a massive success. The demand for caustic and hydrogen peroxide will certainly go up, with a growing textile industry.

BRR: And how is the PVC business expected to grow?

IA: The growth potential is huge in this country. PVC is not just pipe and fittings; it is wood replacement all over the world. Our per capita PVC consumption is barely 1.2 kg, whereas that in India is almost double, so you can well imagine the potential that is there.

BRR: In the near term, how much of an issue is the economic slowdown to the overall demand?

IA: The growth of construction industry is of paramount importance for our business, which is not growing at the moment. We will see a slowdown, but it may not be negative growth. We will still manage flat growth in the short term. The PVC is not used for hardcore construction, so the demand will still be there. Plus, there are multiple new products in the PVC line, such as doors, vinyl flooring and so on and so forth.

BRR: Is the downstream industry also expanding?

IA: Yes, it is expanding constantly. We have around 400 customers and almost everyone is growing. One tough year should not be taken as a proxy for Pakistan’s future.

We work very closely with the downstream sector, playing a parent’s role. We provide them with technical support, new product idea and new product execution mechanism.

BRR: Exceptional circumstances like today’s aside, where do you see the average demand growth rate?

IA: It will depend on the economic growth a lot. If the country’s economy grows between 3-5 percent, we should be growing at 5-8 percent. If the economy grows by 7 percent, then our growth multiplier will accelerate, and we should be growing by 15 percent and more.

BRR: How long will the window of export remained open, because the demand will at some point, cross 300,000 tons?

IA: That is not an issue; we aim to stay ahead of the market demand. Once the demand reaches 300,000 tons, nothing stops us for expanding further to 400,000 tons.

BRR: How big an issue is dumping?

IA: Dumping continues even today, but I must support the NTC. Had they not imposed anti dumping duty on China, we would not have been in the expansion phase today.