Lotte Pakistan PTA is one of the oft-traded scrips on the Karachi Stock Exchange. The company is a world-class supplier of purified terephthalic acid (PTA), an essential raw material used in the polyester industry. A very significant use of PTA is in the manufacturing of polyester staple fibre (PSF) which is used as a substitute for cotton.
The company was previously known as Pakistan PTA (PPTA), but was changed to Lotte Pakistan PTA Ltd when Lotte, a South Korean conglomerate, acquired the majority shareholdings in the company in September 2009.
Imported PTA Lotte is the sole PTA manufacturer in Pakistan, but faces competition from imported PTA. The company currently produces about 500,000 tons of PTA, while local demand hovers around 600,000 tons. The shortfall is met through imported PTA, at which an import tariff of three percent is levied. Lotte Pakistan has been pressing for a higher tariff, especially since it is very low compared to that of regional players China and India. Local PTA prices follow international prices and hence, prices of imported PTA have a significant impact on local PTA prices.
Industry dynamics and profitability After a rough latter part of CY11, CY12 has been a rough year for LOTPTA. Subsequent to a pretty glorified first quarter in CY11, domestic cotton prices saw a significant slump from the second quarter onwards, and the company's profit margins slid considerably. The gross profit margin, operating margin and net margin, all witnessed a year-on-year slump in CY11.
The scenario continued into CY12, with key profitability margins diving into the negatives. The dynamics of PTA-Px margins are key to understanding the situation.
Prices of Paraxylene (Px), a raw material used to manufacture PTA, went up considerably in 2012. This was mainly a supply-led phenomenon since enhanced PTA capacities in China - about 3.7 million tons per annum - led to increased Px demand. Consequently, a tight supply situation led to Px prices staying bullish for most part of the year.
On the other hand, the PTA dynamics were quite the reverse. Thanks to declining demand from the downstream sector, global PTA prices stayed low, the effect being compounded by the economic slowdown in the Eurozone and the US. Lower international cotton prices can also be held accountable for the lackluster demand from the downstream sector, which warranted lesser need to substitute PSF for cotton.
Locally as well, the slump in cotton prices has meant the demand for PSF, and consequently PTA has been affected. However, lately, some respite was offered from the domestic market because of some easing in the availability of energy and the resultant boost to domestic industries. In terms of volumes, domestic sales in 3QCY12 were marginally higher by four percent relative to the same period last year.
All in all, during the cumulative nine months of CY12, sales revenues were down over 10 percent relative to the same period in CY11, primarily driven down by lower PTA prices, which also brought down PTA-Px margins. Combined with higher Px prices during the period, the gross margins during 9MCY12 also fell substantially by around 28 percentage points to -0.6 percent during 9MCY12 relative to 9MCY11.
With a negative gross profit for the first nine months of CY12, the net effect cascaded down into other profitability margins too, with the operating margin slumping by about 15 percentage points to -1.4 percent. Distribution and selling expenses for Lotte Pakistan were lower by about 18 percent year-on-year during the first nine months of CY12, owing to lower export sales by the company. Even the company's finance income during the first three quarters plummeted relative to the corresponding period last year, falling by more than 63 percent. This was led by a decline in the cash surplus of the company which fell because of lower cash generation.
As for finance costs, they registered an increase of about 1.6 percent during 9MCY12 relative to the same period last year. "Finance costs (during 3QCY12) were higher than 3QCY11 mainly on account of net exchange loss due to adverse impact of Rs/Euro parity," said the latest quarterly report of the company. Overall, LOTPTA reported a loss of Rs 422 million in 9MCY12 versus a whopping profit of Rs 4.6 billion in the same period last year.
Leverage and investments As at 30 September 2012, Lotte has managed to keep its liabilities at the same level as was at the end of CY11. The company has also made a long-term investment of Rs 4.5 billion in Lotte Powergen (Pvt) Limited - a wholly-owned subsidiary of the company. The co-generation plant started commercial production on 17 July 2012, and has operated smoothly since then. "The successful commissioning of the co-generation project has minimised the risk of electric supply fluctuations/outages to the PTA plant," says the latest quarterly report of the company.
Investment evaluation Owing to the pressure PTA-Px margins have come down, brokerage houses are not very optimistic about the prospects of LOTPTA for CY12. Furqan Ayub of JS Research said in an analysis report issued in June this year, "International PTA-Px margins have averaged around US $89/ton in June, below the breakeven level. Not surprisingly, LOTPTA in 2012 year to date has underperformed the market by 42 percent. We maintain our 'Hold' recommendation on the stock with a target price of Rs 8.3. At current levels, the stock trades at a 2012E and 2013F PE of 14.52x and 8.34x respectively."
Outlook
Going forward, sketchy PTA-Px margins will keep the company's CY12 earnings depressed. Dwindling demand due to slowing Asian economies, especially China, and incremental PTA supply from China will continue to weigh down on PTA prices and consequently PTA-Px margins, as there is also a strong likelihood of Px prices staying firm for the remainder of the year. Besides, the business is cyclical, and the whopping profits seen in CY10 and in the earlier part of CY11 will likely slide down in CY12 in a cyclic sync.
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LOTTE PPTA - KEY PERFORMANCE INDICATORS
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9MCY12 9MCY11 CY11 CY10
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PROFITABILITY
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Gross profit to sales % -0.6 15.6 12 17
Operating margin % -1.4 13.6 10 19
Net profit after tax to sales % -1.1 10.2 7.3 11
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LEVERAGE
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Debt : Equity ratio times - - 1.1 1.4
Interest Coverage ratio times - - 24.3 26.4
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OPERATIONS
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No of days in Inventory days - - 26 20
No of days in Payables days - - 33 35
Operating Cycle days - - 7 6
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INVESTMENT/ VALUATION
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EPS Rs -0.3 3.0 2.8 3.0
P/E Rs - - 3.4 4.6
Cash Dividend per share Rs - - 0.5 0.5
Dividend Yield % - - 5.4 3.7
Dividend Payout % - - 18.1 16.7
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Source: company accounts
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