A tough 2011 for LOTPTA

For LOTPTA, 2011 saw the end of the glory days witnessed in 2010. While the year started off phenomenally, with the first quarter recording whopping profits with a net margin of 16 percent, the journey downhill commenced from the second quarter onwards, with the Company showing losses in 4QCY11. At nearly Rs.13 billion, the Companys revenues in 4QCY11 were the lowest, while the costs of sales were higher this year relative to the previous three quarters, leading to a gross loss for the last quarter of the year. The southward journey of the Companys profitability can be explained by the decline in PTA-Px margins over the year. Though the margins were higher during the first quarter, they tapered off subsequently. According to Topline Securities, PTA-Px primary margins fell to around $129 per ton in 4QCY11 from $200 per ton in 3QCY11. The pressure on PTA-Px margins has risen primarily during 2HCY11, as validated by the fact that PTA-Px margins crossed $400 per ton in the first quarter this year. Prices of PTA, used as a raw material in manufacturing PSF, a substitute for cotton, have also been influenced by falling cotton prices both locally and internationally, which pulled down PTA and PSF prices too. Overall, PTA-Px margins for the entire year in 2011 were only marginally higher than the previous year by roughly 3 percent, while the last quarter recorded a net loss of Rs.411 million, which was below market expectations. Despite the marginal improvement in PTA-Px margins for the entire year, the overall gross margins for the Company were lower in CY11 than in CY10. The Company attributes the slump in gross profits by about 5 percent year on year in CY11 to pressure from higher costs of electricity and raw material acetic acid. At the same time, distribution and selling expenses for the Company were higher than the previous year, due to higher export sales and the accompanying transport expenses, as were administrative expenses due to the impact of high inflation. However, with declining operating expenses, the drop in operating margins was nearly the same as the drop in gross margins-of nearly 5 percentage points-despite the higher distribution and administrative expenses. Overall, the Companys net margin declined by over three percentage points to 7.3 percent in CY11, relative to the previous year, but, still the Company announced dividends at Re.0.50 per share. Going forward, PTA-Px margins are expected to decline further. Further, no potential uptick in cotton prices is expected in the days to come, thus not offering much hope from that end either. Growing capacity expansion for PTA in Asia, and slowing global economic growth means that demand for PTA, and hence PTA prices are likely to stay subdued in the days to come. The Company has a strong point of contention against the low tariff imposed on imported PTA in Pakistan-3 percent. This is quite low compared to regional players China and India (6.5 and 5 percent, respectively). Because local PTA prices follow international prices, the company has been demanding greater tariff protection. "The tariff is all what we end up getting. If the price crashes in the Chinese markets, our prices go down too, we are very susceptible to the global market," said Asif Saad, CEO Lotte Pakistan. Unless the Company gets government support on tariff protection, any expansion plans of the Company are not likely to see the light of the day. Given the prevailing scenarios, it seems like Lotte Pakistan is up for tough times in the days to come.

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LOTPTA P&L
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(Rs mn)                                    CY11      CY10     CHG
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Revenues                                 57,577    42,402     36%
Cost of sales                            50,915    35,372     44%
Gross profit                              6,663     7,030     -5%
Gross margin                                 12%       17%   -30%
Distribution, selling & admin expenses      528       378     39%
Other operating expenses                    502       606    -17%
Operating Profit                          5,655     6,056     -7%
Profit after taxation                     4,178     4,525     -8%
Net margin                                    7%       11%   -32%
EPS (Rs)                                   2.76      2.99
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Source: KSE notice
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