Lotte Pakistan

Lotte Pakistan PTA is one of the most traded scrips on the Karachi Stock Exchange with trade volumes hovering near the top 3-5 most traded scrips. 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 3 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 (6.5 and 5 percent, respectively). Local PTA prices follow international prices and hence, prices of imported PTA have a significant impact on local PTA prices.
Profitability The latter part of CY11 has turned out to be testing for LOTPTA. While CY10 witnessed an appreciable boost owing to the price bonanza seen in cotton prices last year, CY11 has not been as kind.
1QCY11 has been a respite for the Company, recording a gross margin and net margin growth of 10 and 6 percentage points versus the same period of last year. Subsequently, however, domestic cotton prices saw a significant slump in 2QCY11, falling from a high of over Rs 11,550 per maund in April to Rs 8,544 per maund in June. 3QCY11 has been the most hard-hitting for the Company in CY11 so far with gross margins and net margins declining by 5 and 4 percentage points versus 3QCY10, respectively.
This was despite the fact that the Company's revenues in 3QCY11, increased by 44 percent year-on-year and for 9MCY11 by 46 percent over the same period of last year. Plausibly a price-led increase, the surge in revenues could not help the gross margins of the Company.
Prices of Paraxylene (Px), a raw material used in manufacturing PTA could be responsible for holding back the gross margins. They witnessed a hike in 3QCY11 "increasing before retreating somewhat by the end of the quarter due to non-sustainability of the high price," according to the latest directors' report of the Company.
While this put a strain on PTA-Px margins for Lotte, the PTA market also remained under pressure, both locally and domestically. Increased PTA supply in the global market due to the commencement of new PTA plants in China resulted in excess supply, without any impetus from the demand side. Weak economic conditions in the EU and US, and slowing growth in China meant that both PET and PSF-materials made using PTA-witnessed slowing demand, contributing to subdued PTA demand internationally.
Locally, while slumping cotton prices also led to declining PSF demand and prices, gas shortages and power breakdowns also took a toll on the textile sector of the country, pressing down PSF demand even more. Overall net margin in 9MCY11 decreased 0.2 percentage points over the same period of last year.
Leverage Lotte prepaid $10 million of a loan taken from the parent company KP Chemical Corporation. This helped bring down the Company's long-term liabilities. The Company's capital reserves also registered a decline, perhaps utilised for the capacity expansion of the PTA plant, which has been stalled for the moment. By September 2011, the Company's debt-to-equity ratio had improved to 1.03 from 1.36 at December 31, 2010.
Investment and valuation Owing to the pressure PTA-Px margins have come under, brokerage houses are not very optimistic about the prospects of LOTPTA for 4QCY11. According to AKD Securities, "We estimate PTA-Px PMs (primary margins) for LOTPTA to fall to $175 per ton in CY12F from $315 per ton in CY11E." At the same time, brokerage houses are also expecting inventory losses due to inventory build-up and weak off take, dimming prospects for the Company even more.
Outlook Going forward, sketchy PTA-Px margins will keep the Company's 4QCY11 earnings depressed. In fact, the downsides are expected to be carried forward in the coming year, with little promises from CY12. Capacity expansion plans of LOTPTA may bring some happy news for investors, but those are contingent upon the government's incentives in the form of increased tariff for imported PTA, which analysts are not very optimistic about.

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Lotte PPTA - key performance indicators

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                                          9MCY11      CY10      CY09

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Profitability

Gross profit to sales                %        16        17        16

EBIT to sales                        %        14        19        18

Net profit after tax to sales        %        10        11         9

Leverage

Debt : Equity ratio              times      1.03       1.4      1.97

Interest Coverage ratio          times         -      26.4      6.91

Operations

No  of days in Inventory          days         -        20        14

No  of days in Payables           days         -        35        30

Operating Cycle                   days         -         6        -2

Investment/ valuation

EPS                                 Rs      3.03       3.0      2.36

P/E                                 Rs         -       4.6      3.32

Cash Dividend per share             Rs                 0.5       0.5

Dividend Yield                       %                 3.7      6.39

Dividend Payout                      %                16.7     21.19

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Source: Company accounts
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Copyright Business Recorder, 2011