When Lotte Pakistan PTA revealed its results for 1QCY11, the phenomenal surge of about 6 percentage points in its net margins was not much of a surprise, except that the bottomline was quite large compared to analysts expectations of Rs2 billion in the period under review.
Thanks to rising PTA prices, LOTPTAs revenues soared considerably. PTA prices averaged $1,426 per ton in the last quarter, up 50 percent from $947 per ton witnessed in the same period last year, according to Topline Securities.
The surge in PTA prices also supported PTA-Px margins, which crossed $400 per ton during the quarter, while the two-year historical average was $280 per ton, as quoted in a report by JS Research.
This increase in PTA-Px margins was reflected in an improvement of around 10 percentage points in the companys gross margins.
The phenomenal increase in PTA prices can be attributed to rising cotton prices both locally and internationally, which increased PSF demand, and hence demand and prices of PTA.
However, the rally in cotton prices is expected to ebb in the coming year, as output is expected to improve in India and Pakistan. "The abnormal increase in cotton prices has induced farmers to increase the acreage under cotton cultivation," explained Naseem Usman of the Karachi Cotton Association.
While the potential drop in cotton prices raises a point of concern for the company, LOTPTAs plans of investing $50 million into setting up a wholly owned private limited subsidiary for its cogeneration power project is good news.
Though the exact purpose of setting up the plant was not revealed and company officials were not available to comment; it is likely to ease power costs for the company. LOTPTA had mentioned in its last annual report for CY2010 that, "production of PTA in Pakistan is less competitive than other countries like China and India because of...higher costs of electricity".
At the same time, the fact that KP Chemical Corporation - LOTPTAs majority shareholder - is "seriously considering" setting up a new PTA plant at Port Qasim, adds to the positivity. This announcement has validated market rumours that had initially surfaced at the beginning of the year.
The announced annual capacity of 0.8-1 million tons of the new plant is greater than the anticipated additional capacity of 0.5 million tons guesstimated earlier by analysts.
But this plan is contingent upon discussions going on between KP Chemical Corporation, LOTPTA and the government, which are likely to focus on increasing the import tariff on PTA above the present level of 3 percent.
The catch, however, is that this project may not be an expansion of LOTPTA. It could well be a separate entity.
While the modes of financing for both projects were not disclosed, the companys healthy cash flows and strong leverage position are likely to be key in funding the upcoming plans.
The expansion plans were heartily received by investors, who scampered towards the scrip, making it hit the upper circuit limit of Rs16.68 on Tuesdays intra-day trade, in a session that saw it being traded as the volume leader at the bourse.
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Lotte Pakistan PTA
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Rs (mn) 1QCY11 1QCY10 chg
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Revenues 15,951 9,323 71%
Cost of sales 12,088 7,973 52%
Gross profit 3,864 1,350 186%
Gross margin 24% 14% 67%
Operating profit 3,483 1,226 184%
Profit after taxation 2,489 921 170%
Net margin 16% 10% 58%
EPS (Rs) 1.64 0.61
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Source: KSE notice
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