LOTPTA is booming, despite narrower margins

Lotte Pakistan PTA Limited (LOTPTA), one of the most traded scrips at the Karachi bourse of late; announced record profits for the first six months ending June 2011, yesterday. The companys bottom line improved by a thumping 70 percent in 1HCY11 compared to the same period last year, despite a lacklustre second quarter performance. For the period under review, revenues swelled considerably over last year, crossing the threshold of Rs30 billion. The 44 percent increase in half-yearly revenues is, however, mainly attributable to the stellar sales performance in 1QCY11 on the back of rising PTA (an essential raw material used in the polyester industry) prices during that time. A closer look reveals that LOTPTAs revenues have actually declined by eight percent in the second quarter compared to first quarter this year. During 2QCY11, international cotton prices saw a sharp slump, due to which its close substitute, PSF (manufactured from PTA), also followed suit and consequently, prices of PTA took a downturn. The companys gross margins improved by 265bps in 1HCY11, owing to higher PTA-Px (Paraxylene: raw material) margins witnessed in 1QCY11. However, in 2QCY11, the decline in PTA prices was greater than that of Px prices, which put pressure on the companys cost of sales and clipped gross margins by 1200 bps during the quarter compared to 1QCY11. Heightened electricity costs also pushed the margin lower. Distribution and selling expenditures spiked during 1HCY11 - by a whopping 69 percent - which according to information disseminated by the company was mainly due to higher export sales, which entail higher freight and cargo handling charges. Roughly 33 percent rise in administration expenses was attributed to higher marketing costs, inflationary pressures on various overheads and increase in payrolls. Despite a mixed affair in 2QCY11, the half-yearly operating performance is splendid. Operating profits soared by roughly 70 percent in 1HCY11, thereby increasing the operating margins by 213 bps over the same period last year. LOTPTA earned 23 percent finance income in 1HCY11, due to higher incomes from bank placements and surplus cash generated from operating activities. Finance costs were marginally lower during the period due to lower interest charges resulting from partial repayment of its parent company loan in CY10. Although the bottom-line squeezed by over 50 percent in 2QCY11 compared to 1QCY11, LOTPTA has been able to net Rs3.69 billion in profits in 1HCY11, thanks again to its all-round stellar first quarter performance. The question is: for how long would LOTPTA depend on the long gone first quarter growth, especially when the subsequent quarter results did not impress much? There might be some easing in order for the company. Market reports indicate that lately PTA prices, and thus PTA-Px margins, have started going up owing to rising PTA demand in China, with expectations of it going up further in the near future in anticipation of increased demand for textiles during Christmas. That and the possibility of reduction in power costs; if LOTPTA follows through on its plan of setting up a $50 million private subsidiary for a cogeneration power plant project, may spell good omen for the company going forward.

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LOTTE PAKISTAN PTA LIMITED
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Rs (mn)                 1HCY11    1HCY10       Chg
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Revenue                 30,661    20,796       47%
Cost of sales          -25,004   -17,511       43%
Gross profit             5,656     3,284       72%
Gross margin               18%       16%      Down
                                           200 bps
Operating profit         5,003     2,950       70%
Operating margin           16%       14%      Down
                                           200 bps
Finance income             503       409       23%
Profit after taxation    3,698     2,176       70%
EPS (Rs)                  2.44      1.44
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Source: KSE notice
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