Lotte Chemicals – continue to grow

Lotte Chemicals continues on its strong trajectory of rise in sales and profit. With a nearly 50 percent jump in the top-line and PAT rising by a multiple higher than 8 times, LOTTECHEM profits have been driven by a higher PX-PTA spread.

Recall that paraxylene (PX) is the core ingredient for the manufacturing of PTA and is imported. Furthermore, being a petrochemical, prices of PX and PTA are intricately linked with oil prices. As crude oil prices rose, price of PTA went up by 28 percent YoY. This, along with robust demand has allowed the company to pass on the impact of rupee devaluation. Top-line grew with price increases as well as through volumes.

Price increases in PX have been limited this year because of new capacity additions in Saudi Arabia and Vietnam. Demand for PTA was driven by its downstream products of poly staple fibres (PSF) and polyethylene (PET). This led to a higher core delta and a gross margin over four times higher than same period last year.

Distribution and selling expenses are impacted by export sales indicating that Lotte’s export proportion of sales remained roughly constant YoY. While expenses were on the whole controlled by management, other expenses registered the biggest jump. Since workers’ profit participation fund is its largest component that rises on the back of higher operating profit, other expenses increased 13 times. As bank and other charges makes up the bulk of finance costs, increase in interest rates may have led to the rise in finance costs.

While the company has posted strong results every quarter this year, upcoming US sanctions on Iran will have wide ranging consequences. The escalating trade war between US and China and oil production crisis in Venezuela and Libya are other factors that impact availability of PX and oil prices. Though Lotte has natural hedge from the pricing mechanism of PTA whereby the price is recalculated every month, the latest round of currency devaluation may further erode its margins as PX becomes more expensive. Next quarter’s results may not continue to look as rosy.