LOTTE PAKISTAN PTA LIMITED - Analysis of Financial Statements CY'04-3Q'10

Lotte Pakistan PTA which was known as Pakistan PTA before September 2009 when it was taken over (75% stake) by KP Chemical Corporation which is a subsidiary of the South Korean conglomerate LOTTE.
LPTA is a world-class supplier and manufacturer of Pure Terephthalic Acid (PTA), an essential white powder used in the textiles industry as raw material for making polyester fibres. Taking over the PTA business from ICI Pakistan Limited on 1st October 2000, Pakistan PTA Limited was a member of the ICI Worldwide Group and retained close links with ICI Pakistan Limited.
Following the acquisition of ICI Plc UK by Akzo Nobel on 2nd January 2008, Pakistan PTA Limited was a direct subsidiary of ICI Omricon B.V., with Akzo Nobel being the ultimate holding company. PPTAL's shares are quoted on the Karachi, Lahore and Islamabad stock exchanges.
Until Pakistan PTA Limited started its production, polyester producers in Pakistan, hitherto were entirely dependent on costly imports of PTA. Being the sole producer of PTA in Pakistan, PPTAL provides the benefits of local supply, with short lead times, consistent quality and payment in local currency. Production of polyester in Pakistan has grown strongly and usage of the raw material, PTA, now exceeds 600,000 tons per year. Pakistan PTA Limited also exports PTA regularly to customers in both Asia and Europe.
Apart from making this important economic contribution, PPTAL is also adding value to the local textiles and packaging industry. In recent years the trend has been to blend cotton with polyester and other man made fibers. Garments made from cotton/polyester blends not only find favor with customers, but they also allow increased production, and lesser dependence cotton. Another major use of polyester is as a plastic, in food packaging, particularly bottles for soft drinks and mineral water. Polyester (PET) bottles not only benefit the consumer by being lighter and less fragile, but also save on distribution costs, keeping shop prices low.
Recent performance (3Q10)
Sales volume for Q3 at 122,766 tonnes was 2% higher than the corresponding quarter last year and included 93% domestic off-take. Export sales to China, India and Oman during the quarter aggregated 8,074 tonnes. Production during the quarter at 126,367 tonnes was 2% lower than the corresponding period last year. This was mainly due to a planned plant outage of 3 days.
For the nine months ending September 30, 2010 the net sales increased by 17% to Rs 30.6 billion. Correspondingly, the cost of sales increased by 15.6%. Distribution, selling and administrative expenses increased by 32%, putting pressures on the margins. Other operating income was higher by 80% due to higher returns from short term investments and bank deposits. Other operating expenses were lower due to lower exchange loss faced during the period under review. These two factors helped bolster the PAT. PAT for 9M ending September 30 was Rs 3.18 billion as compared to Rs 2.16 billion in the same period last year an increase of 47%.
PTA spot prices maintained an increasing trend during the quarter, aided by high operating rates in the downstream polyester sector in China and several planned and unplanned outages at major PTA plants in the region. The PTA spot price averaged US $890 per tonne CFR China, with a low of US $843 per tonne in July and a high of US $955 per tonne in September. In the downstream polyester markets in China demand remained high. Polyester Staple Fibre (PSF) and Polyester Filament Yarn (PFY) producers capitalised on the healthy margins over raw material with high production rates. PSF price averaged around US $1,200 per tonne CFR China during the quarter. In the domestic market, PSF manufacturers other than Dewan Salman Fibres Ltd which remained shut due to continuing financial problems, operated at full rates on the back of strong downstream demand due to high cotton prices and resultant favourable PSF/cotton blend economics. The PSF price averaged around Rs 130 per kg during Q3, 2010 which was approximately Rs 90 per kg less than the price of cotton. Going forward, in the aftermath of the floods which has damaged the cotton crop substantially, it is expected that PSF demand shall be high as the price economics will surely favor PSF in light of reduced availability of cotton.
Operations
Sales volume for CY09 at 505,687 tons was the highest ever achieved by the company since its inception. This included 39,160 tons of PTA exports to China, India and Oman. Although the country's largest PSF producer remained completely shut down during the year due to financial problems, overall domestic sales volume remained at the same level as last year mainly due to higher PTA off-take by the other PSF producers as well as the PTA sector.
Production volume in CY09 was registered at the best ever daily, monthly and quarterly levels in the year. Moreover plant capacity utilisation and energy consumption showed the highest efficiency levels this year. Production for the year at 506,750 tons was 14% higher than 2008 and 7% higher than 2006 levels. The record production level was achieved despite of frequent electricity outages, and 5 days non-availability of raw material; hydrogen and nitrogen as the supplier's plant was shut down due to fire.
Profitability
As a result of the favourable trading conditions throughout the year, the company recorded it highest ever profit for any calendar year. Net sales was 14.7% higher compared to 2008 mainly due to highest ever volumes and higher ever PTA prices.
The cost of sales to turnover ratio improved from 89% in CY08 to 83% in CY09 mainly due to the PTA margin over Px being 49% higher than last year.
Distribution and selling expenses were higher than last year mainly due to outward freight and handing charges on account of exports to various countries, compared to their being no exports in 2008.
Moreover, LPPTA also earned Rs 261 million as other income mainly on account of interest on bank deposits and insurance claim of Rs 178 million received in lieu of the lost profit that occurred because one of the suppliers of hydrogen and nitrogen to LPPTA couldn't honor its commitment due to fire.
In addition to that profits became more favorable due to an Rs 425 million reduction in other operating expenses from last year on account of lower exchange losses as USD was relatively stable in the year 2009.
Furthermore the financial charges were lesser from last year as the company did not need to utilize the bank financing because a much better cash flow position for the company. As a result of all these factors the profit before taxation for the year was recorded at Rs 4.7 billion compared to a loss of Rs 1.6 billion in 2008.
Analysing CY07 performance the profits were low as the Port Qasim PTA plant, operated dismally especially in the first half of 2007, mainly due to weak downstream demand which in turn was affected by industry's poor performance. However, in the second half when the demand picked up, it took full benefit from the 60 tons per hour up rate project completed in February 2007. CY07 Production of 456,099 tons was lower than 473,528 in 2006, driven mainly by the reduced rate plant operation in 1H07 due to depressed downstream market conditions. Continued focus on implementation of energy conservation plans and annual technical development projects resulted in sustained conversion efficiencies, particularly electricity consumption and acetic acid conversion.
Overall sales volume for 2007 at 468,516 tons was 7.62% lower than last year's 471,779 tons, mainly due to lower exports and domestic industry slowdown. However, due to strong marketing focus on the local industry along with capitalising on opportunities resulting from new Polyethylene Terephthalate (PET) manufacturing facility, the domestic sales volume of 460,486 tons was 13% higher than CY06 thus accounting for 98% of total volume as compared to 86% CY06.
Liquidity
The company generated strong cash flows from operations and was able to meet its financial and capital expenditure requirements during the year. The current ratio as at 31st December stood at 1.66 compared to 0.91in 2008, which is well above the Prudential Regulations requirement of one time.
Moreover, the improvement of quick ratio reassures the good health of the company in terms of cash flow, standing at 1.40 which is nearly equal to the current ratio itself, hinting that the stock levels were low, which was achieved because of efficiency in operations and also sustained demand throughout the year.
Even in earlier years the liquidity position shows an increasing trend. In CY07 the current ratio at 0.9 was, however, marginally less than 1.0 mandated by the Prudential Regulations, for which appropriate waivers have been obtained from all the concerned local lenders. Its sudden jump in from 0.56 to 0.9 is mainly attributable to decline in current liabilities in addition increase in current assets. Decline in CLs is due to conversion of PPTAL's short-term loans amounting USD 63 million (Rs 3.8 billion), from a group company Mortar Investments International Limited into long-term loans maturing in five years.
Operating cycle
The operating cycle of negative 22.4 days bolsters the applaudable cash flow results discussed earlier. Although the operating cycle has kept on improving from the last 5 years, the results in 2009 clearly signal how the creditor confidence on LPPTA.
As you can see from the chart the inventory turnover and debtor turnover have kept on improving over the years and the creditor turnover has remained at a very high level due to the company's good reputation.
Looking more closely the company's inventory turnover has declined slightly in CY05, rose in CY06 and decline again CY07, which can be again attributed to the high Px prices in the market which somewhat lowered the sale of PTA. With flat net sales and decline in inventory, the ITO declined considerably. Despite this, the overall operating cycle showed an increase of 13 days in CY07 on the back of the 26 days higher days sales outstanding. This increased by significant amount mainly due 2.5 times higher trade debts in CY07 than the previous year's level. Trade debts include aggregate amount of Rs 1,197.091 million (2006: Rs 168.974 million) due from ICI Pakistan Limited. This indicates company's lax credit policy and marketing endeavours.
Asset management
Talking about efficiency, LPPTA did not lag back in making the most of its resources given the much better earning opportunities presented to the company in CY09. Especially the fixed turnover showed a very solid result standing at 3.8 times compared to 3.1 times last year. The TATO and sales/equity ratios have shown a positive rising trend till 2006 due to a considerably higher rise in the net sales than that in assets and equity respectively but trend reversed in CY07 due to comparatively lower sales.
Solvency
The CY09 has been no less than exceptional on many counts, and to gauge the company's financial strength. A very useful measure is its equity strength compared to the debt it has amassed. LPPTA managed to reduce its levels of debt to the lowest level since its inception to 1.54 times and more incredibly it brought it down from the highest level of 2.72 times recorded last year.
More astonishing was the interest cover which was 17 times in the CY09 compared to negative one time last year. This was result of a much higher profitability and lower utilisation of bank financing.
In previous years, however, the interest cover shows a declining trend, owing to lower EBIT and considerably higher financial charges in past few years. Financial charges were higher in CY06 mainly due to the higher utilisation of running finance facilities. Financial charges were 19% lower in CY07 than last year mainly due to lower discounting of sales LoCs, since customers preferred to lift product against cash payment. Hence, the major culprit for decline in the overall TIE ratio in CY07 is lower EBIT.
However in the past PPTAL's D/E ratios clearly showed that it has relied mostly on debt financing. Previously long-term debt to equity ratio showed us that PPTAL was relying more on its short-term financing. However, the deviant situation in CY07 is mainly due to conversion of short-term loans from Mortar Investments International Limited amounting to Rs 3.8 billion into long-term loans of five years maturity, in CY07.
After subordination of the parent company's debt (Mortar loans) to the local lenders in September 2005, PPTAL's debt to equity ratio has been comfortably placed well within the requirements of prudential regulations ie fund-based exposure does not exceed 4 times of its equity. The cash generated during the CY07 enabled PPTAL to retire debt amounting to Rs 1,366 million. Net debt as at 31 December 2007 amounted to Rs 5.873 billion from Rs 6,738 billion in CY06, depicting a declining trend.
Market value
The level of improvement in financial results is evident from the measure of ROE and ROCE, which have elevated to a respectable level after an equally devastating levels sustained in 2008.
Given the poor financial position the share price painted a dull picture as the perception of potential performance of the company was marred by the consistent bad performance of the company since 2006. Nonetheless the decrease of the share price to such low levels had much to do with the decline in the index levels. Now the investor confidence seems to be coming back with the EPS at the best level over the company's history and thus the share price increasing from Rs 1.59 in CY08 to Rs 7.83 in CY09.
Future outlook
Px prices are expected to remain under pressure during most of 2H10 and therefore, in order to balance the market, there will be production cut downs by Px manufacturers. PTA will follow this trend therefore the margins are not expected to increase.
The company continues to face tough competition from foreign producers, particularly Thailand producers since the anti dumping duties have been imposed by Chinese government on Thai and Korean producers. The company is trying its best to rectify the import duty of mere 3% on imports from the government of Pakistan since all other countries in the region are trying to increase the duties from 6-8%.
Sales to the local PET sector could also be adversely affected by the elimination of the zero rating mechanism with effect from 1 July 2010.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].