Analyst
Sohail Ahmed Qureshi
sohail.ahmed@pacra.com
+92-42-35869504
www.pacra.com
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Related Research
PACRA Maintains the Entity Ratings of Engro Polymer & Chemicals Limited
Rating Type | Entity | |
Current (12-Jul-24 ) |
Previous (14-Jul-23 ) |
|
Action | Maintain | Maintain |
Long Term | AA | AA |
Short Term | A1+ | A1+ |
Outlook | Stable | Stable |
Rating Watch | - | - |
Engro Polymer and Chemicals Limited’s (“EPCL” or “The Company”) ratings reflect an established foothold in the manufacturing of Poly Vinyl Chloride (PVC) resin, and Chlor Alkali products (Caustic Soda, Sodium Hypochlorite, and Hydrochloric Acid). EPCL is the sole manufacturer of PVC resin in the domestic market., The Company has successfully completed a series of capacity expansion and efficiency projects over the years. Moreover, some projects including High-Temperature Direct Chlorination (HTDC) and digitization of EDC and VCM plants are near completion and expected to come online during CY24. Globally, the PVC industry faced multi-faceted challenges during CY23 as the prices went down back to pre-COVID levels on the back of suppressed demand in North America and China owing to high inflation and slow economic recovery, eventually creating an oversupply situation. On the flip side, Ethylene (key raw material for PVC) prices remained volatile due to supply crunches and OPEC+ decisions, resulting in a significant decline in core delta, hence lowering the margins and profitability. On the domestic front, the demand remained subdued primarily attributable to high inflation and elevated interest rates resulting in reduced spending in the construction sector. However, EPCL has shown resilience by retaining its market share of 89% with sustainability in its topline. To combat macroeconomic challenges, management is focusing on strengthening its PVC export volumes and developing the market for downstream applications of PVC through its wholly-owned subsidiary Think PVC (Pvt.) Limited. On the diversification front, the management is expected to achieve mechanical completion of the Hydrogen peroxide plant in CY24, which will add further diversity to EPCL’s product mix. During CY23, the Company’s debt increased amidst ongoing diversification and efficiency projects, though, it is being aptly managed by having a mix of concessionary loans (TERF and LTFF) and conventional borrowings. The policy rate has been decreased up to 20.5%, which will further optimize the debt service cost in the future as long-term borrowings dominate the total borrowings. Moreover, a slight increase in the working capital cycle and a reduction in core coverages of the company was observed in CY23. EPCL's association with one of the country's leading conglomerates – Engro Corp – and the very strong financial profile of the sponsors lend further support to the ratings.
The ratings are dependent upon the company’s ability to sustain its position as a market leader, further strengthen its sales volumes through exports, and maintain sufficient margins and profitability. Further, adherence to the agreed financial discipline remains crucial. Timely completion of the remaining planned expansion projects, while retaining stable coverages would remain important. Adequate management of its capital structure and debt payback remains imperative.
About
the Entity
EPCL, established in 1997, started commercial production in 1999. The Company is listed on the PSX. EPCL is primarily involved in the manufacturing, marketing, and distribution of PVC and its allied products. EPCL is a subsidiary of Engro Corporation Limited (ECL) having a majority stake (56%). The other major shareholder is Mitsubishi Corporation (11%). The Board comprises of 8 members including the CEO - Executive Director, one member represents Mitsubishi Corporation, three are independent directors and the remaining are Non-Executive Directors.