Muhammad Harris Ghaffar
PACRA upgrades Entity Ratings of Engro Polymer & Chemicals Limited
Engro Polymer and Chemicals Limited (“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 domestic market. During 1HCY21, EPCL successfully completed its 100KTA PVC plant-3 project along with the 50KTA VCM plant debottlenecking project. The combined capacity of PVC plants now stands at 295KTA. These expansion projects enabled EPCL to fully serve domestic demand, support import substitution, and increase export sales footprint by surplus capacity. During CY21 the Company claimed to dominate the local market share in PVC resin as compared to CY20 mainly on account of import substitution which adds comfort to the assigned ratings. The Company’s topline grew by ~98% in CY21 owing to an increase in sales volume followed by higher PVC prices which translated into the highest ever profitability. It is anticipated that PVC resin demand will remain strong due to ongoing infrastructure and modernization projects, rapid urbanization trends, and rehabilitation of existing sewage and water pipes distribution systems. In addition, the elevation of living standards, rapidly growing population, and real estate developments will continue to drive PVC demand. The Company en-routes another efficiency/expansion projects which include; Hydrogen peroxide production & High-Temperature direct Chlorination. Hydrogen peroxide will add diversity to EPCL’s product mix by penetrating into the Hydrogen peroxide market through a green field manufacturing facility by investing ~USD 35-40mln, both of these projects are anticipated to be commissioned in 2023. Currently, the Company’s debt profile is elevated amidst its phases of expansion, though, it is being aptly managed by having concessionary loans (TERF). The KIBOR has increased up to 15%, further elevating the debt service cost in the future as long-term borrowings dominate the total borrowings. A forex risk arising from the foreign currency loan on the company’s books has been neutralized through a synthetic hedge transaction that EPCL entered into 2020. The Company enjoys a very strong liquidity position on the back of sizable deposits and liquid assets, supplementing its cashflows. 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 with prudent financial discipline. 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.
EPCL, established in 1997, started commercial production in 1999. The Company is listed on Pakistan Stock Exchange. 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 9 members including the CEO - Executive Director, one member represents Mitsubishi Corporation, three are independent directors and the remaining are Non-Executive Directors. Mr. Ghiasuddin (CEO) of Engro Corp.