The Pakistan Credit Rating Agency Limited
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Hamza Ghalib

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PACRA Upgrades Entity Ratings of Engro Polymer & Chemicals Limited

Rating Type Entity
Action Upgrade Upgrade
Long Term AA- A+
Short Term A1+ A1+
Outlook Stable Stable
Rating Watch - -

The ratings recognize Engro Polymer’s established foothold in the local PVC and caustic soda market. EPCL has efficient production process, sound technological infrastructure, and effective control environment. EPCL is the only manufacturer of Poly Vinyl Chloride (PVC), having a market share of ~67% in domestic market. The Company has successfully created a liking for its products. Lately, it is yielding strong margins attributing to improved international dynamics along with strong domestic demand; boding well with the overall profitability. Although EPCL has limited influence on both price ends (i) Ethylene - key raw material, and (ii) PVC – key product. However, over the years company has made vigorous efforts on operational efficiencies which has minimized vulnerability to unfavorable vinyl chain dynamics. On demand side, expanding economy – particularly construction – has led to double-digit growth; a trend that is expected to persist. On the Caustic Soda front (the other major product), the Company enjoys healthy margins and market share in the southern region. The uptick in profits, in turn, free cash flows, has yielded favorably for EPCL’s financial profile. This is reflected in the efficient working capital cycle and healthy coverages; hence, financial risk stays well managed. Moreover, EPCL's debt reprofiling has further eased pressure on its financial risk profile. The ratings also reflect EPCL's association with one of the country's leading conglomerate – Engro Corp. This association has benefited the company historically.

EPCL announced a CAPEX of PKR 10.3bln, an addition of 100K tons capacity on PVC and 50K tons of VCM, on a tune of PKR 7.6bln of which PKR 5.4bln is being raised through the Issuance of right shares. Remaining CAPEX will be funded through internally generated cash and debt. During expansion, the strength of the balance sheet will likely to remain intact.

The ratings are dependent upon holding sustained operations and continuity of improved margins. Successful execution of planned expansion, while, with the new debt to be acquired, maintenance of coverages would remain important to uphold ratings. Sustenance of import and anti-dumping duty is important for the sustainability of the risk profile of the company.

About the Entity
EPCL, established in 1 997, 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 with design annual capacity of 195,000 tons per annum (tpa). Caustic Soda – another product, adds meaningful diversification to the company’s business. EPCL markets the PVC products with the brand name of ‘SABZ'.

EPCL is a subsidiary of Engro Corporation Limited (ECL) having majority stake of 56%. The other major shareholders of EPCL are Mitsubishi Corporation (10%), and others (~34%). The Board of Directors (BoD) comprises 7 members including CEO. Four members from the parent while one member represents Mitsubishi Corporation. The remaining two members are the CEO and independent non-executive director. Mr. Ghiasuddin Khan – the CEO of Engro Corp, is Non-Executive Chairman of EPCL. Mr. Imran Anwer, the CEO of the EPCL, is associated with Engro since 2005. He is a seasoned professional with over two decades of experience. The Company has an experienced team.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.