The Pakistan Credit Rating Agency Limited
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Muhammad Hassan

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PACRA Assigns Initial Entity Ratings to Engro Polymer & Chemicals Limited | Sukuk | Jan 19

Rating Type Debt Instrument
(18-Jan-19 )
Action Initial
Long Term AA
Short Term -
Outlook Stable
Rating Watch -

The ratings recognize Engro Polymer’s established foothold in the local PVC and caustic soda market. EPCL is the only manufacturer of Poly Vinyl Chloride (PVC), having a market share of ~66% in domestic market. Growth of PVC demand in domestic market and improved vinyl chain dynamics lead to higher revenues and improved profitability. Keeping in view growth trajectory, 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 has been raised through the issuance of right shares. Remaining CAPEX will be funded through internally generated cash and debt. EPCL further plans to enter Hydrogen Per Oxide business through a green field manufacturing facility by investing US$ 23mln. The project will be funded through internal cash generation. During expansion, the strength of the balance sheet is likely to remain intact. The ratings also reflect EPCL's association with one of the country's leading conglomerate – Engro Corp.

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. Timely build up of Debt Service Reserve Account for payment of financial obligations will remain critical.

About the Entity
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 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 (11%), and others (~33%). The Board of Directors (BoD) comprises 7 members including CEO. Four Board members are from the parent while one member represents Mitsubishi Corporation. There is one independent 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.

About the Instrument
EPCL has issued a privately placed, secured Sukuk of PKR 8.75bln (inclusive of PKR 5bln green shoe option). Tenor of the Sukuk will be 7.5 years with initial 5.5 years as grace period. The issue has proposed profit (3MK+.90bps) payable quarterly in arrears. The Sukuk’s principal repayment will start after 66th month of issue date in 5 semi-annual installments. The instrument is secured by hypothetication charge over all present and future movable fixed assets with a minimum of 20% margin and build up of Debt Service Reserve Account.

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.