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PACRA Maintains Rating of Engro Polymer & Chemicals Limited | Sukuk | Jan 19

Rating Type Debt Instrument
(18-Jul-21 )
(18-Jul-20 )
Action Maintain Maintain
Long Term AA AA
Short Term - -
Outlook Stable Stable
Rating Watch - -

The ratings incorporates Engro Polymer’s (‘EPCL’ or ‘The Company’) established foothold in the local Poly Vinyl Chloride (PVC) and Caustic Soda market. EPCL, being the sole manufacturer of PVC in domestic market, embraces a distinct position in PVC with a market share of ~66% (CY20). Prudent management of EPCL capacitated it in defying all the unparalleled challenges and achieved milestones during the year CY20. The ratings stance stems from i) EPCL’s highest ever profitability in CY20, ii) Preference shares of PKR 3bln issued, oversubscribed by 5.4x & iii) successful completion of PVC – III capacity expansion of 100,000 M.T and VCM debottlenecking of 50KT. It is much likely that the enhanced capacity will benefit the Company in capitalizing the growth momentum spurred by the construction space and take over the share of PVC imports. Additionally, the Company en-routes other efficiency expansion projects; HTDC, OVR and TLEx, comprising both enhancements in capacity of existing product lines and introduction of new products. This will add diversity to EPCL’s product mix. The Company is also entering Hydrogen Peroxide market through a green field manufacturing facility by investing ~USD 35-40mln, anticipated to commission in late 2022. Currently, the Company’s debt profile is elevated amidst its phase of expansion, though, it is being aptly managed by having concessionary loans (TERF). A forex risk arising from the foreign currency loan on company’s books, has been neutralized. Company enjoys very strong liquidity position on the back of sizable deposits and liquid assets, supplementing it cashflows. EPCL's association with one of the country's leading conglomerate – Engro Corp – and very strong financial profile of the sponsor, lends further support to the ratings.
The ratings are dependent upon company’s ability to strengthen its business as well as financial profile, sustained operation, and in-time completion of the PVC expansion. 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 Pakistan Stock Exchange. EPCL is primarily involved in the manufacturing, marketing and distribution of PVC and its allied products with design annual capacity of 295,000 tons per annum ( previous 195,000 tons). Caustic Soda – another product - adds meaningful diversification to the Company’s business. EPCL is a subsidiary of Engro Corporation Limited (ECL) having majority stake (56%). The other major shareholder is Mitsubishi Corporation (11%). The Board of Directors (BoD) comprises 9 members including CEO - Executive Director, one member represents Mitsubishi Corporation, three are independent directors and remaining are Non-Executive Directors. Mr. Ghiasuddin Khan – the CEO of Engro Corp - Chairman of EPCL. - is the Non-Executive Director.

About the Instrument
EPCL issued a Rated, Secured, Over-The-Counter Listed Islamic Certificates ("Sukuk") of PKR 8.75bln on January 11, 2019. The instrument has a tenor of 7.5 years with 5.5 years grace period. The Sukuk's profit is being paid quarterly in arrears at the rate of 3Months KIBOR+.90bps. The profit is being paid quarterly in arrears at the rate of 3Months Kibor+0.9%. The principle will be paid in five equal semiannual instalments commencing from the 66th month after the issue in July 2024. The instrument is fully secured by hypothecation charge over all present and future movable fixed assets with a minimum 20% margin.

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.