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The Pakistan Credit Rating Agency Limited

Date
25-Jan-2018
Analysts
Amara Gondal
amara.gondal@pacra.com

Hamza Ghalib
hamza.ghalib@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Methodology | Corporate Rating Methodology (Jul 17) [View]
  • Methodology | Correlation between long-term and short-term rating scale (Jun 17) [View]
  • Methodology | Criteria Modifiers (Jun 17) [View]

Related Research

  • Sector Study | Polyvinyl Chloride (Jun 17) [View]
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PACRA Upgrades Entity Ratings of Engro Polymer & Chemicals Limited
 Rating Type Entity
Current
(25-Jan-2018)
Previous
(30-Jun-2017)
 Action. Upgrade Upgrade
 Long Term A+ A
 Short Term A1+ A1
 Outlook Stable Stable
 Rating Watch - -

The ratings recognize Engro Polymer’s established foothold in the local PVC segment and in caustic soda market. This emanates from efficient production process, sound technological infrastructure, and effective control environment. EPCL is the only manufacturer of Poly Vinyl Chloride (PVC), having dominant market share. The Company has successfully created liking for its products. Lately, it is enjoying strong margins attributed to improved international dynamics along with incremental domestic consumption; 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, import and anti-dumping duties benefit. 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 adequate margins and eloquent market share in the southern region, close to plant location. The uptick in profits, in turn free cashflows, has yielded favorably for EPCL’s financial profile. This is reflected in 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 has planned a CAPEX of PKR 10.3bln, addition of PVC by 100K tons, significant debottlenecking of VCM plant on a tune of PKR 7.6bln of which PKR 5.4bln will be raised through fresh equity in form of right share and remaining PKR 2.2bln through debt. Other CAPEX of PKR 2.7bln, funded through internally generated cash and debt. EPCL’s expansionary stance would likely to benefit the company and this is not expected to push up leveraging significantly.

The ratings are dependent upon holding sustained operations and continuity of improved margins. Execution of planned expansion, while, with the new debt to be acquired, maintenance of coverages would 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). One of the by-products of the process is Caustic Soda, which 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 general public (34%).
The Board of Directors (BoD) comprises 7 members including CEO. Four members from the parent while one member represent Mitsubishi Corporation. The remaining two members are the CEO and independent non-executive director. 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.
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