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The Pakistan Credit Rating Agency Limited

Date
30-Jun-2017
Analysts
Rai Umar Zafar
rai.umar@pacra.com

Hamza Ghalib
hamza.ghalib@pacra.com

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

  • Rating Modifiers | Outlook and Rating Watch (Jun 16)
  • Correlation between Long-term and Short-term rating (Jun 16)
  • Corporate Rating (Jun 16)

Related Research

  • Sector Study | Polyvinyl Chloride (Jun 17)
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PACRA Upgrades Entity Ratings of Engro Polymer & Chemicals Limited
 Rating Type Entity
Current
(30-Jun-2017)
Previous
(30-Jun-2016)
 Action Upgrade Maintain
 Long Term A A-
 Short Term A1 A2
 Outlook Stable Stable
 Rating Watch - -

The ratings reflect EPCL's association with one of the country's leading conglomerate - Engro Corp. This association has benefited the company; lately provided debt facility of PKR 3bln. This financing facility is expected to be converted into preference shares during CY17. Preference share are callable and convertible to equity shares after the span of 3 years. EPCL's profile benefits from its position as the sole producer of PVC resins in the country, supplemented by sustained product demand and vertically integrated operations. EPCL has limited influence on both price ends (i) Ethylene - key raw material, and (ii) PVC - key product, wherein inherent volatility enhances the challenge. Margins are on the improving side due to stable PVC prices, softened ethylene prices along with incremental domestic consumption. Reduction in duty on import of raw material & imposition of anti-dumping duty should benefit. 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. EPCL's debt-reprofiling has eased pressure on its financial risk reflected in improving trend of coverages; comfort is drawn by ~32% contribution by the parent in the total debt.

The ratings are dependent upon sustained operations and continuity of improved margins. Maintaining an adequate financial discipline; wherein capex may be adopted according to available financial flexibility remains important
About the Entity
EPCL, established in 1997, started commercial production in 1999. The company is listed on Pakistan Stock Exchange. 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 International Finance Corporation (6%).

The Board of Directors (BoD) comprises 8 members including three members from the parent organization including the CEO, one senior executive from Engro Group and a member of Dawood family, while two members represent Mitsubishi Corporation. The remaining three members are independent non-executive directors Mr. Imran Anwer, elevated as CEO in 2015, has been associated with Engro since 2005. He is a seasoned professional with over two decades of experience. The company has an experienced team.

During 2016, EPCL has witnessed improved production. PVC production stood at 172KT with the capacity utilization of 96% compared to 91% in 2015. ECPL plans to add additional capacity of 20KT which will make total capacity of ~198KT (CY16:178KT). This capacity enhancement plan is line with increasing market demand and to cater upward trend in consumption as ECPL is the only producer of PVC
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.