Analysis of Financial Statements Financial

Tag : RS 232 485
Pakistan PTA is a world-class supplier andmanufacturer of Pure Terephthalic Acid (PTA), an essential whitepowder used in the textiles industry as raw material for makingpolyester fibres. Taking over the PTA business from ICI PakistanLimited on 1 October 2000, Pakistan PTA Limited remains a member ofthe ICI World-wide Group and retains close links with ICI PakistanLimited.

Following the acquisition of ICI Plc UK by Akzo Nobel on 2ndJanuary, 2008, Pakistan PTA Limited continues to be a directsubsidiary of ICI Omricon B.V., with Akzo Nobel being the ultimateholding company. It is listed on all the three stock exchanges ofthe country.

Until Pakistan PTA Limited started its production, polyesterproducers in Pakistan, hitherto were entirely dependent on costlyimports of PTA. Being the sole producer of PTA in Pakistan, PPTALprovides the benefits of local supply, with short lead times,consistent quality and payment in local currency. Production ofpolyester in Pakistan has grown strongly and usage of the rawmaterial, PTA, now exceeds 600,000 tons per year. Pakistan PTALimited also exports PTA regularly to customers in both Asia andEurope.

Apart from making the important economic contribution, PPTAL isadding value to the local textiles and packaging industry. Inrecent years, the trend has been to blend cotton with polyester andother man-made fibres. Garments made from cotton/polyester blendsnot only find favour with customers, but also allow increasedproduction, and lesser dependence on cotton.

Another major use of polyester is in shape of plastic, in foodpackaging, particularly bottles for soft drinks and mineral water.Polyester (PET) bottles not only benefit the consumers being thelighter and less fragile, but also save the distribution costs,keeping the prices low.

Since its inception, PPTAL has been a major investor in future ofthe chemical industry. PPTA completed plant upgradation during theplant shutdown in May'05 for the debottlenecking project, whichincreased the plant manufacturing capacity by 17k tpa to 492k tpa(59tph) from 475k tpa (57tph) earlier. Later, in 2007, aSupplementary Process Air Compresor (SPAC) worth USD 2 million wasinstalled and commissioned adding further 6,000 tpa to plantcapacity and enhancing the conversion efficiencies.

RECENT RESULTS (FY03-FY07) The Port Qasim plant operated dismally, especially in the firsthalf of 2007, mainly due to weak downstream demand, which in turnwas affected by the industry's poor performance. However, in thesecond half, when the demand picked up, it took full benefit fromthe 60 tonnes per hour up rate project completed in February 2007.

FY07 production of 456,099 tonnes was lower than 473,528 tonnes in2006, driven mainly by the reduced rate plant operation in H1'07due to depressed downstream market conditions. Continued focus onimplementation of energy conservation plans and annual technicaldevelopment projects resulted in sustained conversion efficiencies,particularly the electricity consumption and acetic acidconversion.

Overall sales volume for 2007 at 468,516 tonnes was 7.62% lowerthan the last year's 471,779 tonnes, due to lower exports anddomestic industry slowdown. However, due to strong marketing focuson the local industry along with capitalising on opportunitiesresulting from new Polyethylene Terephthalate (PET) manufacturingfacility, the domestic sales volume of 460,486 tonnes was 13%higher than the last year thus accounting for 98% of total volumecompared to 86% of last year.

The flat figures of net sales in FY07 compared to correspondingperiod last year were satisfactory keeping in view the lower volumesold and lower PTA prices, which resulted in 20% lower PTA marginover Px, which continued to rise due to high crude oil prices.

These escalating Px prices with strengthening of downstream demandin mid-2007, the spot PTA prices shot up but depicted a decliningtrend till year end due to increased PTA supply augmented by thenew PTA capacity expansions. Among the conversion costs, the majordriver was increase in repairs and maintenance with Rs 150 millionfrom the planned plant overhaul.

The impact of lower margin over Px and relatively higher conversioncosts resulted in gross profit of Rs 1.3 billion compared to Rs 2.2billion in the corresponding period last year. The lowerdistribution, selling and administrative expenses were mainly dueto lower exports and partial reversal of Rs 50 million from theprovision of Rs 90 million trade related contingency made in FY06.

A severance payment further added to this decline. Apart fromthese, other factors like the insurance claims resulted in a higherother operating income along with a lower other operating expensesmainly lower exchange losses on foreign currency loans, financelease and trade related transactions. This justifies a slightimprovement in the loss made by the company in FY07. Lowerfinancial and tax charges were also responsible for this slightimprovement.

With ratio analysis the picture doesn't seem to be rosy in FY07.Both gross and net profit margins showed a negative trend. The ROAand ROE also followed the negative trend of the profit margin. Bothcontinue to remain below the industry average.

The liquidity position shows an increasing trend. In FY07 thecurrent ratio at 0.9 was, however, marginally less than 1.0mandated by the Prudential Regulations, for which appropriatewaivers have been obtained from all the concerned local lenders.Its sudden jump from 0.56 to 0.9 is mainly attributable to declinein current liabilities in addition an increase in current assets.

Decline in CLs is due to conversion of PPTAL's short-term loansamounting USD 63 million (PKR 3.8 billion), from a group companyMortar Investments International Limited into long-term loansmaturing in five years. The company's inventory turnover hasdeclined slightly in FY05, rose in FY06 and declined again FY07,which can be again attributed to the high Px prices in the marketwhich somewhat lowered the sale of PTA.

With flat net sales and decline in inventory, the ITO declinedconsiderably. Despite this, the overall operating cycle showed anincrease of 13 days in FY07 on the back of 26 days higher dayssales outstanding. This increased by significant amount mainly due2.5 times higher trade debts in FY07 than the previous year'slevel.