Engro Polymer assigned Initial Entity Rating of AA minus/A1 Plus by JCR-VIS

According to a press release by the credit rating agency, JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘AA-/A-1+’ (Double A Minus/A-One Plus) to Engro Polymer and Chemicals Limited (EPCL).

Outlook on the assigned ratings is ‘Stable’.

The assigned ratings incorporate strong market position in PVC (Polyvinyl Chloride) business, improved international dynamics of vinyl chain, cost leadership in caustic soda segment, financial and operational turnaround across key performance metrics, and robust corporate governance infrastructure. Ratings also take into account business risk of the sector given the cyclicality in business due to volatility in raw material prices. Strong financial profile and demonstrated track record of support from renowned conglomerate sponsor-Engro Corporation Limited is also a key rating driver.

EPCL is the only integrated Chlor-Vinyl Chemical Complex in Pakistan; it operates in two major segments i.e. PVC and Chlor-Alkali. In PVC, the Company has a market share of ~67% while market share in Caustic Soda business hovers around 30%. Given the growing demand of PVC and opportunity in chlor-alkali segment, EPCL has announced expansion plan of Rs. 10.3b comprising capacity expansion in PVC/VCM, value addition in its Chlor Alkali business and overall efficiency enhancement projects.

Assessment of business and industry risk profile incorporates healthy demand growth of PVC, which has increased at a CAGR of 11% over the last 5 years, and rationalization of international vinyl chain due to improving demand-supply situation around the globe, particularly in Asia. Nevertheless, cyclicality in business has historically remained high due to volatility in raw material prices translating into moderate to high business risk. However, the company has enhanced operational efficiencies through several interventions to minimize vulnerability of unfavorable vinyl chain dynamics. Going forward, ratings are dependent on international vinyl chain dynamics where JCR-VIS has been given to understand that limited international capacities of PVC are projected to come online relative to ethylene capacities, which are expected to bode well for the Company.

Financial profile draws support from strong liquidity indicators as evident from healthy cash flows in relation to outstanding obligations and favorable working capital cycle. Capitalization indicators are adequate with gearing levels having declined significantly over the last 3 years. Given growing cash flows and projected dividend payout, healthy cash accumulation is expected over the rating horizon. Despite planned expansion, leverage indicators are projected to improve given the funding mix for expansion projects and healthy internal capital generation. Going forward, ratings will continue to remain dependent on maintaining financial indicators within benchmarks for the assigned ratings.