PACRA maintains entity ratings of EPCL

July 17, 2023 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has maintained entity ratings of Engro Polymer & Chemicals Limited (PSX: EPCL) at "AA" for the long term and "A1+" for the short term with a stable outlook forecast, the latest company’s filing to the bourse showed.

The company has successfully completed a series of capacity expansion and efficiency projects.

EPCL was able to maximize its market share and delivered the highest-ever domestic sales volume of 231KT of PVC resin in CY22, which translated into 17.2% revenue growth as compared to CY21.

However, during 1QCY23 prices of PVC remained under pressure in the South Asian Region, due to the slower-than-expected economic recovery in China and the product over-supply situation in India.

On the flip side, Ethylene (major & key raw material) prices kept an upward pressure due to supply crunches and OPEC+ decisions, resulting in a decline in core delta, hence lowering the margin and profitability.

Currently, the demand side is also softened on the back of a decline in consumer buying power and increased cost of construction.

To combat these challenges, management is focusing on strengthening its PVC export volumes and developing downstream applications of PVC through its wholly-owned subsidiary Think PVC (Pvt.) Limited.

On the diversification front, the management is expected to achieve mechanical completion of the Hydrogen peroxide plant in CY23, which will add further diversity to EPCL’s product mix.

Currently, the company’s debt profile is stagnant amidst its phases of expansion, though, it is being aptly managed by having a mix of concessionary loans (TERF and LTFF) and conventional borrowings.

The company is exposed to foreign exchange risk, due to high dependency on imported raw materials, however, forex risk arising from the foreign currency loan on the company’s books has been neutralized through a synthetic hedge transaction that EPCL entered into 2020.

Moreover, EPCL enjoys a very strong liquidity position on the back of sizable deposits and liquid assets, supplementing its cash flows.

EPCL's association with one of the country's leading conglomerates, Engro Corp, and the very strong financial profile of the sponsors lend further support to the ratings.

The ratings are dependent upon the company’s ability to sustain its position as a market leader, further strengthen its sales volumes through exports, and maintain sufficient margins and profitability with prudent financial discipline.

Adequate management of its capital structure and debt payback remains imperative.

Copyright Mettis Link News