PACRA upgrades credit rating of Engro Polymer to AA-/A1+

According to a press release by PACRA and a notification to the Pakistan Stock Exchange, PACRA has upgraded the long-term credit rating of Engro Polymer and Chemicals Limited from A+ to AA- and has maintained short term rating of A+.

The ratings recognize Engro Polymer’s established foothold in the local PVC and caustic soda market. EPCL has efficient production process, sound technological infrastructure, and effective control environment. 

EPCL is the only manufacturer of Poly Vinyl Chloride (PVC), having a market share of ~67% in domestic market. The Company has successfully created a liking for its products. Lately, it is yielding strong margins attributing to improved international dynamics along with strong domestic demand; 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. However, over the years company has made vigorous efforts on operational efficiencies, which has minimized vulnerability to unfavorable vinyl chain dynamics. 

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 healthy margins and market share in the southern region. 

The uptick in profits, in turn, free cash flows, has yielded favorably for EPCL’s financial profile. This is reflected in the 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 announced a CAPEX of PKR 10.3bln, an addition of 100K tons capacity on PVC and 50K tons of VCM, on a tune of PKR 7.6bln of which PKR 5.4bln is being raised through the Issuance of right shares. Remaining CAPEX will be funded through internally generated cash and debt. During expansion, the strength of the balance sheet will likely to remain intact.

The ratings are dependent upon holding sustained operations and continuity of improved margins. Successful execution of planned expansion, while, with the new debt to be acquired, maintenance of coverages would remain important to uphold ratings. Sustenance of import and anti-dumping duty is important for the sustainability of the risk profile of the company.