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Table of Contents
1.0 History and
Overview
3
1.1 Mission Statement................................................................................................ 4
1.2 Core Values........................................................................................................... 4
1.3 Products................................................................................................................ 5
1.4 Major Customers.................................................................................................. 5
1.4 Exports................................................................................................................. 6
1.5 Economic Performance......................................................................................... 6
2.1 Political................................................................................................................. 7
2.2 Economic.............................................................................................................. 7
2.3 Social.................................................................................................................... 8
2.4 Technological........................................................................................................ 8
2.5 Environmental...................................................................................................... 8
3.1 Strengths.............................................................................................................. 9
3.2 Weaknesses.......................................................................................................... 9
3.3 Opportunities...................................................................................................... 10
3.4 Threats:.............................................................................................................. 10
5.1 SPACE MATRIX Diagram................................................................................... 14
5.2 ANALYSIS............................................................................................................ 14
6.1 Financial Situation.............................................................................................. 15
6.2 Marketing........................................................................................................... 17
6.2.1 Customer Focus............................................................................................ 17
6.2.2 Market Development.................................................................................... 18
6.2.3 Horizontal Expansion and Vertical Integration..............................................18
6.2.4 Related Diversification................................................................................. 19
6.2.5 Corporate Social Responsibility....................................................................19
6.2.6 Research and Development.........................................................................19
6.2.7 Competitive Advantage................................................................................20
6.3 Human Resource and Administration.................................................................20
7.1 Problems related to Forecasting and Inexperience.............................................21
Engro Asahi Polymer & Chemicals Limited was a joint venture between Engro Chemical
Pakistan Ltd. (ECPL), Asahi Glass Company and Mitsubishi Corporation (Japan), each with a
50%, 30% and 20% shareholding, respectively. Later, Asahi Glass Company decided to move out
of Poly Vinyl Chloride (PVC) and Vinyl Chloride Monomer (VCM) business worldwide and
offered to sell its holding. Engro Chemicals bought the entire shareholding of Asahi Glass
Company and increased its share to 80%.
In June 2008, EPCL went public by offering 50 million shares and received the amount of Rs.
2.8 billion against the offered amount of Rs. 900 million. After the initial public offer Engros
share in EPCL remained to 56%. Other shareholders included IFC (15%), Mitsubishi (11%),
Individuals (9%) and others (9%).
EPCL started as the only PVC manufacturer in Pakistan with a capacity of 100,000 tons per
annum and its operations are located at Port Qasim in Karachi. Its plant was commissioned in
November 14, 1999 and IFC assisted in the financing of this plant. In 2009, EPCL made
expansion in the plant horizontally and vertically by installing 50,000 tons more PVC resin
facility and a facility to manufacture Ethylene di Chloride (EDC) and Vinyl Chloride Monomer
(VCM), which are the basic raw material and PVC resin manufacturing. In order to diversify the
business and lessen its dependence on the PVC resin business, EPCL also installed Caustic Soda
plant with a capacity of 105,000 tons. Now EPCL has a capacity of producing 150,000 tons of
PVC, 240,000 tons of EDC, 216,000 tons of VCM and 105,000 tons of Caustic Soda, annually.
1.3 Products
Being the sole manufacturer of PVC resin in the country, EPCLs PVC resin sold under the brand
name of SABZ dominates the domestic market. SABZ is available in 5 variations listed
below,
The above listed products differ in their molecular weight and are used according to application.
SABZ PVC AU-72 is a high molecular weight suspension resin, therefore, it is used as a raw
material in the production of electrically insulated PVC cables. Whereas, SABS AU-60 is a
medium-low molecular weight suspension resin and is used as raw material in the rigid PVC
application.
EPCL also started the production of Caustic Soda and sells it to textile mills, leather mills and
soaps and detergent manufacturers.
The Company is also expanding its warehousing network to ensure that PVC stock is
readily available in various key cities of the country. EPCL currently has six warehouses in
five cities namely, Karachi, Lahore, Multan, Faisalabad Islamabad and Quetta.
1.4 Exports
The Company has established itself as a regular supplier to several businesses in the region
thus establishing a strong customer base outside Pakistan. The international customer base is
located in Sri Lanka, Bangladesh, UAE, Bahrain, etc. High Product quality with its strategic
geographical location has given the company an advantage to successfully provide a level of
exports at a competitive price.
2.2 Economic
The economic situation in the country also indirectly affects the business of EPCL. This is
because the demand of the major products of the company, like PVC, is majorly related to the
rise and fall of the construction industry. And, the amount of construction taking place depends
on the earning of the population, the economic situation of the government, investment and
developmental projects in the country. This is because the products that are made out of PVC are
mainly used by the construction industry, like pipes, door and window frames, etc. So, if there is
a lot of construction going on, demand for ECPL products will also be on a rise and vice versa.
The demand for PVC was expected to grow at the rate of 14% every year in domestic market due
to low per capita PVC consumption and increased infrastructure development. But, unfortunate
floods on 2010 had severely affected the demand for PVC in the domestic market. The PVC
demand in Pakistan is again expected to rise in 2H2011, due to full swing in flood relief
operations.
2.3 Social
The social factor affects EPCL in a way that the international economy has just shown some
signs of economic recovery, whereas, Pakistan is still passing through tough liquidity crunch and
financial crisis due to the recent floods. Therefore, the social behavior of the population of the
country has now strongly shifted from that of the spenders to the savers, which has also affected
the demand for PVC in the domestic market. Moreover, the current uncertainty and law order
situation in the country has also contributed in shifting the social behavior of the population from
active spenders to passive spenders.
2.4 Technological
Technology plays an important part in any industry. Every now and then, breakthroughs in the
world of technology are happening and constant evolution is taking place. Being a manufacturing
company EPCL works with different machines, equipments and even processes which are a part
of technology. EPCL will have to keep itself updated with the latest PVC manufacturing
technology to avoid any technology obsolescence risk. EPCL is producing PVC with the raw
material known as VCM which is the common international technology; the other traditional
method was the production of PVC resin through calcium carbide. EPCL has to keep keep track
of the PVC manufacturing technology to prevent itself from operating on less efficient
technologies.
2.5 Environmental
Almost all chemical manufacturing plants release different kinds of gases and produce solid and
hazardous waste, such as sanitary waste, that cause environmental pollution and even health
hazards. ECPL shows strong conviction in keeping itself environment friendly by adopting
various international standards and internally built Environment Management System EMS.
The company is also ISO 14001:2004 certified and is being regularly audited for environmental
compliance. To make its expansion project extremely environment friendly, it envisages state of
the art environment initiatives like waste handling, liquid waste disposal, new waste water
treatment unit and on site Evaporation plant for treating waste.
3.0 SWOT
3.1 Strengths
The parent brand name of Engro Group lends the market an financial strength to all its
subsidiaries including Engro Polymer and Chemicals Limited.
EPCL is the sole producer and marketer of PVC (Poly Vinyl Chloride) resin in the
market, thus operating as a monopoly. It covers 70%-80% of the total market for PVC
resin.
Chlorine, Ethylene di Chloride and Vinyl Chloride Monomer manufacturing facilities
which are the basic raw material in the production of Poly Vinyl Chloride. These raw
material facilities are achieved through backward integration plan of EPCL.
Loyal customer base that has been established through years of strategic long term
relationship building..
High entry barriers in the PVC manufacturing market also serve as one of the major
strengths of EPCL. These high entry barriers have been achieved through continuous
investment in processes thus reducing the cost of producing PVC through backward
integration.
3.2 Weaknesses
EPCL has a weak management, proven by inefficient forecasting, inability to plan for
3.3 Opportunities
EPCL can further increase its production capacity of PVC from 150,000 tons as in
Pakistan the demand for PVC is going to increase in future due to extremely low per
capita PVC consumption as compared to the region. Pakistan has per capita PVC
consumption of 0.7 kg where as China, India and Thailand has per capita PVC
quantities.
Drip irrigation system is a huge opportunity for EPCL as smart use of water is being
promoted by Govt. of Pakistan and the awareness of technologically advance irrigation
system is increasing in domestic markets. This drip irrigation system includes PVC pipes
as a major part of the system thus directly increasing the demand for PVC pipes and
indirectly increasing the demand for PVC resin.
3.4 Threats:
Ethylene prices in the international market posses itself as major threat to EPCL. After
the installation of the production facility of EDC and VCM, ethylene remains as major
raw material that EPCL has to purchase in order to manufacture PVC. Thus, earning per
share is highly sensitive to the ethylene prices in the international market.
Future economic downturn may result in lower demand of PVC resin by the industries
use PVC as a raw material.
High depreciation and interest charges due to recent facility expansion also serve
as a major threat to EPCL. In case of any further breakdowns on the plant EPCL can have
Weaknesses:
1. Weak management
2. Operational constraints
due to maintenance needs
3. Weak interest coverage
and quick ratio- debt
obligations breached
SO Strategies
WO strategies
1. Increase production
capacity
2. Expand in international
markets
3. Infrastructure
development in flood
affected areas-rise in PVC
demand
4. Increased demand of
advanced irrigation systemincrease in PVC demand
Threats
1. Ethylene(raw material)
price increase
ST strategies
WT strategies
W1T2T3T4: By strengthening
Opportunities
2. Economic downturn
decrease demand of PVC
3. Breakdowns and other
incidents in the plant
4. In-experience in handling
plants of VCM and EDC
5. Geo-political situation
hampering supply and
distribution
6. Technology used
becoming obsolete
Particulars
Ratings
Profitability
+3
2.
Revenues
+4
Sub Total
+7
Growth potential
+4
2.
Profit potential
+4
3.
+2
4.
Capacity utilization/productivity
+3
Sub Total
+13
Environmental Stability(ES)
1.
Rate of inflation
-4
2.
Demand variability
-4
3.
Competitive pressures
-2
4.
-5
Sub Total
-15
Competitive Advantage
1.
Market share
-1
2.
Product quality
-2
3.
Customer loyalty
-3
-4
-10
Conclusion:
ES Average is -15/4= -3.75, IS Average is +13/4= +3.25
CA Average is -10/4= -2.5 ,
FS Average is +7/2= +3.5
Directional Vector coordinates: x-axis: IS+CA= +3.25+ (-2.5)= +0.75
y-axis: FS+ES= +3.5 + (-3.75)= +0.25
Scale
-CA and ES values can range from -1 to -6 (-1 being best and -6 being worst)
-IS and FS values can range from +1 to +6 (+1 being worst and +6 being best)
Aggressive
(0.25, 0.75)
IS
CA
Defensive
Competitive
ES
5.2 ANALYSIS
The space shows that ECPL has the internal strengths and competitive advantage to pursue
aggressive strategies. The company has a strong brand name and a monopolistic characteristic
because of which they can reap the benefits of opportunities available to them. They can go for
strategies such as expansion, market development and market penetration using their strengths
and competitive advantage.
integrated backwardly to produce the basic raw materials for PVC that were Vinyl Chloride
Monomer-VCM (capacity of 204,000 tons), Ethylene Di Chloride-EDC (capacity of 230,000
tons) and Chlorine (capacity of 94,200 tons) to lower the cost of raw material and improve the
profitability. A plant to produce Caustic Soda (capacity of 105,000 tons) was also installed to
improve the product offering of EPCL.
These expansions also brought some difficult times for EPCL when a fire incident was reported
in December 2009 where all the plants had to be shutdown. Plants PVC, EDC and Caustic Soda
were re-opened later in the same month with minor maintainenece but VCM plant remained unoperational till April of 2010 due to which the plant could not commercial operational status till
the September of 2010. This incident also contributed to the heavy losses in 2010 as the plant
remained un-operational but the depreciation costs, financing costs and operational cash charges
were levied in the balance sheets and income statements plus the high cost of importing VCM
was being incurred by EPCL despite of having the facility. VCM prices rose from USD 880 to
USD 985 in just the 3rd quarter of 2010.
EPCL has net revenue of around Rs. 10.5bn in first 9 months of 2010 with a growth of 28% if we
compare it to the same 9 months period of 2009. EPCL had recorded net revenue of Rs. 11bn in
2009 which was the highest since its inception and EPCL is expected to cross that mark this year
with just Rs. 0.5bn away in just first 9 months of 2010. Unfortunately, these high revenues are
not affecting the bottom line of the company as COGS also increased 34% in 9M2010
particularly because of the non-availability of the in-house VCM plus high fuel, operations and
financing cost which grew by shocking 197% in 9M2010 over the period of 9M2009.
EPCLs gross margin has been decreasing ever since 2006 and is down to the level of 6.05% in
9M2010 from the highest in the company history, 19.40% in 2006. Which means that the
companys COGS has been increasing since 2006 and EPCL is unable to control it despite its
effort to produce VCM in-house. The gross margin is expected to rise once the VCM plant is
100% operational and produces enough VCM to satisfy the demand of EPCLs PVC plant. But
Ethylene and fuel price increases in the international market remains a concern for EPCL.
The net profit margin of EPCL is also showing alarming result for EPCL as in 9M2010 the net
profit margin has shown a negative growth of 7.52% as compared to 0.26% negative growth in
9M2009. This negative growth is attributed to the above mentioned COGS, operating and
financing costs. The outlook for the 4Q2010 also looks grim and EPCL is expected to file a loss
Rs. 926mn which is further expected to show a negative growth due to low demand of PVC in
domestic market.
The current and quick ratios of EPCL are also decreasing ever since the expansion. Current and
quick ratios currently are at the level of 0.66 and 0.32 in 9M2010 dropped down from the level
of 3.62 and 2.84 in 2007. This shows an alarming situation for the EPCL and it is facing
challenges in honoring the short-term and long term debts to the extent that, it remains in breach
of the loan payment agreement.
Another alarming sign for EPCL is the Interest coverage ratio which has decreased to the extent
that it is in negative, -0.23 in 9M2010. The interest coverage was at the level of 25.32 in 2008
which has been drastically decreased due to heavy expansion financing.
The return on stakeholders equity is also on a strong negative trend with return falling from
positive 18.63% in 2006, negative 3.65% in year 2009 to negative 11.49% in 9M2010. In
addition EPCL also announced Rs. 1.28 loss per share in 9M2010 as compared to Rs. 0.04 loss
per share in 9M2009 and Rs. 0.45 loss per share in 2009. It is projected that the EPCLs loss per
share for 2010 will be Rs. 1.46.
6.2 Marketing
Engro Polymer and Chemical Limited being the only supplier of PVC in Pakistan enjoys the
complete market share of PVC but unlike other monopolistic organizations and businesses in
different industries values its customers a lot. In fact, the core values pyramid of Engro Polymer
describes Customer Focus as one of the core value of EPCL, which states that, customer needs
are their primary focus as they define the reason of EPCLs existence.
negative impact on the income statement of EPCL while reporting a loss of Rs. 790 million in
9M2010.
cannot be broken. Therefore, when the fertilizer business, which is the cash cow, was doing
excellent in the market, polymer business still had to rely on debt financing from external
sources, whereas the same cash could have been provided by fertilizers as credit on lower rates.
Therefore the lack of coordination within the business under Engro Group is minimal.
The management in Engro Polymer business has not been proactive enough to assess the market
situation, the availability of VCM in local and international markets. The prediction was late and
therefore as a result, the new plant was not ready to operate while the local unavailability of
sufficient VCM was prevalent. This further resulted in reliance on external finances in order to
meet the demands, as a result, the cost of raw material increased and profits decreased to extent
of transferring into losses. The company also breached some of the contracts and is expected to
default on few other payments by the end of the year due to late-commercialization of the VCM
plant.
The overall management decision regarding the most important factors like production facility
expansion, financial and debt management pose a great threat to the organization in future. Engro
Polymer has been on reactive approach rather than proactive one as the company was not able to
anticipate the future problems and kept relying too much on debt. This may also be due to the
lack of competition, because of which the management has been complacent in taking such
decisions. The overall growth of Engro Group has neglected some of the core businesses like
Engro polymer and therefore resulted in consistent losses.
In order to prevent this in future, EPCL should conduct proper and more importantly realistic
forecasting in terms of future demand patterns and revenues. This would not only help EPCL in
reducing the risk of low efficiencies but also EPCL would be able to plan future expansions and
growth plans more productively.
9.0 Conclusion
Engro Polymer and Chemical Limited holds huge prospects in Pakistani market due to its status
as only PVC resin manufacturer and major Caustic Soda manufacturer in the country. Moreover,
the backward integration in the PVC plant strengthened its operations as fully operational VCM
plant would not only drastically reduce the raw material cost due to in-house production but
would also increase the entry barriers in the industry because of EPCLs cost advantage.
EPCL is expected to further grow and turn itself in to profits in coming 3-4 years once again
provided it follows the above proposed strategies and the natural environment remains constant.
4Q2010E
Consolidated 2010E
3885770
3657984
227786
374247
-146461
377042
-523503
209401
-314102
-0.47
14396500
13532710
863790
1247109
-383319
1394061
-1777380
672727
-1104653
-1.77
Heads
Net Sales
COGS
Gross Profit
Operating Expenses
Operating Income
Financing Charges
Earning Before Tax
Tax
Earning After Tax
Earning/Loss per share
2010E
14396500
13532710
863790
1247109
-383319
1394061
-1777380
672727
-1104653
-1.77
2011F
2012F