LOTPTA reaps cotton price dividend

KARACHI – Historically high cotton prices are swelling the price and demand of polyester fibers, an alternative raw material. This has ensured that margins of Lotte Pakistan PTA Limited (LOTPTA) remain quite healthy. Though rising oil prices and reduced availability of Paraxylene (Px) due to problems in the Middle East, pushed spot Px prices by 18 percent since December 2010, demand from downstream polyester sector remained resilient enough to push PTA prices up by 26 percent in the same period.
The primary margins are expected to average around $310 per tonne and $290 per tonne for CY11 and CY12, respectively. Due to healthy demand in the downstream polyester sector and the fact that a fall in cotton prices is unlikely in foreseeable future primary margins for LOTPTA are expected to remain strong for at least a couple of years.
Amid strong primary margins and healthy finance income, it is expected that the company will earn profit after tax of Rs 1.62 million with Earning per Share (EPS) at Rs 1.07 for first quarter of 2011, said Syed Abid Ali at Arif Habib Ltd, adding that spot primary margins have averaged at $335 per tonne since January 2011, whereas the second largest contributor to the bottom line is likely to be finance income of around Rs 225 million for the first quarter of 2011.
LOTPTA has been implementing cost saving measures like Catalyst Recovery Unit (CRU) and a 40 MW cogeneration power plant, with a combined cost of $54.3 million, Rs 4.7 billion. The company has already commissioned its CRU in the fourth quarter of last year while the power plant is expected to come online in CY12. The company hopes that this will have an annual impact of Rs 0.68 per share.
In December 2010, the Company paid $23 million out of total parent company loan of $63 million. Though LOTPTA was scheduled to pay this loan as a bullet payment in 2012, however to reduce its exchange rate risk on the loan, the Company partially off loaded the loan. This early retirement is likely to cause a modest decline of Rs 59 million, Rs 0.04 per share, on the financial income. Remaining portion of the loan is expected to be paid on maturity.
On the expansion front, company management highlighted the capital extensive nature of PTA plant which requires a capital outlay of more than $400 million (highest in the polyester chain). Due to this, management deemed raising the PTA import duty pivotal for the expansion case. PTA stressed that the government may not be able to increase the import duty for the protection of downstream textile industry and highlighted that the absence of PTA monetisation makes the case for raising import duty even weaker.