Engro Polymer and Chemicals Limited

Table of Contents
1.0 History and Overview3 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 Polymer and Chemicals Limited 7.2 Problems related to financial and debt management .......................................................................... 22 7.3 Management Issues .............................................................................................................................. 23 8.1 EDC-VCM Plant Action .......................................................................................................................... 24 8.2 Debt Management ................................................................................................................................ 25 8.3 Export Plan ............................................................................................................................................ 25 8.4 Back-up and Forecasting Plan ............................................................................................................... 25 8.5 Product and Market Development ....................................................................................................... 26 9.0 Conclusion.27 9.1 Future Financial Outlook ....................................................................................................................... 27

Engro Polymer and Chemicals Limited

1.0 History & Overview

Engro Polymer & Chemicals Limited previously Engro Asahi Polymer & Chemical Limited is one of the subsidiaries of Engro Corporation, the leading Pakistani business conglomerates with stakes in the fertilizer, food, petrochemicals, power generation, automation and terminal storage industries. Engro Group consists of following subsidiaries:

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%).

Engro Polymer and Chemicals Limited

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.

1.1 Mission Statement

Our mission is to achieve innovative growth which creates value for our stakeholders, customers and employees. Our commitment is to maintain higher standards of ethics, safety and environmental responsibility

1.2 Core Values

Engro Polymer and Chemicals Limited

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, SABZ PVC AU-58 SABZ PVC AU-60 SABZ PVC AU-67S SABZ PVC AU-67R SABX PVC AU-72

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 Major Customers

The customer base of the Company comprises of all categories of PVC application manufacturers. The largest domestic consumer is the Pipe Sector. This sector is showing strong growth on a consistent basis. This is because the PVC pipes are now increasingly used in housing and construction, water supply and sewerage, telecommunications and agriculture. The Companys other customers include manufacturers of artificial leather, shoes, garden hoses, cable compounds, films, rigid sheets, etc.

Engro Polymer and Chemicals Limited

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.

1.5 Economic Performance

EPCL has maintained a steady pace of business development through complete business reviews, risk management, technical services, impact of back integration project, customer services, sales/market share, financial risk management, financial review etc to estimate the company's economic performance. EPCL plays an important part in the development of national economy with a strong sense of responsibility for their people by protecting and preserving their interests, hence growing profits.

Engro Polymer and Chemicals Limited

2.0 PESTE ANALYSIS

2.1 Political
Different rules and regulations do exist that companies dealing with chemicals have to follow. There have been situations in the past, where EPCL and Government of Pakistan have some tax issues to settle. Still, in 2010 there are pending tax rebates, for which EPCL had also filed requests to the taxation department. Due to the lag in solving the issue by the income tax department and excise duty department EPCL has also filed cases in Sindh High Court and even Supreme Court. The payment of Rs. 84 million is still pending The geo-political situation and frequent instances of unrest are also affecting the operations of the company. This is in the form of delay in procurement of raw materials and distribution of their products to the market. Therefore, in order to resolve the delayed procurements issues, EPCL has installed tracking devices in all of its Caustic Soda transportation vehicles in order to keep track of he product delivery process and to keep the customers updated with the product delivery process. Being a player in the chemical industry, EPCL could have aced opposition from the environmental agencies, but EPCL is very transparent in environmental reporting as it is following the maximum environment friendly standards in production. Last year, ACCA-WWF an international environment agency awarded Pakistan Environmental Reporting Award to EPCL for its transparent reporting and environment friendly standards.

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.

Engro Polymer and Chemicals Limited

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
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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 unforeseen incidents, delays in decisions etc. EPCL has been facing operational constraints due to the maintenance needs of the used VCM plant EPCL bought in 2008. Weak interest coverage and quick ratio adds to liquidity crunch that EPCL is going through, due to which it is breaching its debt obligations.

Engro Polymer and Chemicals Limited

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 consumption of 7.5 kg, 1.2 kg and 8.5 kg respectively. International demand for PVC is very high, so EPCL can expand its markets internationally especially to India, China and Indonesia where are per capita PVC consumption is expected to grow in near future due to the extent of infrastructure development going in these countries. Infrastructure development in the flood affected areas also serve as an opportunity for EPCL as PVC pipes, windows, doors and other material will be required in huge 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.

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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 irreversible damages to the balance sheet and income statement.

Due to the lack of experience of operating EDC and VCM plants, EPCL had a fire incident in December 2009 which had a very negative impact on the already sensitive current and interest coverage ratio and the bottom line. The in experience can further hamper operations and maintainenece of EDC and VCM plants.

Geo-political situation in Pakistan serves as major threat to the timely distribution of the raw material to EPCL and manufactured PVC resin to customers. PVC manufacturing technology with EPCL can become obsolete in the near future.

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Engro Polymer and Chemicals Limited

4.0 TOWS Matrix

Strengths: 1. Strong branding of Engro Group 2. Sole producer of PVC in Pakistan 3. Backward integration for raw materials 4. Loyal customer base 5. High entry barriers Opportunities 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 SO Strategies S2O3O4: If demand of PVC products increase in the market then this will be totally beneficial for ECPL as they are the sole PVC manufacturers in the market S3O2: Other than internationally selling its main products like PVC, the raw materials being manufactured in-house can also be sold internationally ST strategies S3T1: Already being into backward integration, the company can also consider inhouse production of Ethylene S1T4: The strong brand name of Engro can help to attract managerial and technical talent from the market Weaknesses: 1. Weak management 2. Operational constraints due to maintenance needs 3. Weak interest coverage and quick ratio- debt obligations breached

WO strategies W2O1: If the company can overcome its current operational constraints , production capacity can be increased more effectively

Threats 1. Ethylene(raw material) price increase 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

WT strategies W1T2T3T4: By strengthening its management, EPCL can avoid some threats. They will be better able to forecast demand situations and thus make decisions about overcoming related problems. Similarly, having a better HR could have saved them form a number of operational problems caused by not having professionals or technical people right at the start.

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Engro Polymer and Chemicals Limited

5.0 Space Matrix

S.No: Particulars Financial Strength (FS) 1. 2. Profitability Revenues Sub Total Industry Strength (IS) 1. 2. 3. 4. Growth potential Profit potential Ease of entry into the market Capacity utilization/productivity Sub Total Environmental Stability(ES) 1. 2. 3. 4. Rate of inflation Demand variability Competitive pressures Ease of exit from the market Sub Total Competitive Advantage 1. 2. 3. 4. Market share Product quality Customer loyalty Control over suppliers and distributors Sub Total 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 -1 -2 -3 -4 -10 -4 -4 -2 -5 -15 +4 +4 +2 +3 +13 +3 +4 +7 Ratings

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)

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5.1 SPACE MATRIX Diagram

FS Conservative

A Aggressive

(0.25, 0.75)

CA

IS

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.

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6.0 Current Situation

Engro Polymer and Chemical-EPCL limited being the sole manufacturer and producer of PolyVinyl Chloride enjoys the monopoly in PVC market. EPCL is a subsidiary of Engro Corporation which owns majority of the share in the organization. Engro Corporation is the second largest producer of urea in Pakistan with other subsidiaries including Engro Foods Limited, Engro Energy Limited, Engro Avanceon, Engro Vopak Terminal Limited. EPCLs current situation in this case study has been reported with respect to the four key areas of the organization which include Finance, Marketing, Administration and Human Resource.

6.1 Financial Situation

On the financial front, EPCL is in red since 2009 and has reported a heavy loss of Rs. 790mn in 3Q2010 with a projected loss of around Rs. 926mn for the year 2010 against Rs. 232mn loss in year 2009 and handsome Rs. 353mn after tax profit in 2008. These heavy losses in 2009 and 2010 are mainly attributed to the backward integration and horizontal expansion of the facility at Port Qasim during 2009, where Engro invested $250mn a 236% non-current asset growth over 2008 and 393% non-current liabilities growth over 2008. In-addition the financing costs, operating costs and rise in fuel prices also contributed to the losses reported in 2009 and 2010. The company after expanding the plant has a capacity of producing 150,000 metric tons of PVC as compared to 100,000 metric tons previously, reporting an increase of 50% to capture the projected growth in the PVC market. In addition to this horizontal expansion, EPCL also 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

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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

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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.

6.2.1 Customer Focus

EPCL is the organization of its words; it has actually worked mutually with its clients to help them grow their business. Help is in terms of both managerial and technical support. EPCL has more than 400 small and big customers and according to CEO, Mr. Qadir, there is not a singe customer out of these 400 customers that has not been visited by the professionals of Engro Polymer.
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Engro Polymer has directly helped PVC pipe industries in growing their businesses and in result their capacity has doubled over the period of five years. In addition, 10 years ago, the industry could only manufacture PVC pipes with only 4 inches diameter but now, they can manufacture PVC pipes with 20 inches in diameter with additional uses. Moreover, EPCL also technically supported dying cable compounding industry in a way that previously the industry used to import 10,000 tons of cable compound but now it is manufacturing 8,000 tons of it. EPCL specializes in customer focus to the extent that they also work to help customers of customers. Drip Irrigation System is that sophisticated technology that helps farmers in preserving water while increasing their agricultural output. This technology promotes the use of PVC pipes which ultimately helps PVC pipe manufacturers and their consumers in conserving water. EPCL, in addition to the above taken steps also helps in developing the customer human resource through proper trainings and guidance. With this 16 Customer Technical Audits were also conducted in order to help improve its customers production processes, recipes, quality of the product and output of the factory. EPCL has also equipped all of its vehicles of Caustic Soda unit with trackers to ensure timely delivery of the raw material to the customer.

6.2.2 Market Development

In order to target handsome growth rate in revenues and profitabity and to lower its dependence on domestic market Engro is also exporting excess of PVC to international customers in Sri Lanka, Bangladesh, UAE and Bahrain. However the exports are limited due to the huge demand of PVC in domestic market.

6.2.3 Horizontal Expansion and Vertical Integration

EPCL in order to meet the growing demand of PVC in the Domestic and International Market grew horizontally with an addition of 50,000 KTons PVC manufacturing capacity. This addition has increased PVC production EPCL by 50% to 150,000 KTons. Plus it also integrated itself in backward direction with the installation of the raw basic raw materials manufacturing capacities. The new plants enable EPCL to manufacture Chlorine, Ethylene di-chloride - EDC and Vinyl Chloride Monomer VCM, which are the basic raw material in PVC production. This backward integration helped EPCL in lowering its dependence on imported VCM which incurred higher cost and risks due to international market and exchange rates
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However, this expansion and integration could not help EPCL in 2010, as due to unfortunate fire incidence at the factory in December 2009, VCM plant suffered damages and could not be put on commercial production status until September, 2010. Delay in the VCM plant start-up caused inhouse VCM shortages which also effected the PVC production as VCM was also short in international. This long delay also contributed primarily in filling huge losses in the income statements of EPCL in first three quarters of 2010 with total expected loss of Rs. 1014 million in 2010.

6.2.4 Related Diversification

EPCL has also diversified in a related business with the production of Caustic Soda. The demand of Caustic Soda is around 230,000 tons in domestic market and EPCL with its caustic soda plant has a capacity to manufacture 105,000 tons with major customer being textile industries and soaps and detergents factories. The Caustic Soda market is growing in Pakistan and EPCL in order to not to solely base its revenue chain on PVC has expanded into Caustic Soda market.

6.2.5 Corporate Social Responsibility

Corporate Social Responsibility is also one of the key concern areas for Engro Polymer as it invests huge amount in building a safer, healthier and a prosperous community. EPCL spent Rs. 8.4 million in 2009 in different projects. Projects include, 100 hectares of plantation projects to contribute towards greener Pakistan, clear drinking water project was installed by EPCL in Razzakabad and Ghangar Phatak, Earth day celebration with the local community and various Education projects including, Support Community Schools, EPCL Scholarship Programs, Taleemi Mela Sponserships and Donations.

6.2.6 Research and Development

EPCL also ensures that it conducts proper research and development in order to continuously improve its products, facilities and processes. In an effort to modernize its products, EPCL local researchers developed lead free pipes for use in portable water systems, food grade geo membrane for lining water reservoirs, medical compounds or I.V sets and syringe gaskets. Furthermore, EPCL is also studying the methods to utilize the Hydrogen which is available at site and ways to grow PVC and Caustic Soda capacity.

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6.2.7 Competitive Advantage

Competitive advantage to Engro Polymer is its position as a sole manufacturer of PVC in the Pakistani market. Engro Polymer enjoys the complete market share of Pakistans PVC market with less than 5,000 tons of PVC resin imports by small traders. EPCL has a very strong advantage over traders who incur high duties, freight charges, financing costs and warehousing charges while importing PVC resin. This cost advantage will sustained by Engro Polymer in long term in way that it has now installed EDC and VCM plant which are the basic raw materials of PVC, thus reducing costs, increasing entry barriers and weakening importers further. In addition, the long-term customer relationship management of EPCL has also developed as one its key strengths in the market. The infrastructure and value addition facilities that EPCL has are very difficult to imitate, thus making sure that the competitive advantage is for long-term and sustainable.

6.3 Human Resource and Administration

Engro Polymer believes that the success of the organization is highly dependent on the skills of its workforce. EPCL specially focuses on the development of the employee so that he/she can better handle professional challenges. According to the figures of 2009, EPCL has 350 employees, which has doubled from 2007 due to expansion/integration plan. At Engro Polymer the rights of the employees are respected and the organization promotes freedom of opinion, expression and open dialogue policy. EPCL offers market competitive compensations and awards incentives on the employees level of performance which automatically triggers an enthusiasm to excel. Incentive like Employ Share Scheme has also been introduced at Engro to reward employees and to build a sense of ownership in them. This policy of EPCL makes sure that the employees grow as the organization grows. EPCL also puts especial emphasis on the regular training and skill development of its employees. For this, various training on different subjects like management, plant operations and maintainenece, IT, marketing and finance are conducted. In 2009, EPCL invested around Rs. 54 million on trainings and travelling.

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Despite the above measures, technical human resource planning has served as a major flaw for the organization. After the expansion and integration, EPCL faced lack of VCM plant operations maintainenece specialties in its existing human resource. Due to the lack of operations and maintenance skills, EPCL incurred huge losses in terms of VCM plant catching fire and delayed re-startup of the plant. EPCL after facing the losses has hired international expertise in operating and maintaining the VCM plant. Had it been done before, EPCL might not have faced the fire incident and ultimately huge losses and delayed re-start-ups. Plus, covering more of the administrative side of the Engro Polymer, there still are many gaps in the productions processes. VCM plant re-start-up was unnecessarily delayed due to lack of planning of maintenance schedules, moreover, when there was a shortage of in-house VCM in last half of 2009 and first half of 2010, there was no future risk, back-up and alternate supplier planning due to which EPCL had to limit PVC to plant to the capacity of 116,000 tons with maximum capacity of 150,000 tons.

7.0 Problems Analyses

Engro Polymer, being in losses for a couple of years, has problems mostly related to inexperience in managing backward integration, forecasting, financial management and some of management issues. The losses are the result of some inappropriate and late decision making by the organization. We will discuss each of problems under each category.

7.1 Problems related to Forecasting and Inexperience

Engro Polymer is the largest and the only PVC producer in Pakistan. From 2008 however, some of the major changes in the production occurred. Companys PVC production was decreased due to shortage of the imported raw material that is VCM. The company did anticipate the shortage earlier as well and decided to set up another VCM production plant in the country. This new plant was needed to manage the shortfall and the plant was expected to operate by 2009. This was good backward integration decision as it would have drastically reduced the raw material import cost of EPCL due to in-house VCM and EDC manufacturing facilities. But due to inefficient prediction and forecasting of shortfall, the shortage started to occur before the plants operations could begin. The company then decided to purchase VCM from international market

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on spot basis. The raw material in international market was on peak prices and therefore it added to the costs of Engro Polymer. In addition, the forecasting of future demand in 2008 and 2009 for 2010 and onwards was unrealistic considering the financial crisis had just started at that time. EPCL should have taken a more realistic path towards forecasting future demand of PVC. Moreover, after the inauguration of the VCM plant, it caught fire in December of 2009 due to lack of expertise in managing the new VCM and EDC plants. If EPCL would have hired experienced professionals to manage new VCM and EDC plants, it would have been facing much lesser extent of financial problem than it is facing now. After the fire incident at VCM plant, EPCL suffered form extremely low level of in-house VCM production till September of 2010, which again forced them to import VCM from the international market on higher prices while incurring depreciation and interest charges on the newly imported plant. VCM in the international market fell short in 2010 due to which the PVC plant operated on 71% efficiency in first 9 months of 2010. This phenomenon had a double negative impact on the income statement of EPCL while reporting a loss of Rs. 790 million in 9M2010.

7.2 Problems related to financial and debt management

Apart from the above mentioned problem, another problem in Engro Polymer was seen as related to financial and debt management. Engro Polymer has been breaching few of loan agreements and form past one year; the raw material costs have been drastically increased and the in-house raw material production is on extremely low levels. Moreover, the investment for new VCM plant have also added to the debts. Engros long term debt to equity ratio has increased by 67% from 0.21 in 2007 to 0.64 in 2009 and the interest coverage ratio has decreased by 94.3% from 25.32 in 2008 to 1.44 in 2009, thereby adding to the poor financing and payback policies. Other reasons adding to the costs include incremental costs due to depreciation of assets, financial credit term agreements and increasing fixed costs due to expansion and backward integration. Analyzing the problem strategically, the financial analyses of the organization have not been calculated properly, the company is relying on too much of debts from banking and other entities. Common stocks have also been issued to the general public, to whom; Engro has failed

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to give dividends for past couple of years. The debt ratio of the company is greater than the industry average and the company is expected to be in loss at least till the end of year 2011 or 1H2012.

7.3 Management Issues

Engro Polymer is a result of acquisition of Esso (later renamed as Exxon) in 1991 and it is now part of Engro Group which has a diversified range of products from Fertilizers to foods. It is important to understand that the management of Exxon was taken over by the management of Engro and therefore there was a shift in management style. The companys profitability condition was very positive and the future was optimistic as well. However, Engro group gradually started diversifying into other categories, especially Engro foods after which the expansion was rapid, the financials were needed and company started relying too much on debt financing. In spite of the fact that Engro Polymer is a separated entity and operates irrespective of what the other entities in Engro group are up to, the link between the companies under the name of Engro 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

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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.

8.0 Future Proposed Strategy

After the detailed and thorough analysis of Engro Polymer and Chemicals Limited, we have prepared a strategy that will enable EPCL to come out of these difficult times successfully. The strategy is named as The New-Fangled Approach, which encompasses, EDC-VCM Plant Action Debt Management Export Plan Back-up and Forecasting Plan Product and Market Development

8.1 EDC-VCM Plant Action

EPCLs VCM plant caught fire in December of 2009 due to lack of expertise and experience of EPCL in managing the new facility. After the fire, VCM plant remained un-operational since April 2010 and could not achieve the Commercial Operations status since September 2010 due to which EPCL reported huge losses. This lack of expertise and experience in operating VCM plant was due to non-hiring of experts for the job. EPCL now should hire international experts for the job, so that future such incidents can be minimized. EPCL with its international expertise should focus on the efficiency of the VCM plant as it affects the capacity of the PVC plant as well. Operating VCM plant at 100% efficiency would (1) reduce the raw material cost, (2) improve the efficiency of the PVC and (3) most importantly will play a major role in bringing EPCL out of losses.

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8.2 Debt Management

There is a need to take EPCL out of losses through proper debt management. The debt on EPCL is accruing huge interest charges due to which EPCL is breaching many of its loan agreements. Debt refinancing is an attractive option for EPCL, where the debt refinancing should not be done through financing institutions but through Engro Corp. itself. Engro Corp. being the major shareholder in EPCL should refinance it debt on lower interest rates with deferred payments. Term finance certificates like Engro Rupiah or sucking cash out of its cash cow like Engro Fertilizer can provide the amount needed to refinance the debt on lower interest rates. This debt refinancing would immensely reduce the interest rate pressure on EPCL and would also provide EPCL with cash to inline its operations once again.

8.3 Export Plan

After the recent economical situation and floods in Pakistan, the demand for PVC is not expected to remain upbeat for the 4sth quarter and 1H2011. Therefore, EPCL can have excess of PVC in 2011 which can be exported to earn more revenue. The more profitable export arenas for EPCL can be China and India as their per capita PVC consumption is on low levels as compared to Korea per capita PVC consumption of around 20kg. Furthermore, as Caustic Soda demand in domestic market is 230-240k tons, EPCLs caustic soda production will produce excess in the market and prices locally will fall further. Therefore, instead of completely focusing on domestic market with caustic soda production, EPCL should equally focus on exporting caustic soda to India and China.

8.4 Back-up and Forecasting Plan

After the unfortunate fire incident at VCM plant and delay in commercial operations, EPCL faced massive shortages of in-house VCM. This shortage forced EPCL to again start importing VCM until its plant gets operational. EPCL, then started importing VCM on higher prices due to international supply shortages and then had to stop PVC plant, courtesy further shortages in

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international market. Due to this VCM supply and demand situation in international market, EPCL suffered with high cost of goods sold which increased by 55% from 2008 to 2009, whereas, gross profit only increased by 2% during the same period. EPCL, in order to prevent itself from such situations in the future should keep its VCM plant functional at100 efficiency, through proper maintenance, operations and management skills and expertise, as it is a basic raw material in PVC production. Moreover, if the VCM plant still goes offline as a result any unfortunate incident, EPCL should have a fixed back-up VCM supplier with whom EPCL is the primary customer to be served. In addition, realistic future domestic PVC demand, revenue and net income forecast could have lessen the loss that EPCL is expected to report in 2010. According to EPCL in 2009, the domestic PVC demand was expected to grow at 10%-14% growth for next 3-4 years instead of the fact that financial and political crisis had just begun at that time. Now in 2010, EPCL is facing low demand due to almost no infrastructure development projects in Pakistan and passive behavior of the market towards construction of homes, which is not only reducing the revenues but also increasing losses by charging the same fixed cost and interest charges over the new imported machinery. 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.

8.5 Product and Market Development

Whenever the organization is going through the low demand phase of its products, product and market development serves as a savior in such situations. EPCL can increase the uses of PVC by proper research and development. Drip irrigation system is an excellent initiative by EPCL as it not only increases the agricultural productivity but also indirectly increases the demand of PVC resin. EPCL should aggressively pursue the introduction of Drip Irrigation System in Pakistan as it holds huge potential. Further more adding to the uses of PVC, unplasticized polyvinyl chloride sheets are commonly used in US, UK and Australia in construction of homes as it is low maintainenece material. This use can

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also be promoted in flood affected areas where there is urgent need of home building with finished building material. In addition, market development of PVC resin and Caustic Soda in China and India would help EPCL cover future low demand of its products in domestic market by selling them in international market.

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.

9.1 Future Financial Outlook

According to the management of EPCL, the product demand is projected to go down further domestically due to liquidity crunch. The situation is expected to exist till the 1H2011 and then in 2H2011 the demand is again expected to show some positive signs as the flood relief schemes come in full swing. EPCL is going to focus on export of PVC to China, India and Middle East in 2011 to balance the demand and production. The company is also expecting heavy decline in raw material prices as VCM plant will again begin its operation on 100% efficiency from 4Q2010. Plus the prices of PVC and Caustic Soda have risen in the international markets and are expected to remain at the same level which will further strengthen the top-line of the company. International Chlor Vinyl margins are also increasing in the international market which will further lessen the COGS burden on EPCL. Based on these sector and market assumption and provided the internal and external environmental factors remains constant, 4Q2010, Year 2011 and 2012 can be projected as,

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Heads Net Sales COGS Gross Profit Operating Expenses Operating Income Financing Charges Earning Before Tax Tax Earning After Tax Earning/Loss per share

4Q2010E
3885770 3657984 227786 374247 -146461 377042 -523503 209401 -314102 -0.47

Consolidated 2010E
14396500 13532710 863790 1247109 -383319 1394061 -1777380 672727 -1104653 -1.77

Rs. In 000, except Earning/Loss per share

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

Rs. In 000, except Earning/Loss per share

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