Engro Polymer and Chemicals Limited – BR Research

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Engro Polymer and Chemicals Limited (PSX: EPCL) was established in 1997 under the Repealed Companies Ordinance 1984 (now Companies Act 2017). It is a subsidiary of Engro Corporation Limited. The latter, in turn, is a subsidiary of Dawood Hercules Corporation Limited.

EPCL is primarily engaged in the manufacture, marketing and sale of polyvinyl chloride (PVC), vinyl chloride monomer (VCM), caustic soda and other chemicals. The company also supplies surplus electricity to Engro Fertilizers Limited.

Shareholding model

As of December 31, 2020, more than 67% of the company’s shares are held by associated companies, companies and related parties. Of this total, 56 percent of the shares are held by Engro Corporation Limited. The local general public owns 13 percent of the shares, followed by over 11 percent in mutual funds. The directors, the CEO, their spouses and their minor children hold a negligible share. The remaining 9% of shares belong to the rest of the shareholder categories.

Historical operational performance

Engro Polymer and Chemicals has mostly seen sales growth over the years with the exception of CY14 and CY15 and more recently CY20. Profit margins, on the other hand, increased after CY14, decreased once in CY19, and increased again in CY20.

In the year CY17, revenues increased by more than 21%, exceeding 27 billion rupees. This was due to the growing demand for the vinyl segment; PVC prices and demand have increased. The domestic PVC market itself grew by 11%. With increasing revenues, production costs accounted for a lower share of revenues at 78%, bringing gross margins to nearly 22%. The effect of this was also seen in the net margin which increased to 7.4 percent. Some additional income was provided through income from bank deposits; other income had been exceptionally low over the previous two years. In addition, financial charges also represented a lower share of sales, which also contributed to better margins over the period. The company posted an incredibly high net profit of over 2 billion rupees.

The company maintained its growth momentum as the turnover increased by 27% in the year CY18, exceeding Rs 35 billion in turnover. This was attributed to the completion of debottlenecking of the PVC / VCM. Since the demand existed, the company was able to meet this domestic demand and thus improve its profitability. The increase in demand could be attributed to the fact that initially the utility of PVC was limited to pipes and fittings; but in the recent past its utility has broadened to include PVC foam panels and wall panels which have seen double digit growth. The cost of production, on the other hand, remained close to 78 percent, so the gross margin was also largely stable. But the escalation of other income and the fall in financial charges allowed the net margin to reach its peak at almost 14%. The exceptionally high income of over Rs 1 billion came mainly from an insurance claim.

At over 7%, revenue growth during CY19 was relatively subdued compared to that seen in the previous two years. However, the revenue growth occurred despite a 6% decline in domestic PVC volumes and a 4% decline in caustic product volumes. The general macroeconomic environment has also been difficult with inflationary pressures, rising interest rates and weak construction demand. The company gradually diversified into other PVC applications in order to reduce its dependence on the construction sector alone, which had experienced a slowdown due to the macroeconomic environment. On the other hand, while production costs fell slightly, keeping gross margin stagnant at 21%, other expenses and escalating finance charges due to rising interest rates brought the net margin down to 9.8% for the year.

After increasing for four consecutive years, albeit at varying rates, sales contracted 6.6% during the CY20. International prices in the PVC market plunged during the first half of CY20, due to eroding demand. The second half of the year was marked by some recovery with the resumption of commercial activities and the focus by countries on construction activities. A similar trend was also observed in the domestic market. On the cost side, production costs accounted for 69% of sales, allowing gross margin to peak at nearly 31%. Additional support was provided by other income, derived from income from financial assets; Despite the increase in financial expenses and taxation, the net result was recorded to a high of over 5 billion rupees, and the net margin at 16%.

Quarterly results and future outlook

Revenues more than doubled in the first quarter of CY21, reaching Rs 15.7 billion. The unprecedented growth was due to the same period last year with the Covid-19 pandemic; therefore, sales were lower than normal. In addition, the Chlor Alkali market declined due to a slowdown in textile exports; this in turn was the result of the increase in Covid cases in the United States and Europe. Another development during the first quarter of CY21 was the start of operations on the new PVC plant which increased the capacity to 295,000 MT per year. With significantly higher revenues year over year, coupled with lower production costs to 60% of lower income, finance charges and other expenses, the net margin jumped to over 26%.

The company expects PVC prices to remain high in the future due to tight supply and demand, given the focus on the construction sector by several countries.

© Copyright Business Recorder, 2021

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