EPCL: margins leap backwards

Pity the investors who bought-long term stakes in EPCL. The stock plainly fails to take off, simply because the firms business profitability has failed to take off.
After a series of loss-making years between 2009 and 2011, the firm had posted marginal profits of Rs50 million in CY12. CY13 saw profits roar to Rs717 million--an envious year-on-year growth rate. But come CY14, and the company has managed to regress backwards.
The half-year ending June 2014 saw the firm positing a net profit of Rs123 million, down 71 percent over last year. The decline comes as a result of falling gross profit margins that improved significantly last year owing to healthy growth in both PVC and caustic segments.
The fall in EPCL's 1H profits comes despite a 21 percent quarter-on-quarter growth in second quarter's sales revenues. However, eroding margins-that slipped to 12 percent in 2Q from 14 percent in 1Q--clipped EPCL's top line quarterly gains. Gross margins had stood at 20 percent in CY13 compared to 17 and 12 percent in the preceding consecutive years.
In March this year, the company expected PVC margins to remain under pressure due to high feedstock prices and slow global demand, whereas domestic demand and prices of caustic soda were also expected to remain under pressure due to high inventory in the country.
Sales growth and windfalls aside, at the end of the day profitability matters.

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ENGRO POLYMER & CHEMICALS

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Rs (mn)                                1HCY14    YoY chg     2QCY14         YoY chg

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Net revenue                            11,903        -1%      6,536              6%

Cost of sales                        (10,337)         6%    (5,730)             12%

Gross profit                            1,565       -31%        806            -23%

Gross margin                              13%   down 570 bps     12%   down 470 bps

Distribution and marketing expenses     (666)         7%      (343)             21%

Administrative expenses                 (310)        14%      (171)             13%

Other operating expenses                (128)       -38%      (105)             13%

Other income                               62        57%         38            149%

Operating profit                          524       -57%        224            -58%

Finance costs                           (315)       -51%      (273)            -16%

Profit/(loss) after taxation              123       -71%       (25)

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Source: KSE notice