ECPL bottom line in red but good days ahead

Engro Polymers CY09 net profits plunged by 155 percent as higher depreciation charges and high spot VCM prices squeezed its gross margins while soaring financial costs also lopped its bottom-line earnings.
Its net revenue rose by a staggering 48 percent over last year, driven mainly by higher sales volumes of PVC. The company sold 20 percent more PVC in domestic market during CY09 than the preceding year. The top line was also aided by 10,000 tons of PVC exports during the period, which were negligible in the preceding period.
The company has also successfully started marketing caustic soda in the domestic market by virtually capturing all the southern market but its share in revenues remains very low in comparison to that of PVC.
International PVC prices joint hands with the higher sales volume to make the top line look greener. The prices, which dipped to $650-700 per ton in the end of previous year, were around $900-950 per ton levels in the last quarter of CY09. This, coupled with sizeable rupee depreciation against dollar meant even higher revenues in rupee terms.
On the other hand, capitalization of PVC plant and backward integration capitalization spurred the depreciation charges. This coupled with higher VCM spot prices soared the companys cost of sales by 55 percent to over Rs10 billion - squeezing the gross margins further to 10 percent from 14 percent in CY08.
After expanding the capacity by 50,000 tons/annum, the company could not operate the plant at optimal efficiency, causing the surge in depreciation charges. The underutilization is mainly attributed to declining demand both in international and domestic market, owing to slowdown in construction activity and weak economic outlook.
What made matters worse were the rising financial charges which surged 18 times due to higher financial charges on capitalization of loan taken for the new PVC plant.
Although the company did not announce any dividend, it issued 27.5 percent right shares at the par value. The company envisages to restructure its balance sheet by marginally lowering its debt equity ratio from 65- 35 to 62- 38, to reduce its short term debt and meet some project payments from the Rs1.4 billion to be raised from right issue.
The company completed its PVC expansion unit and its backward integration to produce EDC, VCM, caustic soda and associated chemicals. All of these plants are in commercial production but VCM. The funds raised from right issue will also be deployed in higher project capital cost and delaying cost in VCM plant startup.
With more capturing of caustic soda market and commencement of VCM plant - as VCM is cited as one of the reason for high cost of production - the companys margins are likely to improve in this year. Moreover, with global and domestic economic recovery, the construction activities are likely to pick that will help the company to optimally utilize its expanded capacity. However, international prices that were high in the last quarter are likely to fall in coming days to eat some of the benefits.

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EPCL P&L

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Rs (mn)               CY09    CY08  (+/-)%

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Sales               11,633   7,868     48%

COGS                10,419   6,736     55%

Gross profit         1,214   1,133      7%

Gross Margin           10%     14%    -27%

Other Income           116     125     -7%

Operating profit       123     649    -81%

Finance cost           606      34   1708%

PBT                   -197     456   -143%

Taxation                 3     105    -97%

PAT                   -194     350   -155%

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EPS(Rs)              -0.37    0.68

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Source: Company Results

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