Engro Polymer and Chemicals Limited (PSX: EPCL) was set up under the repealed Companies Ordinance, 1984 (now Companies Act, 2017), in 1997. It is a subsidiary of Engro Corporation Limited. The latter, in turn, is a subsidiary of Dawood Hercules Corporation Limited.
EPCL is essentially in the business of manufacturing, marketing, and selling Poly Vinyl Chloride (PVC), Vinyl Chloride Monomer (VCM), caustic soda, and other chemicals. The company also provides surplus power to Engro Fertilizers Limited.
As at December 31, 2020, over 67 percent shares of the company are held by the associated companies, undertakings and related parties. Of this, 56 percent shares are held by Engro Corporation Limited. The local general public owns 13 percent shares, followed by over 11 percent in mutual funds. The directors, CEO, their spouses and minor children hold a negligible share. The remaining roughly 9 percent shares are with the rest of the shareholder categories.
Historical operational performance
Engro Polymer and Chemicals has mostly seen a growing topline over the years, with the exception of CY14 and CY15, and then more recently in CY20. Profit margins, on the other hand, rose after CY14, decreased once in CY19 and increased again in CY20.
During CY17, revenue grew by over 21 percent, crossing Rs27 billion. This was due to increasing demand for the vinyl segment; prices and demand for PVC increased. The domestic market, itself, for PVC grew by 11 percent. With the rise in revenue, cost of production made a smaller share of revenue at 78 percent, taking gross margins to near 22 percent. The effect of this was also seen in net margin that grew to 7.4 percent. Some additional income was brought in through income from bank deposits; other income had been unusually low for the previous two years. Moreover, finance expense also made a smaller share in revenue, that also contributed to better margins for the period. The company posted staggeringly high bottomline at over Rs2 billion.
The company maintained its growth momentum as revenue grew by 27 percent during CY18, crossing Rs35 billion in sales. This was attributed to the completion of de-bottlenecking of PVC/VCM. Given that demand existed, the company was able to fulfil this domestic demand and thus improving profitability. The rise 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 had expanded to include PVC foam board and wall panel that witnessed double digit growth. Cost of production, on the other hand remained close to 78 percent, therefore gross margin was also largely flat. But the escalation in other income and decline in finance expense allowed net margin to reach its peak at nearly 14 percent. The unusually high income of over Rs 1 billion primarily came from an insurance claim.
At over 7 percent, growth in revenue in CY19 was relatively subdued compared to that seen in the preceding two years. However, revenue growth came despite a 6 percent decline in domestic PVC volumes and 4 percent in caustic volumes. The general macroeconomic environment was also challenging with inflationary pressures, rising interest rates and low construction demand. The company has been gradually diversifying towards other applications of PVC in order to reduce reliance on the construction sector solely, that had witnessed a slow down due to the macroeconomic environment. On the other hand, while cost of production inclined marginally, keeping gross margin stagnant at 21 percent, other expenses and escalation in finance expense owing to higher interest rates brought net margin down to 9.8 percent for the year.
After growing for four consecutive years, albeit at varying rates, revenue contracted in CY20 by 6.6 percent. International prices in the PVC market nosedived in the first half of CY20, due to demand erosion. The second half saw some recovery as business activities resumed and countries emphasized on construction activities. Similar trend was also seen in the domestic market. On the costs side, production cost made 69 percent of revenue, allowing gross margin to peak at almost 31 percent. Further support was brought in through other income, sourced from income from financial assets; despite the rise in finance expense and taxation, bottomline was recorded at the highest of over Rs5 billion, and net margin at 16 percent.
Quarterly results and future outlook
Revenue 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 seeing the Covid-19 pandemic; therefore, sales were lower than usual. Moreover, the Chlor Alkali market declined due to a slow down in textile exports; this in turn was a result of rising Covid cases in US and Europe. Another development in the first quarter of CY21 was the commencement of operations on the new PVC plant that took capacity to 295,000 MT annually. With significantly higher revenue year on year, coupled with a drop in cost of production to 60 percent of revenue, lower finance expense, and other expense, net margin jumped to over 26 percent.
The company expects PVC prices to remain high in the future due to tight supply and high demand, given the focus on construction sector by several countries.