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Engro Polymer & Chemicals Limited (PSX: EPCL) was incorporated in Pakistan in 1997. EPCL is a subsidiary of Engro Corporation Limited which is the subsidiary of Dawood Hercules Corporation Limited. The company is engaged in the manufacturing and sale of Poly Vinyl Chloride (PVC), Vinyl Chloride Monomer (VCM), Caustic Soda and other related chemicals. The company also supplies excess power produced from its power plants to Engro Fertilizers Limited.

Pattern of Shareholding

As of December 31, 2022, EPCL has a total of 908.923 million shares outstanding which are held by over 36000 shareholders. Associated companies, undertakings and related parties are the largest shareholders of EPCL with a stake of 67.31 percent in the company. This category is dominated by Engro Corporation Limited holding 56.2 percent shares followed by Mitsubishi Corporation holding 11 percent shares. Local general public accounts for 27.8 percent of the outstanding shares of EPCL. The remaining shares are held by other categories of shareholders, each having less than 1 percent shares.

Historical Performance (2018-22)

Except for a marginal downtick in 2020, the topline of EPCL has been posting growth in all the years under consideration. Conversely, the bottomline slid in 2019 and 2022 despite growth in net sales in those years. The margins of the company which inched down in 2020, started picking up to reach their optimum level in 2021, however, they tumbled in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, EPCL’s topline grew by 7 percent year-on-year which came on the back of 6 percent drop in the sales volume of PVC and 4 percent in Caustic soda to clock in at 191 KT and 83 KT respectively. In 2019, the company started commercial operations of its caustic flaker plant and also announced two other significant projects i.e. LABSA and HTDC. The marginal topline growth was the result of slowdown in construction activity in the country due to tamed economic growth. Moreover, there was excessive dumping of PVC from various geographical locations despite the imposition of anti-dumping duty. The demand of Chlor-Alkali dropped after the implementation of sales tax on local sales, CNIC requirement as well as gas curtailment. The cost of sales ticked up by 7 percent year-on-year in 2019 owing to significant increase in gas prices coupled with Pak Rupee deprecation which drove up the prices of imported raw materials, however favorable international vinyl market somehow diluted the impact of a weaker local currency. Gross profit grew by 4 percent year-on-year in 2019, however, GP margin slightly dwindled from 21.6 percent in 2018 to 21.4 percent in 2019. Distribution expense grew by 2 percent year-on-year while administrative expense climbed down by 2 percent year-on-year in 2019. 47 percent year-on-year hike in other expense was the result of exorbitant exchange loss incurred on the translation of foreign currency denominated lease liabilities during 2019. Other income, on the other hand, shrank by 28 percent year-on-year as insurance claims were made in 2019 unlike 2018. This translated into a 3 percent year-on-year drop in operating profit with OP margin sinking to 18 percent in 2019 from 20 percent in 2018. Finance cost multiplied by 195 percent year-on-year in 2019 which was the effect of high discount rates as well as higher short-term and long-term borrowings obtained during the year. Net profit slid by 25 percent year-on-year in 2019 to clock in at Rs.3.70 million. NP margin nosedived from 13.9 percent in 2018 to 9.8 percent in 2019. EPS dropped from Rs.6.21 in 2018 to Rs.4.07 in 2019.

In 2020, the outbreak of COVID-19 brought the economic activities to a halt. Due to lockdowns imposed across the world, there was severe supply chain disruptions coupled with dampened demand. EPCL’s topline sank by 7 percent year-on-year on the back of 15 percent decline in PVC volume and 27 percent decline in Caustic soda volume to clock in at 163 KT and 61 KT respectively. Historic high PVC prices during the 2HCY20 due to supply chain constraints enabled the company to somewhat dilute the impact of a massive volumetric slump. Cost of sales dropped by 18 percent year-on-year due to lower production on account of tamed demand and lockdowns. This drove the gross profit up by 35 percent year-on-year in 2020 with GP margin climbing up to 31 percent. Distribution expense dropped by 38 percent year-on-year in 2020 on account of curtailed sales promotion activities, lesser payroll expense due to lower volumes sold and significantly lower training, travel and conveyance expense incurred in 2020. Administrative expense also nosedived by 3 percent year-on-year despite human resource headcount rising from 508 in 2019 to 563 in 2020. Other expense also posted a decline of 31 percent year-on-year due to lesser exchange loss incurred on the translation of lease liabilities in 2020. Other income grew by 22 percent year-on-year in 2020 due to higher income from financial assets. Despite 7 percent weaker topline, cost control measures enabled EPCL to drive its operating profit up by 52 percent year-on-year in 2020 with OP margin jumping up to 29.5 percent. Finance cost grew by 23 percent year-on-year in 2020 due to higher long-term borrowings as the company obtained Islamic Long-term financing facility of the SBP worth Rs.2000 million to finance its PVC expansion project coupled with the issuance of Rs.3000 million preference shares for financing the similar project. Net profit grew by 54 percent year-on-year in 2020 to clock in at Rs.5.712 million which was the then highest ever net profit earned by the company. NP margin rose to 16.2 percent in 2020 while EPS grew to Rs.6.21.

2021 brought about tremendous 98 percent year-on-year growth in EPCL’s topline. The PVC price rally continued in 2021 which caused demand destruction in the local market despite the construction stimulus package in place which was announced in 2020. EPCL took advantage of the situation and sold its product at competitive prices. Besides, EPCL’s export sales to the US, European, Middle East and Afghanistan market commendably grew in 2021. This resulted in a 28 percent year-on-year rise in PVC volume and 12 percent year-on-year rise in caustic soda volume to clock in at 208 KT and 68 KT respectively. The upward trajectory of commodity prices particularly EDC and Ethylene prices on the back of higher crude oil prices pushed up the cost of EPCL’s raw materials. This was reflected in an 89 percent year-on-year rise in the cost of sales in 2021, however, robust volume and higher prices translated into a 120 percent year-on-year growth in gross profit in 2021 with GP margin soaring to 34.3 percent. 55 percent higher distribution charges in 2021 was the result of high payroll expense coupled with increased dealer commission as well training, travel and conveyance charges. Administrative expense also grew by 24 percent year-on-year in 2021 mainly on account of higher payroll expense and purchased services. The number of employees also grew from 563 in 2020 to 598 in 2021 to make up for improved capacity utilization of the plants. 182 percent higher other expense was the result of greater provisioning for WPPF and WWF as well as higher foreign exchange loss and a generous increase in donations. Other income grew by 20 percent year-on-year in 2021 due to higher income from short-term investments. Operating profit multiplied by 111 percent year-on-year in 2021 with OP margin touching 31.3 percent. Finance cost slipped by 13 percent year-on-year in 2021 due to monetary easing. During the year, the company also availed TERF through Musharaka agreement to finance its capital expenditure and also availed exports refinance facility. Net profit grew by 164 percent year-on-year in 2021 to clock in at Rs.15.10 million, setting a new benchmark. NP margin ticked up to 21.6 percent in 2021 while EPS also jumped to Rs. 12.49.

In 2022, EPCL’s topline grew by a relatively lower magnitude of 17 percent year-on-year. While the sales volume of PVC grew by 11 percent year-on-year to clock in at 231 KT. The company not only met the local demand in 2022 but also exported surplus PVC products worth USD 21 million, however, lower PVC prices in the 2HCY22 due to global recession stimulated by Russia-Ukraine crisis, slowdown in China and higher than expected monsoon season in India diluted the sales revenue from PVC. Sales volume of caustic soda tumbled by 20 percent year-on-year as the local textile industry was grappling against supply chain constraints on the back of import restrictions due to dwindling foreign exchange reserves. Cost of sales grew by 28 percent year-on-year in 2022 due to inflationary pressure as well as unavailability of gas which pushed the company to shift its operations to expensive RNLG to ensure uninterrupted supply. Gross profit sank by 3 percent year-on-year in 2022 with GP margin dropping to 28.5 percent. Distribution expense grew by 51 percent year-on-year in 2022 particularly on the back of higher payroll expense, dealer commission and sales promotion. Administrative expense also increased by 47 percent year-on-year due to higher payroll expense on account of inflationary pressure as there was a marginal increase of 3 employees during the year. Higher rent, rates and taxes, amortization as well as training and travel charges also contributed towards higher administrative expense incurred during the year. Other expense also grew by 47 percent year-on-year in 2022 due to exorbitant exchange loss incurred on foreign currency denominated lease liabilities. Other income grew by 10 percent year-on-year in 2022 on account of higher profit on bank accounts and income from financial assets at amortized cost. Squeezed gross profit and higher operating expenses culminated into a 10 percent year-on-year drop in operating profit with OP margin falling to 24 percent in 2022. Finance cost grew by 62 percent year-on-year in 2022 on account of excessive monetary tightening and higher long-term borrowings. The bottomline shrank by 22 percent year-on-year to clock in at Rs.11.710 million with an NP margin of 14.3 percent. EPS also ticked down to Rs.9.69 in 2022.

Recent Performance (1QCY23)

EPCL’s topline couldn’t sustain economic and political headwinds and dropped by 22 percent year-on-year in 1QCY23. The topline dip came on the back of 26 percent lesser PVC volumes and 38 percent lesser caustic soda volume in 1QCY23 when compared to the same period of last year. Tamed demand was the result of the underperformance of the major customers of EPCL suffered idle capacity due to unavailability of raw materials on the back of import restrictions, unprecedented level of discount rates and energy prices. Squeezed volumes were combined with low international prices of PVC due to geopolitical turbulence, recessionary pressure and volatile energy prices. The cost of sales dropped by only 7 percent year-on-year in 1QCY23 due to high indigenous inflation. This resulted in a 53 percent year-on-year drop in gross profit with GP margin drastically falling from 33 percent in 1QCY22 to 20 percent in 1QCY23. Distribution expense shrank by 3 percent year-on-year due to lower sales volume. Conversely, administrative expense didn’t show any respite and grew by 20 percent year-on-year in 1QCY23. Other expense dwindled by 10 percent year-on-year in 1QCY23 while other income grew by a marginal 3 percent during the period. Operating profit posted a plunge of 59 percent year-on-year in 1QCY23 with OP margin plummeting from 29.7 percent in 1QCY22 to 15.8 percent in 1QCY23. Finance cost multiplied by 92 percent year-on-year in 1QCY23 due to high discount rate. Net profit slipped by 75 percent year-on-year to clock in at Rs.1.18 million in 1QCY23 with an NP margin of 6.6 percent versus 20.4 percent during the same period last year. EPS also fell from Rs.3.91 in 1QCY22 to Rs.0.98 in 1QCY23.

Future Outlook

International prices of PVC are contingent upon the settlement of geopolitical and recessionary tensions as well as rebound of Chinese economy. Hence, there will be a pressure on the margins in the short-term. Locally, the demand of PVC and caustic soda may improve following the riddance of the import restrictions and improved position of foreign exchange reserves. However, in the near term, lower prices of PVC and caustic soda may override the demand recovery, resulting in a squeezed profitability.

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