Engro Polymer and Chemicals Limited (EPCL)


Dear Clients,

Engro Polymer and Chemicals Limited (EPCL) held its analyst briefing today to discuss 4QCY20 results and the company outlook going forward. The key highlights from the briefing are as follows:

– The management accredited a 24% Y/Y surge in revenues during 4QCY20 to (i) improved PVC pricing at USD1,110/ton, (ii) PVC sales of 48k tons, and (iii) 19k tons of caustic soda sold.

– Commenting on the international PVC price trend and outlook, the company sees supply constraints to prevail well into 1QCY21 as a result of lower product availability in the region.

– On the volumetric side, PVC sales were recorded at 48k tons for the quarter, flattish on a sequential basis. Caustic soda sales were noted at 19k tons for the quarter. Cumulatively, the company sold 162k tons of PVC and 61k tons of caustic soda.

– Management eyes the PVC market to expand by around 7% next year where its upcoming expansion in PVC can help the company capture the downstream demand going forward.

– On the cost side, ethylene prices were seen in an uptrend to reside at USD954/ton for the quarter, up by 30% Q/Q and 26% Y/Y.

– Interestingly, the company realized PVC-Ethylene margins at USD800/ton, higher by USD42/ton compared to the regional margin of USD758/ton. We peg the same to aggressive sourcing of ethylene at low rates as well as better realized rates of PVC.

– The caustic market has recovered with better utilization rates of the textile sector. The healthy influx of orders with the textile sector is expected to lead towards better volumes going forward.

– In respect of GIDC re-measurement, the company recorded gains of PkR680mn. It remains a one-off after-tax gain of PkR0.5/sh. The company also reversed the GIDC provision amounting to PkR253mn for 3QCY20.

– Management updated on the PVC III project that is on track for scheduled COD by end of Q1CY21. VCM debottlenecking has experienced delays pushing COD to early Q2CY21.

– The company is has resumed work on its H2O2 venture targeting COD in 1HCY22. To recall, the CAPEX required for the project is eyed at USD30-35mn as per preliminary assessment.

– We have an Outperform stance on the stock trading at a forward P/E multiple of 6.0x. Our base case earnings incorporate PVC-Ethylene delta at USD450/ton vis-à-vis prevailing margins of USD783/ton. Given the volatility in margins, we may see an upside risk to earnings and TP. Our TP of PkR62/sh offers 30% upside from close.

KASB Research

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