Dear Clients,

Engro Polymer and Chemicals Limited (EPCL) held its analyst briefing today to discuss 1QCY21 results and the company outlook going forward. The key highlights from the briefing are as follows:

– The management accredited a 122% Y/Y surge in revenues during 1QCY21 to (i) improved PVC pricing at USD1,320/ton, (ii) PVC sales of 53k tons, and (iii) 19k tons of caustic soda sold.

– Commenting on the international PVC price trend and outlook, the company sees supply constraints from the US storm affecting PVC supplies. Additional supply pressure is expected from large plant turnarounds scheduled ahead. This is likely to keep PVC prices elevated well into 1QCY21 as a result of lower product availability in the region.

– On the volumetric side, PVC sales were recorded at 53k tons for the quarter, of which 2k tons were exported. On a sequential basis, volumes were up by 8% Q/Q. Caustic soda sales were noted at 19k tons for the quarter flattish on a sequential basis influenced by a seasonal slowdown in downstream market demand.

– Management eyes the PVC market to depict recovery towards pre-Covid market size in CY21. Export avenues are likely to be exploited in wake of the handsome prevailing delta.

– On the cost side, ethylene prices were seen in an uptrend to reside at USD962/ton for the quarter, up by 14% Q/Q and 41% Y/Y.

– Interestingly, the company realized PVC-Ethylene margins at ~USD1,000/ton, higher by USD160/ton compared to the regional margin of USD840/ton. We peg the same to lower imported PVC availability leading to better-realized rates of PVC. However, a sequential drop in gross margins for the company can be attributed to the presence of GIDC impact (~PkR680mn) in the last quarter as well as sales phasing.

– The company is tapping the end consumer with Think PVC outlets. So far, EPCL has set up 4 outlets to spread focus on the use of PVC as the go-to material for varied applications.

– The company is on track for its H2O2 venture targeting COD in 1HCY22. To recall, the CAPEX required for the project is eyed at USD30-35mn as per preliminary assessment for plant size of 28k tons.

– Consideration and setting up the LABSA facility under EPCL remains on hold for now influenced by COVID-19 led disruptions.

– While our earnings estimates were aggressive, we see positives from the positive delta banked by the company to be a norm in the 1HCY21 and well into 2HCY21. That said, our earnings are likely to see upward revision from our base case estimate on margins of USD450/ton vis-à-vis prevailing margins north of USD1,050/ton. We have an Outperform stance on the stock trading at a forward P/E multiple of 7.0x. Our TP of PkR67/sh offers an 18% upside from close.

Regards,
KASB Research