Karachi, August 22, 2022 (PPI-OT): EPCL: Fundamentals turn grey

Engro Polymer and Chemicals Limited has provided total return of ~44% since the start of CY22, amid high PVC-Ethylene core delta and attractive payout. However, we are downgrading our rating for EPCL to HOLD due to steep decline in PVC core delta, upcoming hike in gas tariff and general slowdown in economy.

PVC prices reached US$630/ton in Apr’20 attributable to COVID related lockdown and supply chain restrictions. However, PVC prices started to recover in 2HCY20, amid supply side issues and earlier than expected easing of lockdown in Asian region. PVC prices touched high of US$1,850/ton in Oct’21 mainly attributable to tight supply. However, just like other commodities, PVC prices also started to decline and currently stands at US$1,000/ton, amid monetary tightening in economies across the globe and pileup of inventories.

Upcoming hike in gas tariff will further erode company’s earnings as company follows import-parity based pricing strategy and will be unable to pass on increase in gas cost.

We have HOLD rating on the stock with TP of PkR67.6/sh, depicting total return of ~17%. Our revised earnings of PkR14.97/8.48 per share for CY22F/23F, implying P/E of 4.4x/7.8x.