Karachi, August 11, 2023 (PPI-OT): EPCL: Analyst Briefing Takeaway

Engro Polymer and Chemical Limited (EPCL) conducted its analyst briefing today to brief investors on its 2QCY23 results and future outlook. Here are the key highlights from the briefing: To recall, EPCL recorded earnings of PkR1.5bn (EPS: PkR1.39) in 2QCY23, marking a 33%YoY decline compared to PkR2.3bn (EPS: PkR2.45) in SPLY. The drop in earnings was primarily attributed to an annual decrease in core delta margins and huge taxation charges.

PVC sales volumes saw a 6%QoQ decline, clocking in at 49K tons vs the previous quarter's 52K tons. This reduction was attributed to a slowdown in construction activities. On the other hand, caustic soda (chor alkali) sales experienced significant growth, rising by 57%QoQ to 22K tons from 14K tons in the previous quarter. However, the increase in chor alkali sales has a limited impact on the bottom line, as PVC sales contribute to the majority of earnings (~80-90%).

Financially, revenues for 1HCY23 posted an 18%YoY decline, primarily due to falling PVC prices in the international market. Core delta margins also decreased to ~US$400-450/ton during the first half of the year, compared to ~US$750/ton in SPLY. Notably, the super tax charge had the most significant impact on the quarterly bottom line, amounting to ~PkR1.2bn (PkR1.3/sh).

Looking ahead, management anticipates elevated ethylene prices due to elevated crude oil prices in the international market. In terms of demand, PVC sales are expected to settle at ~210-215K tons in CY23, compared to 241K tons in the prior year. The company's primary focus for sales will be on the local market. Regarding gas rates, management stated that SSGC has imposed a blended gas rate (25% LNG and 75% indigenous gas price) for Aug-Sept’23. This development is expected to increase costs and negatively impact gross margins in the upcoming quarter.

Management reported that LC restrictions have been mostly lifted, and payments to foreign suppliers for ongoing projects (High Temperature Direct Chlorination and Hydrogen Peroxide) were honoured around Aug’23. These projects are progressing well, with mechanical work expected to conclude by the end of the current calendar year. While the initial impact of the HPO project on the bottom line is expected to be minimal in the first half, its influence on earnings is projected to become more significant in the second half of the subsequent calendar year.