Earnings Report /
Pakistan

Engro Polymer & Chemicals Ltd: 1QCY21 review – Impressive rise in earnings on record PVC margins

  • Gross margins clocked in at 40% as PVC-Ethylene spreads averaged c.US$840/ton

  • Revenue clocked in at PKR15.6bn (up 122% yoy) as PVC prices increased 55%

  • Earnings momentum to continue as PVC-Ethylene spreads have averaged c.US$1070 in 2QCY21

Intermarket Securities
19 April 2021

Engro Polymer & Chemicals (EPCL) has posted a NPAT of PKR4.1bn (EPS: PKR4.56) for 1QCY21, a sharp jump from a NPAT of PKR0.17bn (EPS: PKR0.18) in SPLY, up 15% qoq and a massive 24x yoy. The massive yoy jump emanates from (i) unprecedented Core delta of c.US$840/ton in 1QCY21 compared with c.US$510/ton in SPLY, (ii) PVC prices increasing 55% yoy, (iii) boost in local demand for PVC on the back of rising construction activity. The company also announced an interim cash dividend of PKR0.8/sh.

Key takeaways:

  • Revenue clocked in at PKR15.6bn, up 26% qoq and 122% yoy. The surge in revenue is largely due to (i) higher PVC prices in 1Q (up 55% yoy) due to surge in global demand amid reopening of economies from lockdowns, and (ii) higher volumetric sales amid strong demand from the construction space.

  • Gross margins have risen by 22ppt yoy clocking in at 40% compared with 18% SPLY. The uptick can be attributed to the unusually high international core delta – averaging c.US$840/ton in 1Q, up 63% yoy – due to global demand and supply dynamics for the commodity. Raw material inventory from the previous quarter (Ethylene prices rose 14% qoq) should have also lifted gross margins.

  • Distribution and Admin expenses increased by 33% and 46% yoy, respectively, in line with the increase in sales; whereas other expenses are down 77% yoy, most likely due to lower exchange losses on foreign currency denominated lease liabilities.

  • Finance cost clocked in at PKR403mn, down 48% yoy, due to lower interest rates, whereas the effective tax rate for the quarter stood at 28%.

The result is impressive as the company has achieved gross margins of 40% on the back of significantly above average PVC-Ethylene spreads (Core delta) of c.US$840/ton. We expect EPCL to carry this momentum in 2QCY21 as PVC-Ethylene spreads have averaged c.US$1,070/ton in the period, and local PVC demand will be supported by the rise in construction activity. EPCL should also be able to increase its market share, as its new PVC capacity expansion comes online in 2QCY21. We are revisiting our estimates in light of the recent surge on international core delta.