Earnings Report /
Pakistan

Pakistan Chemicals – Earnings affected by lower volumes and primary margins

  • We expect IMS Chemicals Universe (LOTCHEM, EPCL and ICI) to post combined NPAT of c.PKR6.6bn up by 6%/12% QoQ/YoY

  • LOTCHEM’s primary margins have been relatively stable and remained upwards (+5% QoQ).

  • Sales volumes of IMS Chemical universe are likely to decline amid reduced textile exports & lower construction activity.

Intermarket Securities
11 October 2022

Pakistan Chemicals – Sep’22 result previews

We expect IMS Chemicals Universe (LOTCHEM, EPCL and ICI) to post combined NPAT of c.PKR6.6bn up by 6%/12% QoQ/YoY, mainly due to higher topline growth and in the absence of one off super tax impact on a sequential basis.

LOTCHEM’s primary margins have been relatively stable and remained upwards ( +5% QoQ). This will likely to safeguard its margins and profitability as compared to peer companies. 

Sales volumes of IMS Chemical universe are likely to decline amid reduced textile exports and lower construction activity. We are expecting a payout from EPCL and LOTCHEM to the tune of PKR2.25/PKR1.00, respectively.

Volatile primary margins offset removal of one-off super tax

We expect our Chemicals Universe (EPCL, LOTCHEM and ICI) to post combined net profits of c.PKR6.6bn, up c.6% QoQ. However, spreads remained volatile for most of the quarter, as both international PTA and PVC markets saw a jolt in demand and decrease in cost of feedstock (PX and Ethylene, respectively).

LOTCHEM: Declining textile exports to hinder PTA demand

LOTCHEM is expected to post NPAT of PKR2.6bn (EPS: PKR1.74) in 3QCY22, down 5% QoQ, but up c.3.0x YoY. International PTA-PX spreads in 3QCY22 trended upwards to c.US$150/ton (assuming 1 month lag) from US$144/ton in 2QCY22. Previously, PTA-PX spreads expanded because of an oversupply of PX led by new PX capacities in China, while there were delays in commissioning of new PTA capacities. Now, PTA capacities are coming online but normalized demand is yet to commence. However, the saving grace for margins is the contraction in PX prices, all thanks to lower oil prices. GMs are expected to clock in at 17.4% for 3QCY22, decreasing by 2.8ppt QoQ. This is due to the decline in volumetric sales and increased fuel and power cost. We expect a payout of PKR1.0/sh, as historically the company has a practice to payout in 3Q. That said, there is a possibility of a surprise high payout as the parent company plans on divesting from the Pakistani market. Last reported cash and equivalents are PKR11.7/sh.

EPCL: Delta unable to sustain elevated levels

EPCL is likely to post NPAT of PKR2.2bn (EPS: PKR2.40) for 3QCY22, down 2%/30% QoQ/YoY. PVC-Ethylene spreads peaked out at over US$1,200/ton in early November 2021 followed by a sharp downward correction to c.US$388/ton by mid-September 2022. Thus spreads averaged US$618/ton (assuming 1 month lag), down 21% QoQ. News circulating within the industry suggests that consumers are still hesitant to buy PVC at current prices as they anticipate further price reductions in upcoming days, owing to reduced demand and inventory pile-up. Also, slowdown within the construction industry will keep a check on EPCL's demand as pipes and fittings are seeing lackluster demand growth. We expect the company to pay an interim cash dividend of PKR2.25/sh.

ICI: Lower Polyester sales affect profitability

ICI is likely to post NPAT of PKR1.8bn (EPS: PKR20.16) for 1QFY23, up c.30% and down c.16% QoQ/YoY. Earnings have been majorly hindered by a slowdown in volumes due to a reduction in downstream demand. Along with super tax (4%), variable cost has seen a drastic increase. Gross margins are estimated to slightly increase by 0.24ppt QoQ. The company will witness lower profitability due to the partial divestment of Nutrico Morinaga which will be classified as an associate company rather than a subsidiary. This will coincide with reduced PSF demand owing to lower export sales within the textile industry. That said, the pharmaceutical and life sciences segment earnings will likely remain firm.