A trailblazer in plastics and chemicals, Engro Polymer and Chemicals Limited (PSX: EPCL) is the only fully integrated chlor-vinyl chemical complex in Pakistan. The market leader of PVC boasts a market capitalisation of over Rs 5.8 billion. Its flagship brand 'SABZ' has become synonymous with quality PVC in Pakistan.

The company was set up in 1997 under the name Engro Asahi Polymer and Chemical Ltd as a joint venture between Engro Chemical (50 percent), Asahi Glass Company (30 percent), and Mitsubishi Corporation (20 percent). Thus, a 100,000 MT capacity PVC plant came into commercial operation in 1999 at Port Qasim.

In 2006, Asahi Glass divested from the business and Engro Chemical acquired its shareholding. The company name was thus changed to Engro Polymer & Chemicals Limited. In 2007, the company enhanced the PVC capacity to 150,000 MT and set up EDC-VCM (Ethyl dichloride, vinyl chloride monomer) and chlor-alkali plants. In 2009, the company's product portfolio added caustic soda and sodium hypochlorite into the mix.

Stock / Pattern of Shareholding

For the first half of FY16, EPCL stock outperformed both the KSE100 and BR Chemicals Index. However, at the start of the new year, the stock tumbled and has since been underperforming. This might have to do with the company's full-year results that were largely disappointing. Throughout 2016, the stock has remained relatively low, once again dropping significantly after the half-year results.

Unlike most companies, the top brass does not hold the majority of ECPL shares. The parent company Engro holds the major 56 percent, while International Finance Corporation and Mitsubishi hold the remainder of the 81 percent. Twelve percent of the shares are available for trade to the public.

Prior performance

The past couple of years have not been kind to Engro Polymer, as top line has been on a downtrend while the bottom line has been showing losses. Still, the company had seen significant growth in earlier years; the CAGR for the past four years is 7.16 percent.

Engro Polymer's profitability largely hinges on a metric known as 'core delta,' which is a measure of the difference between PVC and ethylene price (ethylene being the main raw material). As per the company's Director's Report, the enormous blow that came in 2014 was due to declining PVC prices, imposition of duty on PVC pipes by Afghanistan, local imposition of duty on raw materials, and higher energy prices.

Last year, international PVC prices were in between $705 to $885 per MT. The decline has been due to falling crude oil and ethylene prices. Moreover, the market remains in a state of oversupply. However, although profits have been down, business is booming; in 2015, the company witnessed substantial volumetric growth in PVC sales, primarily driven by the construction boom and import substitution. The company's market share rose to 83 percent, as compared to 77 percent in 2014. So, the company is growing; it's just that it hasn't been getting the right price.

In the caustic soda segment, Engro holds a market share of 32 percent. However, this was a decline over 2014, as there is strict competition in this segment. Moreover, one of the main industries of this segment is textile, which has been suffering and so demand has been softer.

A segment analysis shows that the caustic soda segment accounts for only 20 percent of total sales (as of FY15). A very small portion comes from the power supply segment (which supplies surplus power generated from its power plants to Engro Fertilizers Limited), and the core business by far is PVC. However, as mentioned earlier, PVC margins are highly volatile and abysmally low, compared to the other two segments.

Moreover, one area where Engro Polymer is lacking is in international presence. As of FY15, exports accounted for just over 8 percent of total sales. The exports come from the PVC segment alone, as caustic soda and allied products are all consumed locally. The lack of exports of caustic soda is unfortunate, since this segment can help the firm's margins. In terms of PVC, Engro Polymer itself claims that India and China are the two main vinyl demand generators of the region, and this gives EPCL a "delivery time" advantage over other regional competitors. But for this claim, there's not much to show. Granted, there has been a significant increase in exports circa 2013, but this is still an area where Engro could do more.

Recent performance

For the half year ended 2016, Engro Polymer has begun turning things around. Although the top line fell by 10 percent year-on-year, lower costs helped to achieve a greater gross profit. This, coupled with a significantly lower finance cost, helped the company turn a profit of Rs 38 million, as opposed to the loss of Rs 435 million in the same period last year.

In the first quarter of 2016, Engro Polymer reported its highest ever quarterly sales. Unfortunately, it appears there was a slowdown in the second quarter of the year, thus reflecting a decline in top line. Nevertheless, profits were healthier than before.

Although prices of PVC still remain low, the price of ethylene - the main raw material in PVC manufacturing - also nose-dived at the start of the year. Global ethylene prices tumbled 17 percent in December 2015 to $978 per MT, from $1,177 in November. So, some pressure on the core delta was eased over the period, returning the company to a state of profitability.

Outlook

The domestic market for PVC is expected to continue its robust performance, while caustic soda is expected to remain stable, reads the last quarterly report. For now, Engro is focused on cutting its costs and making its books look good, ever since the bid by ATS Synthetic to acquire the company in November 2015.