EPCL's primary commodity for sale is PVC for which it has a monopoly in Pakistan. While locally it is used to manufacture pipes mostly, it has a range of uses including artificial leather, shoes, garden hose, windows, and doors. Demand is influenced by the level of construction in the country.
Caustic soda is primarily used in the textile sector for dyeing and mercerizing purposes. It is also used for water purification and Free Fatty Acids (FFA) removal from edible oil and ghee. Sodium hypochlorite is used for water treatment, detergents, and bleaching. Hydrochloric acid is used for pickling, oil well acidizing, water treatment, cleaning, food processing and medicine and hydrogen is used for the manufacture of terphthalic acid.
Expansion plans
EPCL has expansion plans of Rs10 billion in the pipeline to increase capacity. The company intends to increase PVC capacity by 100,000 tons and conduct VCM plant de-bottlenecking of 50,000 tons per annum. Of the amount required, Rs5.4 billion have already been raised from issue of rights shares. Furthermore, International Finance Corporation announced financing of $35 million (approximately Rs4.9 billion) for EPCL's expansion plans last year.
The company is also planning to enter the hydrogen peroxide segment. This was enabling the company to capitalise on available hydrogen, which is derived as a by-product of its existing process.
Financial overview
While recent years have been too kind to EPCL, it has seen its share of difficult years. Slowdown in major economies of Europe, China, and India put PVC margins under pressure in 2012 due low international demand. Unrest in Middle East fueled uncertainty of crude oil supply leading to higher ethylene prices. High raw material cost and low international price of PVC put pressure on margins.
The company turned around in 2013 with the company posting profits before losses of 2014 and 2015. Unanticipated drops in margin, lower sales of caustic soda and increase in price of natural gas led to losses of Rs1 billion and Rs649 million respectively in 2014 and 2015.
Sales and profits have been on an upward trajectory since then. The last financial cycle saw the highest turnover and profits in EPCL's history with the bottom line increasing by triple digits. This was led by a growth in the top line as sales increased by 21 percent, in part due to higher prices.
Hurricane Harvey closed down plants in Texas, the petrochemical hub of the United States, in 2017. This caused a decrease in global PVC supply, which resulted in higher prices. Furthermore, de-bottlenecking increased production by 17,000 tons. Together, higher prices and higher volumes drove the top line. While EPCL was able to capitalise on higher international PVC prices, good inventory management and regional supply of ethylene allowed its PVC and ethylene spread to increase resulting in a triple digit increase in the bottom line in 2017.
9MCY18 Performance
As good as CY17 was, CY18 promises to be better. Top line was led by slightly higher prices as compared to same period last year. Overall, demand in the domestic market continued to grow and the company was able to supply non-conventional downstream segments as well, leading to volumetric growth. Sales revenue was also supported by a healthy caustic soda market.
On the operational front, EPCL produced the highest ever amount of PVC over a nine month period. This was possible through successful de-bottlenecking that increased production from 178,000 tons to 195,000.
Despite an increase in raw material prices, the gross profit margin increased. This could be because of the company's focus on efficiency to ensure optimum raw material consumption. Similarly, despite an increase in sales, the distribution costs decreased marginally indicating efficiency.
Part of other income was the income recognised against insurance claim of Rs388 million pertaining to business interruption during 2017. The claim was because of non-supply of ethylene by the company's primary provider. Other income also stems from income on bank deposits and short term investments.
Future outlook
While international vinyl dynamics are a function of regional demand and supply trends and thus cannot be depended upon, the domestic PVC and caustic soda markets are expected to remain stable.
Given the emphasis of the current government on increasing exports, textile sector's demand for caustic soda is likely to increase. Similarly, if PTI's housing project goes through, demand for pipes and hence PVC will rise. In the past, EPCL has projected PVC demand to rise in double digits every year in the medium term.
Since EPCL is dependent on imports for raw material, devaluation of currency is likely to impact its financials. As yet however, it has posted strong results going from strength to strength.
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Pattern of shareholding (as at December 31, 2017)
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Category No %
of shares
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Directors, CEO, Spouse, and minor children 7 0%
Associated companies, undertaking and related p 441,800,827 67%
Banks, DFIs, Non-Banking Financial Institutions 706,600 1%
Insurance companies 23,864,000 4%
Modarabads and Mutual Funds 76,315,800 12%
General public-local 82,480,581 12%
Others 31,941,573 5%
Shareholders holding 5% or more
Engro Corporation Limited 372,809,989 56%
Mitsubishi Corporation 1,040,840 10%
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Source: Company accounts
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Engro Polymer & Chemicals Limited
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Rs. (mn) 9MCY18 9MCY17 YoY
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Net revenue 25,524 20,390 25%
Cost of sales -18,724 -15,327 22%
Gross profit 6,800 5,061 34%
Distribution and marketing expenses -995 -1,002 -1%
Administrative expenses -536 -386 39%
Other operating expenses -470 -269 75%
Other income 620 61 916%
Operating profit 5,419 3,466 56%
Finance costs -452 -588 -23%
Profit before taxation 4,968 2,877 73%
Taxation -1,102 -930 18%
Profit for the year 3,865 1,947 99%
Earnings per share-basic and diluted 5.03 2.70 86%
Gross profit margin 27% 25% 7%
Net profit margin 15% 10% 59%
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Source: Company accounts