Engro Polymer: doing better

Despite a lower top line, Engro Polymer & Chemicals Limited (PSX: EPCL) is having a much better year than last; for the nine months ended 2016, significantly lower costs have enhanced the company's gross profit and helped drag the bottom line into positive territory.

Engro operates in two main segments - PVC and caustic soda. PVC is used in construction and can be seen as an indicator of the construction industry, which has been booming all year. It accounts for 80 percent of the firms sales, but only 43 percent of the profits (as of 1QCY16). Engro Polymer holds the majority market share of 83 percent (as of FY15). PVC demand in Pakistan remained strong on account of construction activity and positive economic sentiment, which helped the company to record its highest ever sales during the period, says the half-yearly Director's Report.

The second major segment is caustic soda, which is used in the textile industry. Naturally, this segment has been slower, but it accounts for the bulk of the bottom line. However, in this market, Engro only has a 30 percent market share, and is engaged in a price war with Sitara Group, driving prices lower.

Notwithstanding a modest up tick in the first quarter of the year, PVC prices remained depressed in the period under review, which explains the lower top line figure. However, the price of ethylene - the main raw material in PVC manufacturing - dropped as well, due to improvement in supply side dynamics. This helped boost margins significantly. Similarly, the margins of the caustic soda segment have been pressed due to competitive pricing landscape, but raw material prices were stable.

As per the half-yearly Director's Report, Engro achieved its highest ever production of PVC and VCM (Vinyl Chloride Monomer) during half year 2016 despite undergoing a planned shutdown. So, the company continues to do well, but is suffering on account of low prices.

Finally, it would be remiss not to recognize the cost-cutting efforts; the lower other operating expenses and finance cost were instrumental in keeping the bottom line afloat.