Engro Polymer and Chemicals Limited

Engro Polymer and Chemicals Limited (PSX: ECPL) was established in 1997 under the Companies Ordinance, 1984. It was established as a joint venture between Engro Chemical, Asahi Glass Company and Mitsubishi Corporation. It started operations commercially two years later in 1999. The name was changed to Engro Polymer and Chemicals after Asahi Glass divested from the business in 2006.

Engro Polymer and Chemicals produces Caustic Soda, Sodium Hypochlorite, ethylene dichloride (EDC) and Vinyl Chloride Monomer (VCM) and Poly Vinyl Chloride (PVC).

Shareholding pattern

The company is majorly held by its associated companies, undertakings and related parties- about 67 percent. Of this, 83 percent is owned by Engro Corporation Limited which is the holding company of Engro Polymer and Chemicals. Close to 12 percent is owned by modarabas and mutual funds followed closely by the local general public which owns about 10 percent. The directors, CEO, their spouses and minor children hold a very negligible amount.

Historical operational performance

Engro Polymer has been on an upward growth trajectory since the last decade when it comes to its topline. Except for CY14 and CY15, the company has continuously experienced an incline in its net revenue. Profit margins have declined sharply in CY14 before recovering again until CY18 after which they slide down slightly.

The year 2015 was the second consecutive year of posting losses; however, comparatively the loss recorded was nearly halved. So while, operating and net margins have remained negative, they have improved year on year. The topline registered a negative growth; although in volume terms, sales were higher, but they could not be translated into higher net revenue due to low margins on PVC/Ethylene chain. Despite the lower revenue, gross margin was able to take off. Moreover, lower customs duty during the second half of the year, on the import of necessary raw material provided some support to the bottomline.

In CY16, topline picked up, but only marginally- at 2.7 percent year on year. This was due to better margins on Vinyl chains and higher sales volume for PVC. The domestic market for PVC grew by 17 percent and the company was able to capture 80 percent of the market. Thus prices and volume together allowed profit margins to improve drastically.  Moreover, caustic soda production, which was affected in the previous year due to plant repair and maintenance, regained momentum. Costs, on the other hand were curtailed despite higher net revenue. This was possible due to exploring new markets for procuring cheaper raw material. Thus the company came out of losses, posting a net profit of Rs 655 million for the year.

The domestic market for PVC grew by 11 percent while demand in the international market remained high. In the domestic market, Engro Polymer and Chemicals is the leader, however it also faces threat from dumped imported PVC material. The domestic market picking up allowed for Engro Polymer’s net revenue to increase year on year by 21 percent- the highest seen in the last six years. This was attributable to the price factor- price of PVC fared better relative to 2016, with it remaining higher for the most part of the year. On the profit margins side, some support was brought in by other income which had reduced substantially in the last two years; it increased on the back of income from bank deposits. The company also earned from disposal of operating assets however this is not a recurring income.  Thus net margin more than doubled from close to 3 percent in CY16 to 7 percent in CY17.

Engro Polymer has always faced the threat of dumped imports of PVC. Previously National Tariff Commission had imposed provisional anti-dumping duty on Asian countries. However, now the company was facing threat from dumping of PVC from North America and Europe. The company registered a year on year topline growth of 27 percent in CY18. This can be attributed to an expansion in the market size. Initially in Pakistan, PVC’s utility was limited to pipes and fittings. However, in the recent past, it has expanded to other ways of consumption as well. PVC foam board and wall panel experienced double digit growth. Distribution costs fell incredibly due to a onetime cost recorded in the preceding year while other income provided massive support to the bottomline, causing margins to improve significantly.

Topline growth at 7 percent was subdued in CY19 in comparison to previous two years. The economic slowdown brought with it a slowdown in the construction sector as well which in turn impacted the domestic PVC market. However, with PVC finding utilities in other sectors apart from pipes and fittings allowed it to perform relatively better. While most other elements remain unchanged, there was an escalation in the finance costs primarily related to long term and short term borrowings. Thus, gross margins remained flat while operating and net margins reduced.

Future outlook

The company foresees that the direction the domestic market of their products will take is dependent on policies and macroeconomic indicators. Moreover, with PVC finding new ways of consumption, there is hope for growth. However, the recent continuing pandemic which shows no signs of slowing down, brings with it immense uncertainty.