Engro Polymer and Chemical Limited (EPCL)

Engro Polymer and Chemical Limited (EPCL) announced its 1Q2021 results reporting profitability at PkR4.1bn (EPS of PkR4.56/sh), up by 25x Y/Y and 13% Q/Q. This is in line with street estimates and below our expectation of PkR5.26/sh.

– The result deviates from our estimates largely on account of the cost of sales reported. We believe the company procured fresher inventories of ethylene at higher rates in a bid to restock. This has likely resulted in a lower-than-expected primary delta realized. That said, we expect the upbeat profitability to remain in limelight.

– Along with the result, EPCL announced a cash dividend of PkR0.8/sh.

– During 1Q2021, EPCL reported an increase in revenues to PkR15.7bn, up by 2.2x Y/Y as a function of healthier PVC prices. On a sequential basis, the company saw a 26% Q/Q rise in revenues. We believe this was further supported with better PVC sales compared to trailing 3 quarters.

– On the cost front, a 41% Y/Y rise in raw material ethylene rates leads COGS to PkR9.4bn up by 44% Q/Q and 63% Y/Y during 1QCY21. We believe the company has utilized ethylene procured at higher rates that explain the phenomena as well as increased usage from commissioning of PVC line III.

– Resultantly, gross profits surged by 5x Y/Y and 7% Q/Q to PkR6.2bn during the quarter translating to gross margins of 40%, up by 22.1pps Y/Y.

– Administrative expenses stood at PkR166mn down by 8% Q/Q. Distribution expenses for the company rose 73% Q/Q and just 3% Y/Y to PkR74mn. Moreover, other income was noted at PkR282mn.

– Low interest rates brought tamer finance costs that stood at PkR403mn lower by 48% Y/Y.

– Overall the company saw its strongest bottom-line during the quarter at PkR4.2bn, up by 25x Y/Y translating to EPS of PkR4.56/sh.

– Going forward, we see positives emanating from upcoming PVC line expansion to deliver a robust bottom-line for the company despite as well as healthy primary delta proving beneficial for the bottom-line. We see multiple positives from the expansion of the company into H2O2 line and improved economic activity along with low interest rates. We have an Outperform stance on the scrip with TP of PkR67/sh.

Regards,
KASB Research

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