1QCY11 LPS recorded at PKR0.10: Engro Polymer & Chemicals Limited (EPCL) posted a loss after tax (LAT) of PKR68mn (LPS: PKR0.10) during 1QFY11, recovering from a loss of PKR207mn (LPS: PKR0.31) during the same period last year. On a QoQ basis, bottom line witnessed deterioration, owing to 50bps contraction in gross margins, coupled with high distribution cost.
Top-line up 24% YoY; Gross margins up 850bps: Net sales registered an increase of 24% YoY to PKR3.9bn, as PVC sales were up 32% YoY during 1QCY11. Gross margins, though up 850bps YoY to 13% in 1QCY11, were 50bps lower than the previous quarter, despite 7% QoQ increase in PVC-Ethylene margin as a cumulative 45 day plant shutdown during the quarter led to higher VCM imports.
38% YoY ↑ in finance cost hurt bottom line: Interest cost witnessed a surge of 38% YoY to PKR382mn as the company had started expensing interest on backward integration related long-term loans since 4QCY10. Finance cost declined by 3% on QoQ basis, as majority of loan repayments occur during the months of May and November.
Investment perspective: At yesterday’s closing price of PKR11/share, the scrip trades at an expensive CY11E/CY12E P/E multiple of 9.8x/7.7x.
Top-line up 24% YoY; Gross margins up 850bps
Net sales registered an increase of 24% YoY to PKR3.9bn during 1QCY11 primarily attributable to 32% YoY in PVC sales to 29k tons. Moreover, PVC prices jumped 28% YoY. Gross margins jumped 850bps on YoY basis to 13% during the quarter mainly due to in house production of VCM. However, gross margins contracted by 50 bps on QoQ basis, despite 7% QoQ increase in PVC-Ethylene margins due to a cumulative 45 day plant shutdown during 1Q, and resulting higher VCM purchases. EPCL’s VCM plant faced a 15-day shutdown in Jan-11 for clean-up followed by a 30-day shutdown for complete cleanup and plant turnaround March. PVC-Ethylene margin recorded at USD530/ton during 1QCY11 as opposed to USD495/ton during 4QFY10.
38% YoY ↑ in finance cost hurt bottom line
Finance cost rose 38% YoY to PKR382mn as finance cost pertaining to VCM operations were being capitalized during 1QCY10. Post COD of VCM plant in Sept-10, P&L is witnessing the complete impact of interest cost related to PKR13.5bn debt acquired to fund the expansion & backward integration. However, on QoQ basis, finance cost declined by 3% YoY as majority of the loans repayments occur during the months of May and November.
Investment perspective
With plant shutdowns a frequent and recurring factor, stable operations of the VCM plant remains a key risk for the company, where any disruptions will hamper margins and earning capacity as PVC-Ethylene margins are 4x of PVC-VCM margins. The scrip currently trades at a marginal 9% discount to our PT and rich CY11/12E PER of 9.8x/7.7x.
Pakistan agrees with IMF on 14% inflation, 2% power hike in budget
Pakistan and the International Monetary Fund (IMF) have agreed to set the target of inflation at 14% in the upcoming budget. Pakistan has also assured the IMF that power tariff would be increased by 2% from June 1. The tax-to-GDP ratio has been set at 8.9% while the GDP target would be PKR21tn. Meanwhile, the government has decided to remove subsidy on petroleum and electricity in the Budget 2011-12.
Expansion of oil refineries: Planning Commission seeks end to deemed duty
Planning Commission has recommended removal of deemed duty meant for expansion of oil refineries. Initially government was collecting deemed duty at the rate of 10%/ litre of oil which was later revised downward to 7.5%.
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