Engro Polymer & Chemicals Limited (EPCL): CY24 analyst briefing takeaways

Engro Polymer & Chemicals Limited (EPCL) faced a tough year in CY24 as PVC prices dropped significantly from USD 948/ton in June 2024 to USD 798/ton by year-end, marking a record low in recent years.

This decline was largely attributed to the normalization of freight rates and supply chain constraints. The core delta stood at USD 337/ton by the end of CY24, directly impacting EPCL’s margins and financial performance.

Despite the challenges, domestic PVC demand increased by 8% as cheaper imports from Indonesia and China entered the market. However, EPCL’s targeted pricing strategies, market incentives, and confidence-building measures enabled the company to sustain its market position. Additionally, EPCL regained market share in caustic soda by onboarding new customers, maintaining an 80% supply to domestic Export-Oriented Units.

Revenue and profitability

EPCL reported a revenue of PKR 76Bn in CY24, a 7% decline from the PKR 81Bn reported in CY23. The company’s gross margin shrank significantly to 8% from 25% in the previous year due to higher gas costs.

Despite losses in the first three quarters, EPCL managed to end CY24 with a profit of PKR 610Mn, primarily due to tax reversals. This was a notable decline from the PKR 9.2Bn PAT reported in CY23.

Power supply and operational efficiency

As a process plant, EPCL requires stable and reliable power to maintain seamless operations. Rising gas prices and levies have made conventional energy sources less viable, prompting EPCL to explore alternative energy options. The company is investing in efficiency projects to optimize power consumption, ensuring that its machinery operates more efficiently, reducing overall energy costs, and enhancing operational reliability.

EPCL remains disconnected from the national grid due to concerns over voltage fluctuations, which could disrupt process plants. However, the company is exploring hydrogen as an energy source, particularly for hydrogen peroxide production, which could diversify its product portfolio and generate additional revenue. The hydrogen peroxide plant is expected to become operational by the end of Q1CY25.

Strategic investments and future outlook

EPCL is positioning itself for long-term growth despite current market challenges. The company has made strategic investments in major projects such as the PVC 300 project, the VCM plant, and the upcoming HTDC project. Once commissioned, these projects are expected to enhance efficiency and help EPCL navigate the downturn, positioning itself for future upswings.

Additionally, EPCL’s short-term borrowing increased during CY24 as part of the Zero Gap project, an initiative aimed at optimizing inventory levels to ensure continuous plant operations and minimize supply disruptions.

While the market remains challenging, EPCL’s focus on operational efficiency, diversification, and strategic investments provides a path forward. By leveraging alternative energy sources and optimizing its supply chain, the company aims to mitigate risks and sustain its position in the industry.