What is behind EPCL’s rough quarter?

Engro Polymer & Chemicals Ltd. (EPCL), one of the leading chemical companies in Pakistan, recently announced its financial results for the second quarter of CY24 and the figures reveal a challenging period.

The company reported a Loss After Tax (LAT) of PKR 688 million, translating into an LPS of PKR 0.76.

This marks a significant downturn compared to the same quarter last year, where EPCL had posted a Profit After Tax (PAT) of PKR 1,562 million, with EPS at PKR 1.39.

Factors behind the decline

Several key factors contributed to this sharp decline in profitability:

1. Escalating gas prices: The chemical industry is highly sensitive to energy costs, and the rising gas prices have further squeezed EPCL’s gross margins, which were already under pressure, remaining depressed at around 7% for the first half of the year.
2. Narrowed PVC-Ethylene Margins: The primary margin between Polyvinyl Chloride (PVC) and ethylene, a major revenue stream for EPCL, has significantly shrunk. This compression in margins directly impacted the company’s profitability, leading to reduced earnings.
3. Increased Finance Costs: The company also faced a 37% year-over-year increase in finance costs, largely due to higher borrowings. This surge in costs further eroded the bottom line, contributing to the overall loss.
4. Decline in Revenue and Other Income: EPCL’s revenue took a 6% year-over-year hit, exacerbating its financial woes. In addition, other income, typically a buffer against operational challenges, plummeted by 64% YoY, primarily due to a reduction in short-term investments

Future Outlook

The current financial scenario for EPCL is undoubtedly challenging, but it also presents an opportunity for introspection and strategic realignment.

Engro group is currently going through some restructuring with its parent company Dawood Hercules (DAWH). It is also selling some of its assets. In a challenging business environment, it is hard to see when EPCL will turnaround.

However, one thing is clear the turnaround will only happen when international PVC margins improve substantially. Local construction demand is also important.

There doesn’t seem to be any upside trigger for the stock in the short term.