EPCL_Continuing to push above its weight, (AKD Daily, Apr 07, 2021)
AKD Daily
EPCL: Continuing to push above its weight
We initiate coverage on Engro Polymer & Chemicals Ltd (EPCL) with a Buy call and a TP of PkR72/sh (upside: 32.0% at LDCP), citing significant near term catalysts including (i) uptrend in PVC Ethylene margins and (ii) 100K MT PVC expansion (50% of existing capacity; CoD: 1QCY21). The PVC ethylene margins have recently surpassed ~US$1,000/MT in Mar’21 on the back of force majeure declared by PVC capacities in the US and, soft ethylene prices amid recent wave of global capacity expansion resulting in excess ethylene supply. We expect PVC Ethylene margins to hover at US$850/MT in 1HCY21, normalizing to some extent in 2H, to average at US$690/MT in CY21. Our long term assumption stands at US$400/MT on average, where every US$50/MT higher than expected margins would result in ~20% EPS impact. To add, EPCL’s investment in high temperature direct chlorination (HTDC) technology will reduce gas requirement for PVC manufacturing process by 10% from CY22F onwards (incorporated in our estimates), somewhat negating the impact of upcoming gas rate hikes (incorporated 15% hike in Jul’21). Upside triggers include EPCL’s entry into hydrogen peroxide and LABSA business (c. 15% impact on bottomline post CoD; not incorporated yet). EPCL is trading at undemanding CY21/22F P/E of 4.68/6.50x vs. market P/E of 6.70x—Buy!
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Engro Polymer & Chemicals Limited is a chlor vinyl chemical company. The principal activity of the Company is to produce and market chlor-vinyl products, which include poly vinyl chloride (PVC), vinyl chloride monomer (VCM), caustic soda, hydrochloric acid and sodium hypochlorite. The Company operates through three segments: poly vinyl chloride (PVC) and allied chemicals, caustic soda and allied chemicals, and power supplies. The poly vinyl chloride (PVC) and allied chemicals segment manufactures and sells PVC and allied chemicals to various industrial customers, including pipe manufacturers, shoe and packaging industry. The caustic soda and allied chemicals segment manufactures and sells caustic soda and allied chemicals to textile and soap industry. The power supplies segment supplies surplus power generated from its power plants to Engro Fertilizers Limited. The Company manufactures and markets over four grades of PVC under the brand name SABZ.
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