Engro Polymer and Chemicals Limited reports loss of Rs 68 million

LAHORE –– Engro Polymer and Chemicals Limited (EPCL) reported a net loss of Rs 68 million in 1Q2011, compared to a loss of Rs 207 million in the same period last year. Higher domestic margins up 43 percent and improved PVC offtake were the primary reasons behind improved earnings performance.

Experts said that higher interest charges due to additional loans on account of delay in the CoD of the plant remained a key irritant for the company.

Gross profit margins during the quarter improved significantly to 13 percent, compared to 4.6 percent in the corresponding period last year. Margin accretion was seen on the back of a steep rise in PVC prices (treaded up to US$1140 per ton at March end from US1,030 per ton at the start of the year) and a strong domestic demand, leading net sales to witness an impressive growth of 24 percent to arrive at Rs 4.0b.

These coupled with utilization of in house VCM (only 7k tons imported) resulted in domestic margins to stand at a notable US$423per ton as compared to US$295 per ton in 1Q2010. Interestingly, despite closures of its PVC and VCM plants for 15 days and 45 days, respectively for maintenance, total PVC sales were higher at 31k tons versus 22k tons in 1Q2010. Post the turnaround, VCM production is in excess of 400 tons per day as against capacity of 420 tons per day (based on 365 days).

Looking ahead, the management remains confident that PVC offtake in the ensuing quarters will stay at similar levels, which is commensurate with our full year estimate of 128k tons. Further, it has highlighted that the company is diverting its focus from the export market to the local market as it believes that domestic demand is sufficient to absorb the entire production. While on the margin front, the PVC prices are likely to stay firm on robust demand from Japan where reconstruction activities have already started. As a result, PVC-Ethylene margins are also likely to remain healthy.

Working capital requirements have eased off significantly as the cash conversion cycle in 1Q reduced to 10 days from an average of 20 days in the last two years. This improvement is primarily attributable to increase in credit terms with its suppliers by a net 30 days. Hence, payables are now paid in 55-60 days, while receivables are settled in 10 days.

Moreover, about 90 percent of the sales are done on cash. As a result, the company was able to generate Rs1.8b in operating cash flows as well as retire short term borrowings of Rs 1.5b. Albeit enhanced operating cash flows, total cash flows will be impinged by repayment on long term loans expected to be Rs1.9b and Rs2.6b in 2011 and 2012 respectively.

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