Incentives in construction sector to back PVC market

Aftab Ahmed

Islamabad: Engro Polymer and Chemicals Limited (EPCL) believes that PVC market will remain strong due to various incentives provided to the construction sector.

Additionally, the company has also inaugurated its THINK PVC outlet in April to further promote other applications of PVC in the domestic market. Going forward, the company believes that the PVC market will remain strong due to various incentives provided to the construction sector.

With regards to upcoming projects, VCM debottlenecking project is expected to come online during 2QCY21. On the other hand, the Hydrogen Peroxide (H202) project is likely to come online in 2HCY22 with an expected CAPEX of USD 32-35Mn, whereas the timeline for the LABSA project is still undecided.

The company is planning a plant turnaround at the end of Jun’21 for a period of 20- 25 days. However, since the current capacity of EPCL is higher than the local demand, the company believes that they will have sufficient inventory to meet local demand during that period.

 The company raised concerns of gas curtailment and hoped gas supply would continue as the plant cannot operate on electricity supply from the grid to produce PVC in the market. In this regard, they are expecting an audit by the government.  We maintain our BUY stance on the company with our Dec’21 TP of PKR 67/sh, which provides an upside of 18% from the last close.

Engro Polymer and Chemicals Limited (EPCL) conducted its analyst briefing session on Monday, discussing the 1QCY21 results and business outlook. To recall, the company posted historically high earnings of PKR 4.1Bn (EPS: PKR 4.6) during the period, up 21.5/1.1x YoY/QoQ. They discussed key takeaways during the briefing.

Higher international PVC margins backed earnings growth during the period , with core delta of nearly USD 1,000/ton in 1QCY21, 2) improved downstream demand, and 3) operational efficiencies.

PVC prices maintained their upward trajectory in 1QCY20 as will with average prices of USD 1400-1500/ton in the market. The uptick in prices mainly resulted from the cold storm in Texas in February which knocked down over 87% of PVC supply.

Additionally, higher freight costs and turnarounds planned by several producers during the period contributed to the uptrend. On the other hand, Ethylene prices also increased during 1QCY21 due to price rally in crude oil market.

As a result, this translated into a higher realized core delta of USD 1000/ton in 1QCY21. Going forward, the company believes that PVC margins will remain firm in the market till 2QCY20 due to supply tightness and slowdown in demand recovery amidst the third wave of COVID-19.

Its sales remained at par with the last 5-Yr average market. The volumes showcased a massive growth of 60/10% YoY/QoQ to 53 KT during 1QCY21. The company also recently completed the expansion of its PVC plant by 100k tons in Mar’21 (taking the total capacity to 295k tons) which supported the volumetric growth.

Additionally, the company has also inaugurated its THINK PVC outlet in April to further promote other applications  in the domestic market. Going forward, the company believes that the market will remain strong due to various incentives provided to the construction sector.

The caustic segment recorded a growth of 27% YoY in volumetric sales to 19KT in 1QCY21 for PVC owing to downstream demand recovery in the textile sector. Moving forward, the company has a bearish outlook on the caustic market due to rising COVID cases in the US and Europe which may affect export orders.