Engro Polymer and Chemicals Limited (EPCL) Q3 FY2025 Earnings Call Transcript & Summary

[Foreign Language] everyone, and welcome to Engro Polymer's Analyst Briefing for the 9 months 2025. We'll just get started. [Operator Instructions] So as we get started for the 9-month YTD. Financial highlights [Foreign Language] revenue 6% above last year -- same period last year at around PKR 57.6 billion. Gross profit better. Profitability is down versus last year and LPS is also down versus last year, primarily on the back of some tax adjustments that we've had to take compared to last year. Market cap remains almost the same. Safe man hours, we have [Foreign Language] completed 48.8 million man hours in this quarter. Total assets and total employees around about the same. Asian CFRs, we see are beginning to firm up. So the potential is there for margin recovery. However, there is also a lot of competition coming in from China and the Far East, which we are -- which globally PVC prices will remain range bound in the near future. On the other side, you see the core delta, has been steadily tracking upwards over the last months. And in the last quarter, as we see it, ethylene, the other half of the core delta equation has started softening. Ethylene prices were stable in Q3 and moved down from $825 -- to around $823, $825. But if you really look at it on quarter-on-quarter, ethylene prices down from $866 per tonne to around $820 per tonne quarter-on-quarter. So we see ethylene prices in the future softening and core delta should get some relief in the coming quarters. However, future core delta stability, as we see it, will depend on regional demand pickup and further easing in ethylene pricing. Domestic PVC demand is [Foreign Language]. We expect to see it gradually improve with the market development activities. If we can move on to the next slide. In terms of gas cost, you can see the industrial gas pricing and the captive gas pricing in the line graphs. And you can also see the impact of levy. So the levy was notified, if you recall, in March at PKR 791 per MMBtu. However, for every month, it is actualized and built by the gas supplier, SSGC via OGRA notifications. And as you can see from the red dotted line, it has been lower than PKR 791. So this has been actualized in the third quarter for the months from, I think, March. April to July and August and September is still accrued at PKR 791 crores for the moment, since we do not have the bidding for that time. Proactive measures are underway. We are working on third-party sourcing, alternate energy projects and government engagement to ensure long-term competitiveness. I'll talk more about it later in this presentation. If you're talking about business updates, as you see them, over the 9 months versus 9 months last year, PVC remains in terms of revenue, 80% of our revenue. And in terms of profitability, while it might have decreased -- sorry, I think just a second, I'm going to remove this chat reviews. So as you can see, we see more relief on the caustic side. But primarily, we see the relief has shown up on both PVC and on caustic chlor-alkali. In terms of production, you will see higher production for PVC and almost the same for caustic soda and VCM production has gone up. Next, we have achieved our highest ever 9-month sales and primarily on the back of the domestic market, which is very strong. And at 85%, 87% market share, we still see strong traction for PVC domestically, and that has had one of the major reasons for the strong revenue showing this quarter and this year, YTD. If you look at the pie chart, you can see that pipes and fittings and other construction materials remain a key source of our sale and demand. So we continue to ensure product availability, and we engage closely with our channel partners through strategic customer interventions to ensure offtake of domestic product. Next. In terms of chlor-alkali, you see caustic prices remain largely stable. Regionally, we see new capacities coming in China and Southeast Asia, and margin pressure continues in this business for us, which is why we don't see much expansion of our demand. What we see is that -- because we produce on domestic gas, captive power, the impact of the gas levy is strongest on the chlor-alkali business and impacts us all. Domestic competition remains already, no major supply disruptions and we are continuing, as a business, whether it's PVC or it is the chlor-alkali business to prioritize cost discipline and value chain integration. We continue to safeguard our margins, given the volatile energy and pricing environment. HPO, we are [Foreign Language] producing well and sales continue to gain momentum. As we see it, we are constantly increasing our market share, as we establish our presence in the market. There is low-cost dumped imports from Bangladesh coming in, and that continues to disrupt the Pakistani market, but we are working strongly on the local market and also exporting some small cargoes of HPO. Next. In terms of consolidated performance, as I said, revenue is up around 6% YTD and primarily due to higher PVC sales volumes, and that's supported by the demand in pipes, wire cables profiles, primarily in the construction sector. PAT is down 51%. And this actually, if you look at the explanation in the bottom, PBT grew by 18% in the 9 months and primarily due to lower finance costs because interest rates have gone down, cost optimization measures put into place late last year and early this year, I have started taking [Technical Difficulty]. If you can just -- sorry, gentlemen, I think something is just going down and come back up. We will just take 2 minutes for everyone to join back online and continue. Apologies. So just for the last -- in terms of -- where we stand, in terms of safety, we continue to lead with a strong safety culture. Safety remains our top priority. A lot of cash and cost optimization is most definitely happening in the organization, but still safety is a priority, and it's not something that we will compromise on. The future efforts will drive zero incident performance through enhanced contractor safety management, rigorous safety audits. That's not something that is negotiable at all at Engro Polymer especially with HPO, HTDC and the new projects also having been commissioned earlier this year, that is what we work on. In terms of PVC, domestic demand is expected to remain robust. It's supported by infrastructure and construction activity. We are aiming to build further on our current performance, looking at stronger and deeper customer engagements, expanding into higher growth and new segments. And also while we are at it, we look to expand outwards into other segments, which can -- which where PVC exports can be supported and increase our -- just a second, please -- so -- where PVC resin can be used. In terms of caustic, we see, while regional oversupply persists, demand from alumina and textile offers opportunities to absorb volumes. Caustic may -- rising cost pressures remain a challenge for our business. And what we see is that we will be selling enough to manage our margins, but a strong push because export key opportunities remain muted in the caustic business for the moment. Internal hydrogen peroxide, we are expanding our presence in the market. We target key textile players, explore export opportunities, and that is our primary aim. Gas [Foreign Language] so there are 2 things. I think there's a lot of interest in this also, so I'll just answer this right here so that we don't have to take questions in the chat window. The company has -- and I know we've had multiple questions at multiple forums. The company continues to explore options for power, alternate power. We have looked -- we have in terms of our evaluation, looked at solar, we have looked at coal, we look at the grid and continue evaluating. We expect to have a traction and a final way forward to share with our shareholders and stakeholders by the end of this year, early next year, as we commit to one path beyond just captive gas if necessary. I just want to reemphasize over here that while gas prices have gone up and margins have decreased Engro Polymer [Foreign Language] at this point, captive gas power was a competitive option. Not anymore with the levy at PKR 791, it wasn't, but at lower levy pricing, captive gas compared to coal and others remains a competitive option primarily because we have a VCM plant where we cannot -- we have high reliability constraints and we cannot afford trippages. So we need very high reliability -- 94%, 96% reliability in our power solution for that VCM plant. Strategic energy road map to position EPCL for long-term cost stability and sustainability is very much underway, and we will share it as soon as it is approved and finalized. In terms of cash conservation, you will have seen this most strongly in the second quarter to third quarter results. There's a strong focus on cash conservation and on cost controls and disciplined working capital management, cost optimization. In the second quarter, if you recall, I had talked about how the EPCL business had shut down the plant for 30, 35 days to manage working capital and ensure our customers remain served without actually putting any stress on our balance sheet, and that is showing its results even now. So in terms of cash conservation, in terms of power, we are very much looking at all optimizations possible to improve the fundamental health of the business. Next. So I think we can take questions now.

A lot of the questions are already coming on the side bar, but why don't -- [ Asif Jalal from Maple Leaf ].

My question pertains to the mechanism of gas captive levy. Is it something like a fuel cost adjustment in power, which is notified with a lag? And secondly, you mentioned that you've been trying to secure third-party gas sourcing. So the captive levy third-party gas sourcing could be applicable [Foreign Language]? And finally, on the chat window, your team mentioned that there was a reversal of gas provision in the third quarter. If you could please share the amount of the reversal?

Asif, can I ask -- Asif, can you repeat your first question? Sorry I didn't...

My first question was about understanding the mechanism of gas captive...

[Foreign Language] I got it. I recall. In terms of how the gas levy is calculated, there is opacity on the calculation mechanism itself, which we are talking to the authorities to share for better forecasting of the industry. [Foreign Language] you are absolutely right that it comes with a lag. So for example, April, May, June, July [Foreign Language] gas levy notify [Foreign Language] PKR 791 at some point [Foreign Language] but that is not the actual -- from what we understand now, not the actual levy that will be charged. And [Foreign Language] red bar [Foreign Language] dotted bar in my gas levy slide, that is what it was actually notified at. So I believe it was notified, for example, at PKR 550, PKR 402, PKR 578 for April, May, June, July. For March, it was notified at PKR 238 per MMBtu. So [Foreign Language] and not even a month's lag or a quarter's lag, there's significant lag sometimes with which it is being notified. In terms of captive levy, on third-party gas, as of right now, that is our understanding, at some point, the legislation is such that captive gas levy will be applicable on any third-party gas intended for captive gas. However, there is some discussion -- there is no clarity from the legal billing process on whether a captive gas levy will be applied to it. What was your third question, Asif?

The third question was about -- I mean, in the previous quarter briefing, you mentioned that you guys booked a provision [indiscernible] we understand the third quarter [Foreign Language].

[Foreign Language] obviously, you will also note [Foreign Language]. [ Ghulam Haider ]?

[Foreign Language]

[Foreign Language] In terms of borrowings [Foreign Language] compared to last quarter last year, as said you, [Foreign Language] primarily, we are shifting and [Foreign Language] last year until the end -- until the early part of this year [Foreign Language] we were working a lot on short-term [Foreign Language] short-term borrowings to complete the HPO and HTDC project. Now that they were commissioned at the beginning of this year, we have started fixing the balance sheet against the duration management to bring the long-term assets and the long-term borrowings in line. [Foreign Language] Short-term borrowings reduce [Foreign Language] that primarily links to actually the core delta because the core delta is putting a lot of stress on the business in terms of the margin generated. We see that this will actually relieve itself with cash conservation [Foreign Language] and you have seen some results of that -- some significant results from our cash conservation rise from cost conservation from the second quarter to the third quarter and of course, over the course of this year versus last year [Foreign Language] and we continue to work on it. [Foreign Language], this will require a lot of effort that the company is undertaking as well as some power solution to bring down the cost of our power. And that is also something the organization is looking at. I think you had asked -- I think you were asking where we see core delta in the coming years. [Foreign Language] we see core delta is there will be relief, as we see it, maybe early next year. Definitely, we forecast by the second half of next year that core delta [Foreign Language] organization to be globally. Where we are right now, already, the trend is upwards. So first quarter and second quarter of this year, core delta was much lower. [Foreign Language] over the first half of this year, our core delta was around $275 per tonne. [Foreign Language] third quarter already, for example, the core delta was around $335 -- $330, $335 [Foreign Language]. And we've seen more relief in the last 2 weeks or month of October because -- not because PVC prices are going up because they are not. PVC prices globally are flat and remain range bound [Foreign Language] ethylene prices are dropping [Foreign Language] Ethylene [Foreign Language] structurally, we have seen [Foreign Language] globally. Ethylene [Foreign Language] supply primarily China, Thailand. And we expect in the coming years, we see more ethylene supply coming in, which will further reduce our cost side of the equation and give some support to the core delta. So we are cautiously optimistic for the rest of the year and early part of next year, and we are definitely optimistic that the downturn, we have seen the worst of it, and we see it going -- we see it moving forward.

[Foreign Language].

[Foreign Language] By the end of this year, we hope to have some final approved solution that we can share with all our stakeholders, but absolutely...

Last question [Foreign Language].

[Foreign Language] Arif Habib Asset Management.

This is [ Ejaz ] from Arif Habib Asset [Foreign Language] shifting from captive?

Shifting from captive to what?

[Foreign Language].

[Foreign Language] where we are in terms of captive [Foreign Language] caustic business, 100%, we are on captive pricing. PVC business [Foreign Language] power is what we use the gas for. That's your first question. For the second one, like I said, we are evaluating options, whether it's solar, whether it's grid, whether it's coal, all options are being explored. As we stand right now, there is [Foreign Language] because of the increase in gas cost. And the levy has actually made us -- made it incompetitive, levy at PKR 791 per MMBtu. [Foreign Language] levy actually charge at PKR 500, PKR 200, PKR 400 per MMBtu [Foreign Language] business remains -- gas produced [Foreign Language] became -- still remains competitive for the business. So we are exploring something. And hopefully, by the end of the year, however, we should have a solution for the gas -- for the power -- for the increase in power cost. [Foreign Language] what we are actually gearing towards is not incremental or small deals. We are looking at more of an anti-fragile power portfolio where we can hedge our bets and come up with a big enough -- a slate of options so that we are not dependent on one source of power. So whether it's grid, whether it's coal, whether it's solar, whether it's gas power, the organization is moving very strongly towards a solution which will mix different power production options to give the best solution for the -- especially given growth aspirations in the future. [indiscernible] funds.

As you said, the captive gas without levy is a better option than a coal. But as per my understanding and my calculation, coal fuel cost would be around $20 per unit at current $90 per tonne of coal. And if we include [indiscernible] and financing cost, it would be around $28 per unit. So on the other hand, gas would cost around $34 per unit. So how it is more cheaper gas without levy?

[Foreign Language] $34 per unit [Foreign Language] of course, there is also the efficiency of the machines and other things to look at. Also, we don't just produce power [Foreign Language]. So in terms of energy is how we are [Foreign Language]. So we have steam and we have power. [Foreign Language] energy cost per kilowatt down. So we actually don't look at it on -- in isolation.

[Foreign Language]

I don't think I would have said because it would not be the correct statement [Foreign Language] very much coal is an option to explore. Sitara is on coal. Ittehad is looking at coal and biomass. So coal is -- although they are only caustic and on the chlor-alkali side, we are in the vinyl chain also, which is PVC, VCM. [Foreign Language] we are exploring options [Foreign Language] grid is an option. Coal is an option [Foreign Language] We need grid with our solar for it to make sense and other options. Gas is very much an option because captive power [Foreign Language] we have other less sensitive equipment, which can maybe run on power options where reliability doesn't need to be at 94%, for example.

[Foreign Language]

[Foreign Language] At the end of the day [ Akhil ] -- and then we'll move on to somebody else's question because [Foreign Language] in a very broad sense. So I can, of course, import VCM and make PVC, which is my higher margin product, but right now, caustic [Foreign Language]. So my actual real business, if you look at it, you will have seen 20% comes from caustic and 80% of my revenue comes from the vinyl chain, which is PVC.

[Foreign Language] How much levy is incorporated in the third quarter by '25? Actual levy [Foreign Language]?

[Foreign Language].

[Foreign Language].

I'm sorry. Did you guys not hear anything? So I believe [Foreign Language] in case [ Akhil ], you didn't get my last answer, what I was saying was that the gas levy has been actualized till what's it called August? And July and August and September is at PKR 791, and you can see it from the red dotted line on the gas side. If we can take [ Maha Farman's ] questions.

[Foreign Language].

So like I said, and to be very clear, it is not that coal is not an option. And I don't know why everyone is getting this opinion that coal is not an option. Coal power is an option that we have that we are evaluating. It is not -- it does not make economic sense always because of levy than expected carbon tax and the CapEx involved, but coal is very much an option. The VCM plant is sensitive and -- but that doesn't mean that cannot run on power produced by coal. What we are saying is that as we stand right now, captive gas [Foreign Language] is still relatively competitive compared to other options. And that is why for Engro Polymer, it takes time to decide which solution will make sense because it will be a major investment for us. We have around 50, 55 megawatt. And we will make an investment now, which will get us through the next 10, 15 years, for example. In a broad sense, we want to fix our power horizon for the next 10, 15 years. And that's what we are looking at. In terms of options, we are, like I said, exploring coal, we have explored solar, we are exploring grid and gas turbines also. And yes, so that is where we are right now.

[Foreign Language]

55 megawatts.

[Foreign Language]

We are 100% sensitive because we are a globally competitive business. So we are priced on global pricing for PVC so -- because our competition is global. Caustic is domestic [Foreign Language] again, I will say, it's 20%. PVC is 80%. So we have -- we are globally competitive. We compete with global products. Asif? Are there any other questions? Asif? I guess he's not asking the question. So have you guys answered all the questions on the chat window? So I think no more questions, so we can call it a day. Somebody commented on Berkshire Hathaway buying OxyChem. Yes, that is a vinyl producer. So yes, let's see where the end market is going. Thank you.