The investment theme
• Expansion of the PVC plant expected to come online by 1QCY21.
• Robust demand.
• Record high PVC margins.
• Low interest rates.
• Experts target price is based on the back of plant expansion, stability in PVC margins, rising demand of PVC & Caustic Soda and strong sales & earnings growth.
• The stock is currently trading at CY21 PE multiple of 5.3x with dividend yield of 6.3%.
Massive expansion plan to add further value
• Engro Polymer and Chemicals Limited (EPCL) announced massive expansion plan of PVC and VCM.
• The new PVC plant which is going to be installed has the capacity of 100k tons which will brought the total capacity to 295k tons per annum, while it will also increase the production of VCM (the raw material) by 50k tons, which therefore will debottleneck the existing plant.
• It is a chemical used in producing plastic products namely; tubes, bottles, Vinyl flooring and materials for construction like electric cable coating and pipes.
Record high core delta
• The PVC margins were clocked in at highest levels during the Feb’21 to USD 823/ton, due to supply constraint of PVC caused by the shutdown of plants amid supply issues caused by COVID19.
• During the 4QCY20, the margins remained at USD707/ton as compared to USD500/ton in 3QCY20 implying 41%QoQ improvement, likewise, margins were up by 50%YoY.
• We assume the margins to settle at ~USD500-525/ton in CY21
Sole Producer in PVC
• EPCL remains the sole producer in local PVC market, and is expected to expand its market share to 80-85%, the total PVC demand in the country is estimated at ~300k tons and EPCL is likely to cater 250k tons going forward due to its expanded capacity. The stock is currently trading at CY21 PE of 5.3x with dividend yield of 6.3%.
Strong demand to fuel up sales
• The upcoming strong demand growth of PVC ~8-10% in next 5 Years will enable the company to utilize its maximum capacity.
• With the rising usage of PVC in Foam Board, Wood Plastic and PVC wall will improve sales.
Massive construction activities to boost demand
• There has been a significant increase in construction activities in the country in recent years mainly due to government incentives.
• With ongoing boom in the construction industry, we expect greater demand and the company is capable to fill.
Investment risks
• Increase in international Ethylene Prices.
• Hike in gas tariff.
• Interest rates hike.
• Supply disruption in raw material ethylene.
Recommendation: ‘BUY’ with Dec’21 target price of Rs65/share
• We recommend ‘Buy’ on a DCF-based Dec’21 target price of Rs65/share, which translates into a potential upside of 36% from the last closing of Rs47.7/share.
Courtesy – Spectrum Securities Limited