Sector Analysis: Chemical sector emerges victorious last quarter, courtesy of improved pricing

March 6, 2019 (MLN): Following the completion of last quarter (Oct-Dec 2018), a large number of publicly traded companies released their earnings reports which when categorized into sectors, gave abundant insight on the impact of their performance on their respective sectors.

As we analyze the financial results of the following chemical companies namely; ICI, LOTCHEM, EPCL, COLG and ARPL having above 80% share in chemical sector, a fair representation of the sector’s performance comes into view.

The cumulative earnings of these companies remained impressive as the sector’s profit surged by around 76 percent during the last quarter which ended with December 2018 as compared to same period last year.

The sector’s outstanding financial performance is attributable to improved pricing and decent offtakes. In numeric terms, higher inflows compared to total cost and expenses, helped in raising the sector’s pre-tax profit by 72% YoY.

The topline earnings of the sector witnessed a growth of 36%, whereas the total cost of sales jumped by 37% YoY.

Moreover, higher effective tax rate played a major role in dragging down the net profit margins of the sector, as the total taxes paid by the sector increased by 63% compared to same quarter of the last year.

Total Profit and Loss statement of Chemical Sector (Oct-Dec 2018)

(Rupees in thousands)

Dec-18

Dec-17

% Change

Revenue

     55,908,581

     41,126,445

35.94%

Cost of sales

     46,567,640

     33,896,431

37.38%

Gross Profit

        9,340,941

       7,230,014

29.20%

Total outflows

        5,477,030

       4,823,660

13.55%

Total inflows

        1,038,514

           440,707

135.65%

Pre-Tax Profit

        4,902,425

       2,847,061

72.19%

Taxation

        1,299,211

           797,776

62.85%

After-Tax-Profit

        3,603,214

       2,049,285

75.83%

In particular, the largest growth in profits was clearly recorded for LOTCHEM whose net income during the quarter sky-rocketed from Rs.7.2 million in 4QFY18 to over Rs.1 billion in 4QFY19. Its net sales took a 77% leap while gross profits amplified by 392%, YoY, bringing a 6.8 ppt rise in gross margins.

Based on growth, following LOTCHEM closely is EPCL with another mammoth expansion in quarterly gains which stand at Rs.1.1 billion, up from Rs.106 million. The company’s topline grew by 33% while its gross margins inched up by 4.8ppt to 19%.

The rise in topline is primarily accredited to higher pricing of PVC as a result of Rupee devaluation and higher core-delta (up 20% YoY). Moreover, mounting demand has encouraged the company to fetch a higher premium over imported substitute and pass on the impact of Rupee devaluation.

During CY18, the company sold 203 thousand tons of PVC against 187 thousand tons sold in CY17. This marks an 8.6%, YoY rise on the back of rising demand from local market due to increase in PVC applications.

Similarly, ARPL and COLG managed to put together a good performance after closing the last quarter on a positive note by achieving net profit growth of 19% and 6% to Rs 332.6 million and Rs 903 million compared to last year respectively.

On the other hand, ICI Pakistan Limited’s net profit declined by 65% to Rs279.4 million. The decline in bottom-line was due to the decrease in operating results, higher finance cost owing to increased interest rates and higher effective tax rate due to non-availability of tax credits as were available during same period last year on the Light Soda Ash expansion project.

However, the company saw a 25% increase in sales to Rs. 15 billion with the cost of sales of Rs. 12.9 billion which was higher by 33% in the period under view.

Company-wise growth (‘000 Rupees)

Companies

PAT

YoY growth

COLG

             903,265

6%

ICI

             279,395

-65%

ARPL

             332,674

19%

LOTCHEM

         1,023,135

14073%

EPCL

         1,064,735

905%

Based on companies’ earnings share as percent of total sector’s earnings, EPCL stood on top with 30% of the sector’s earnings followed by LOTCHEM (28%), COLG (25%), ARPL(9%) and ICI (8%).

Based on market capitalization as of today, COLG represents around 38% of the whole sector followed by ICI (20.08%), EPC (11.06%), LOTCHEM (7.35%) and ARPL (6.58%) respectively.

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