KARACHI - Engro Polymer and Chemicals (EPCL) in its 1H2009 results posted earnings of Rs7.1mn (EPS 0.01) as against Rs427mn (EPS of 0.83) in the corresponding period last year, depicting a decline of 98 percent on YoY. Dwindling gross margins (down 1,247bps) and sizeable jump of 665 percent in finance costs were the key reasons for the decline in profitability of the company. EPCL posted net sales of Rs4.9bn versus Rs4.4bn, a rise of 13 percent on YoY, as the increase in volumetric sales was the driving factor behind this increase as it also compensated for lower PVC prices during the period. Though volumetric sales rose by 22 percent to 60,900 tons from 49,800 tons in 1H2008, capacity utilisation fell to 81 percent from 100 percent as capacity increased by 50k to 150k tons. Moreover, PVC prices on average fell by approximately 60 percent on YoY at the back of global recessionary woes. Despite VCM prices, a major raw material for PVC, declining by 53pc on YoY, cost of sales rose to Rs4.5bn led by 20pc rupee depreciation. Resultantly, gross profit fell by 54pc on YoY to Rs415mn with gross margins down 1,247bps to 8pc. The financial cost for the company rose to Rs119mn in 1H2009, up 665 percent at the back of borrowings to finance its horizontal expansion. Moreover, distribution & administration expenses also saw a jump of 19 percent YoY thus bringing down net margins by 963bps to 0.14 percent (net profit down 98 percent YoY). Though the Chlor-alkali and EDC plants have commenced production, successful commissioning of the VCM plant will be the key to boost profitability of the company. The plant is expected to come online during the third quarter of 2009. Moreover, PVC prices have risen 8 percent since June 30, 2009 and are currently trading at $938/ton while Caustic Soda prices have not seen any significant slip post EPCLs plant coming online in July 2009. Int'l Ethylene prices, a major cost driver for VCM production, are also down 28pc since June 30 due to facilities coming online in the Middle East. Hence, gross margins for the company are expected to benefit from these developments. With EPCL currently trading at 2010E PE of 8.2x, at par with the markets multiple, we maintain our 'Hold stance on the scrip.