THE Engro Corporation Ltd — a conglomerate that operates in such diverse fields as fertiliser, food and energy — has decided to part ways with its subsidiary, Engro Polymer and Chemicals Ltd.

Engro has offered to sell all of the 373m shares it holds in the subsidiary, which account for 56.19pc of EPCL’s paid-up capital, along with management control of the company. The company is engaged in the manufacturing, marketing and selling of poly vinyl chloride (PVC), vinyl chloride moomer (VCM), caustic soda and other related chemical products.

The potential buyers of EPCL have been identified as “ATS Synthetic (Pvt.) Ltd, along with persons acting in concert”. Although knowledgeable market people were aware of EPCL as a target for acquisition, the market is still speculating about the reasons behind Engro’s decision to spin off and let go of the chemical business.

In a November 18 report, analysts at KASB Securities and Economic Research said the step is part of the conglomerate’s restructuring. They added that another Engro subsidiary, Eximp, would be scaling down its B2B business while exploring opportunities in the more profitable and less risky B2C segment. The pilot project ‘Onaaj Chakki Atta’ was launched in that spirit and had received a positive response from consumers.

They also claimed that Engro intends to reduce its stake in the Sindh Engro Coal Mining Company (SECMC) and Engro Powergen Thar (Pvt.) Ltd (EPTL) to 12pc and 51pc respectively.

“We also expect the company to consider divesting its stake in Engro Powergen Qadirpur Ltd and believe a further divestment from Engro Fertiliser is also possible at this stage.” Some other independent observers agreed in varying degrees with these statements.

EPCL was established in 1997 and is the only fully integrated chlor vinyl chemical complex in the country.

“If the current sale of EPCL goes through at a market rate of Rs11.54 per share, the Engro Corporation will book capital gains of Rs1.24 per share on a standalone basis,” calculated a sector analyst.

‘If the current sale of EPCL goes through at a market rate of Rs11.54 per share, the Engro Corporation will book capital gains of Rs1.24 per share on a standalone basis’

EPCL’s other major shareholders include the Inter¬national Finance Corpora¬tion with a 14.64pc stake and the Mitsubishi Corporation with a 10.24pc equity interest. It is still unclear if these two entities will retain their stake in the company after Engro’s withdrawal.

In case of a successful bid, the acquirer shall make a public announcement of the offer to EPCL’s shareholders in accordance with the Securities Act 2015. By end-2014, 32,542 small shareholders had 79m or 11.9pc of the company’s stock.

Meanwhile, after having invested in the country’s first LNG terminal, Engro is also making progress on its Thar coal mining and power plant projects. Financial close of both projects is expected to be achieved by next June.

The company had Rs26.3bn worth of assets by end-2014, and its share capital was Rs6.6bn. The EPCL stock closed last Thursday at Rs11.78 a share, giving the company a market capitalisation of Rs7.8bn. In 2014, it ‘generated wealth’ amounting to Rs5.7bn, of which Rs3.4bn (59pc) was paid to the government in taxes, levies and workers’ funds.

However, EPCL’s performance over the last few years has been far from satisfactory. Although net sales continued to grow from Rs12bn in 2009 to Rs24bn in 2014, the company suffered after-tax losses in four of those six years, with the highest loss amounting to Rs1bn in 2014.

For the nine months ending September 30, the company posted consolidated revenues of Rs17.1bn — about the same as last year. However, it suffered a big loss of Rs813m in the period, translating into a loss-per-share of Rs1.22, against a loss of Rs33m or Re0.05 per share in the corresponding period last year.

Yousuf Rehman, an analyst at Global Securities, remarked that EPCL’s caustic soda segment had been a key contributor to earnings over the years. For the past two years, however, the segment had come under strain due to an oversupply of the chemical, which had caused its price to recede.

But Rehman believed that the segment’s performance would improve upon the recommencement of stable plant operations. For the longer run, power sector reforms and a consequent increase in the textile sector’s operating rates are expected to increase demand for caustic soda and alleviate the current surplus.

EPCL’s President and CEO, Khalid Siraj Subhani, stated in his annual 2014 report that “the domestic PVC market [had] demonstrated resilience in 2014 despite a contraction due to the imposition of duty on PVC and products and depletion of inventory by end-users. The domestic market for caustic soda remains well supplied. The overall supply situation may restrict EPCL [from] influencing pricing and [also] restrict its ability to pass on cost pressures due to an increase in energy prices”.

“However, economic value-creation [by] the company remains largely linked to uncontrollable factors such as vinyl chain prices in the international market, energy prices, duty on primary raw materials and currency volatility”.

But some still hold hopes high for EPCL. “The ongoing China-Pakistan Economic Corridor will significantly boost construction activities in the country, increasing demand for PVC as a result,” said one.

Published in Dawn, Business & Finance weekly, November 30th, 2015