CORPORATE STRATEGY

LIVE CASE STUDY

FINAL REPORT

SUBMITTED BY:

Table of Contents

Contents
1.0 Introduction ................................................................................................................................ 3
1.1 History and Overview ............................................................................................................. 3
1.2 Mission statement.................................................................................................................. 4
1.3 Vision statement .................................................................................................................... 4
1.4 Products & Markets................................................................................................................ 5
1.4.1 PVC .................................................................................................................................. 5
1.4.2 New PVC markets ........................................................................................................... 5
1.4.3 Caustic Soda .................................................................................................................... 5
1.4.4 Hydrogen Peroxide ......................................................................................................... 6
1.4.5 Caustic Flakes.................................................................................................................. 6
1.4.6 Other products ............................................................................................................... 6
1.5 Organization Structure ........................................................................................................... 6
3.0 Internal Environment Analysis................................................................................................... 9
3.1 Human Resources & Management ........................................................................................ 9
3.2 Sales & Marketing ................................................................................................................ 10

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 3.3 Finance .................................................................................................................................. 11
3.4 Production and Operations .................................................................................................. 11
3.5 Supply Chain ......................................................................................................................... 12
3.6 Health, Safety and Environment .......................................................................................... 12
4.0 External Analysis ...................................................................................................................... 13
4.1 Global .................................................................................................................................... 13
4.2 Political ................................................................................................................................. 13
4.3 Economic............................................................................................................................... 14
4.4 Social ..................................................................................................................................... 15
4.5 Technological ........................................................................................................................ 15
5.0 SWOT ........................................................................................................................................ 16
5.1 Strengths............................................................................................................................... 16
5.2 Weaknesses .......................................................................................................................... 16
5.3 Opportunities ....................................................................................................................... 17
5.4 Threats .................................................................................................................................. 18
6 Analysis – Strategic Group Map & SPACE Matrix ........................................................................ 19
6.1 Strategic Group Map ............................................................................................................ 19
6.2 SPACE Matrix ........................................................................................................................ 20
6.2.1 Space Matrix – Diagram ............................................................................................... 21
7.0 Problems and Alternate Strategies .......................................................................................... 21
7.1 Major Problem – Devaluation and Current Economic Climate........................................... 21
7.2 Minor Problems .................................................................................................................... 22
7.2.1 Minor problem 1 – Managing Cash Flows ................................................................... 22
7.2.2 Minor problem 2 – Market Size ................................................................................... 22
7.2.3 Minor problem 3 – Competition from Imports ........................................................... 22
7.2.4 Minor problem 4 – Managing Ethylene Supply ........................................................... 22
7.3 Strategic alternatives and choice......................................................................................... 23
7.4 Recasted Financial Statements ............................................................................................ 24
8.0 Distribution of work ................................................................................................................. 24
9.0 Interviews taken ....................................................................................................................... 24
ANNEXURES .......................................................................................................................................... 25
ANNEXURE A..................................................................................................................................... 25
Table 1 .......................................................................................................................................... 25
Graph 1 ......................................................................................................................................... 25
Annexure B ....................................................................................................................................... 26
Annexure C ....................................................................................................................................... 27

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 Annexure D ....................................................................................................................................... 28
Annexure E ....................................................................................................................................... 29
Annexure F........................................................................................................................................ 30

1.0 Introduction
Engro Polymers & Chemicals Limited (EPCL) is a subsidiary of Engro Corporation

Limited, a subsidiary of Dawood Hercules Corporation Limited. Incorporated in 1997, EPCL

manufactures and markets Chlor-Vinyl products which include Polyvinyl Chloride (PVC),

Vinyl Chloride Monomer (VCM), Caustic Soda, Hydrochloric Acid and Sodium Hypochlorite.

1.1 History and Overview

Poly vinyl chloride (PVC) is one of the few petrochemicals in which Pakistan is nearly

self-sufficient in. PVC’s sole supplier in the country is EPCL but its downstream market

consists of SMEs. Belonging to the chlor-alkali sector, EPCL’s domestic demand is about

240,000 tons with import substitution being carried out to the tune of $150 million.While

EPCL’s core offering is its flagship PVC brand “SABZ”, it produces other products within the

chlor-vinyl products which include Vinyl Chloride Monomer, Caustic Soda, Hydrochloric Acid

and SodiumHypochlorite.

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 Currently, Engro Corp holds 56% of EPCL’s shares and Mitsubishi Corporation holds

11%.EPCL is working towards increasing PVC production by 100,000 tons for which Rs10.3

billion investments is planned. The project aims to increase its capacity to 295,000 tons from

195,000 tons.In Pakistan, per capita PVC consumption is only about 1.2 kg as per EPCL

estimateswhile world consumption is about 5.5kg per capita.Comparison is shown in

Annexure A Graph 1.

Though the bulk of Pakistan’s PVC requirements are fulfilled through local

production, about 16 percent of total PVC consumption is met through imported scrap. PVC

imports are tariffed at 13.4 percent at 4-digit level. At the 8-digit level most pertinent to

domestic production (3904.1090 and 3904.1010), tariff protection is at 11 percent with

provisional anti-dumping duties ranging from 11 percent to 42 percent. EPCL maintains that

tariff protection is essential for continued domestic production.

1.2 Mission statement

“To achieve innovative growth which creates value for our stakeholders, customers and

employees. Our commitment is to maintain the highest standards of ethics, safety and

environmental responsibility.”

1.3 Vision statement

“Lead Pakistan in Polymers & Allied Chemicals with international footprint”

While plant safety was highlighted as an aspect of the mission, especially in terms of

man hours, the vision statement appeared to be more taken to heart. It is possible, that the

vision statement is easier to understand and explain since EPCL is a leader in polymers

through its PVC activities.

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1.4 Products & Markets
1.4.1 PVC
PVC pipe manufacturing industry has presence in all major industrial cities of

Pakistan with around 350 - 400 manufacturing units. Lahore with 250 units is the biggest

pipe manufacturing cluster with Gujrat a far off second with 25 units. Pipe & fitting segment

has seen growth in recent year due to government projects, CPEC related spending, increase

in private housing, and tube well pipe refurbishment. Since demand is anticipated to grow

strongly, several pipe manufacturers have upgraded their facilities and added new

production capacity.There is 95 percent penetration of PVC pipes in the conduit sector, 65

percent in the tube well sector and 15 and 20 percent respective penetrations in the

drainage and water supply sector.

1.4.2 New PVC markets

EPCL has been working towards developing markets other than traditional pipes. As

per its annual report, its star products for 2018 were PVC foam board and PVC wall panel

which posted double digit growth. To develop these markets, EPCL participates in trade

exhibitions, industry fairs, and conferences to educate potential customers. These include

Build Asia Conference and ABAD International Expo which showcased PVC products such as

doors, windows, roofing, panels, floorings, mater etc. In these exhibitions, EPCL acted as a

mediator between PVC product manufacturers and consumers like architects, builders, and

contractors. EPCL aims is to introduce multiple uses of PVC to downstream markets and

they are working with builders, architects, and contractors to do so.

1.4.3 Caustic Soda

Caustic soda is mostly used in dyeing and mercerizing in textiles. It is also used in FFA

removal from edible oil & ghee, soap and water purification. Its main use is by the textile

sector. Despite several attempts by government, PML-N and PTI, growth in textile sector has

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been sluggish. Latest figures by Pakistan Bureau of Statistics for 8MFY19 posted a sluggish

2% growth. If current trends continue then caustic soda’s market will remain oversupplied

by domestic players.

1.4.4 Hydrogen Peroxide

EPCL derives hydrogen as part of its caustic manufacturing process. Currently

hydrogen is being used mainly as fuel so the company is planning to enter the hydrogen per

oxide business through a green field manufacturing facility. The company is also investing in

sodium hypochlorite and hydrochloric acid which mostly caters to the textile sector.

1.4.5 Caustic Flakes

It is a new product line within the chlor alkali segment. A 20,000 MT plant is

expected to come online this year to allow the company to supply the southern domestic

market and export through sea.

1.4.6 Other products

Hydrochloric Acid isused for pickling, oil well acidizing, water treatment, cleaning, food

processing, and medicine.Sodium Hypochlorite isused for as bleaching agent mainly by

textile industry, as a disinfectant, and as a water treatment agent. The company expects this

chemical to replace chlorine gas for water purification.

1.5 Organization Structure

Organization structure in attached at Annexure D

2.0 Financial Analysis, Future Projections

EPCL is a public limited company listed on the PSX (Pakistan Stock Exchange) and therefore

it is not appropriate to overlook the stock price and performance. The stock outperformed

KSE 100 index by +54% posting areturn of 46% during CY18. The company reported

earnings of PKR 4.92bn (or PKR5.42/share) for CY18 which is 2.5 times higher than prior year

(PKR 2.05bn (EPS:2.26)- CY17; Reasons for this are a) better PVC-ethylene margins

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amidweak PKR USD exchange rate, b) continuation of Anti-dumping and RegulatoryDuty, c)

volumetric growth in PVC sales leading to highest ever sales of PVC at growth rate of +9%

compared to last year and d) steady caustic soda market (minor growth of +2% in CY18 as

compared to prior year).

During 2018, international PVC prices witnessed a slight increase of +3%YoY,averaging at

USD 920/ton. On the flip side, ethylene prices climbed aggressively(+9%YoY) to 1,165

USD/ton on the back of high feed costs and tight supply amidcracker turnarounds.

Global Ethylene prices remained volatile during 2018. As a result, core margins of PVC-

ethylene increased from an average of USD 362/ton during the 9MCY18 to 426USD/ton by

4QCY18. EPCL’s gross margins were however not reflective of this and saw a sequential

decline, from 29% in 1QCY18 to 20% in4QCY18. The reason for this includes upward gas

price revision effective from October 2018 with limited price pass-over and high cost

inventory on-hand.

From a long-term perspective, global ethylene capacity enhancements are in process for the

next nine years (totalingapprox...280mtpa). Major additions are coming up in China and

USA. Some of these capacities are expected to commence business in CY19 with suppliesin

Asia already increased to 3.5% in 2019 (S&P GlobalAnalytics). Demand for PVC in Asia is

expected to remain strong given growing private consumption and infrastructure

developments. However, supply might be affected with China’s decision of cutting its

production (due to environmental regulations). Hence, prices are likely to stay firm, backed

up by seasonal demand from India during the first half of 2019.

EPCL plans to expand its business through PVC Capacity enhancement and product portfolio

enhancement (caustic flakes and hydrogen peroxide). Given factors mentioned above, we

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foresee that earning will start to grow form 2020 onwards since impact of these expansions

will materialize.

As per Table 1 in Annexure A, EPCL is in the process of expanding its capacity in PVC by 100k

tons, which is expected to commence commercial operation by the end of 2020. To

financethis investment, the company raised PKR 5.4bn through right shares issue and

recently availed Ijarah based financing facility of US 35mn (PKR 5.0bn) with IFC.

Furthermore, as part of process improvement, EPCL aims to utilize oxygen basedVCM

technology (capex approx.. USD 9mn), which is expected to reduce its raw material

consumptionby 2%, and further reduce cost of sales (this could lead to a positive EPS impact

of circa PKR0.5/share). The project will be funded through internal cash generation.

Recently the government has withdrawn regulatory duty (2%) onimported resin, the impact

of which translates negatively to PKR 0.30/sharefor EPCL.

The stock of EPCL is currently trading at P/E ratio of 7.8 and offers a dividend yield of 2.7%.

Although on P/E basis, the stock is tradingrelatively higher (7.80x), but keeping a

conservative view, we would project market P/E of 7.6x. The real impact of this shall be

translated 2021 onwards when expansions and new businesses materialize.

Commentary on Ratio Analysis:

Higher gross profit during 2018 has significantly impacted the Company’s profitability which

depicts a healthiereconomic picture as compared to last year. EBITDA increase by ~ PKR.

3,139 Mn. Additionally, profit margin ratio has also shown improvement by rising from 7.4%

in the previous yearto 13.98% in the current year, which measures effectiveness of

convertibility of the Company’s sales into net income.Gross Profit ratio also improved from

21.9% in 2017 to 24.77% in 2018.

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Liquidity ratios have been showing significant improvement since 2013 including current ratio for the

year which improved to 41 basis points due to availability of excess cash generated from operations

and raised through issuance of right shares for funding of expansion project. Due to better

management of working capital cycle, quick ratio has also improved by 63 basis points.

3.0 Internal Environment Analysis

3.1 Human Resources & Management
From 2008 till 2015, EPCL was not doing well with the news in the market being that

Engro will divest EPCL. Things started changing for the better from 2015 onwards. Then

there was a change in upper management with EPCL’s CEO becoming Engro Corp’s CEO and

Imran Anwar (IA) took over CEO EPCL. Since the change, the company took a turn for the

better financially. There were three aspects internally when IA took over. First, the base

business of PVC was in trouble. To combat that, IA brought in optimization in every process.

The second was investing in plant debottlenecking and increasing reliability. Third, was

getting cheaper finance for the company.

As per various interviews, EPCL promotes internally as well hires from outside the

organization. Succession planning is taken serious at EPCL. Every year "Talent Review

Sessions' are conducted with the objective to map the succession plan of a department, as

regards its capacity, potential and career development needs of employees. Then a

comprehensive Talent Management Plan is developed.

The talent review process is a series of structured, facilitated process where

employees (direct reports) are reviewed in terms of their key strengths, career goals, stage

of readiness, and areas for development and action plans. Learning Framework has been

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launched in 2018 for all career levels comprising of specific programs not only for people

managers and supervisors, but also for individual’s contributors. The collaboration with

Harvard Manage Mentor to provide online digital learning opportunity for people has been

appreciated and gives a flexibility to the employees to choose area where they want to

develop and learn more from the best in class modules designed by Harvard.The flagship

initiative of EPCL Cares - an initiative which combines experiences & gestures to touch at

employee’s heartstrings and show the organization cares about our employees and their

families has been an instant hit among the employees.

HR has continued the tradition of organizing monthly Face2Face with CEO – monthly

skip level meetings in order to have free flowing communication across all levels with 91%

resolution rate of issues by Dec 2018.With repeated interactions with different employees

the following has been observed:

 There is general optimism in the success of the company. Employees seem to buy

into EPCL’s long term expansion plans

 The physical environment in which employees operate also impact motivational

levels and productivity. EPCL’s offices were observed to be beautiful with lots of

natural sunlight and easy access to amenities.

3.2 Sales & Marketing

The company faces competition from imports. The China US trade war has resulted

in a global crunch resulting in a downward trending market because of excess supply. While

EPCL has lobbied for anti-dumping duties, those are limited to 4 countries: China, Taiwan,

South Korea and Thailand. It faces competition from imports from countries such as the US.

To combat this competition, the company offers technical support to customers and helps in

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training them. But the company is facing competition from US, Germany, Indonesia, and

Belgium which do not have anti-dumping duties imposed.

To combat this, EPCL focuses on its sales and marketing to develop long term

relationships with its customers. It carries inventory exposure for its customers and delivers

PVC when required so that their customers do not need to maintain extensive inventories.

As part of its strategy, EPCL also provides technical expertise to its customers. So for

example, PVC resin kadanais used to make pipes. If the pipe producing company has a

problem manufacturing, EPCL provides technical expertise to help with it. This is how the

company sets itself apart from imports not protected by anti-dumping.

3.3 Finance
The company faced major financing challenges till 2015. From 2016 onwards its

profitability improved and with loans from Engro it survived its liquidity crunch. The

company is working towards Rs10.3 billion expansion plan for its production plants of PVC,

Vinyl Chloride Monomer, and caustic soda. EPCL has raised Rs5.4 billion through rights share

issue and $35 million for International Finance Corporation, a member of the World Bank

Group. As per recent company notices to the bourse, EPCL also issued a Shariah-compliant

Sukkuk of Rs8.75 billion in January this year with the purpose of re-profiling its long term

loans. As per 3QCY18’s report, JCR VIS assigned a rating of AA-/A1+ and PACRA upgraded

entity rating to AA-/A1+. This seems to bear witness to EPCL’s robust business model and

strong financial profile.

3.4 Production and Operations

The company has had repeated bouts of debottlenecking. It is working continuously

towards making its production process more streamlined and efficient. This was one of the

changes made by Anwar when he took over as CEO – to ensure that the plant is running

optimally. As a result, the plant had its highest number of man hours (15.67 million) without

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loss through work injury till date. These efforts resulted in the highest ever PVC being

produced till data from 178,000 tons to 195,000 tons. However, it came to light during one

of the interviews that the plant is close to optimum efficiency and there may be little left in

terms of major operational improvement that could enhance production.

3.5 Supply Chain

Supply chain is a huge challenge for EPCL. Ethylene is a key raw material for PVC and

makes up for 65% of its cost of production. But sourcing ethylene is difficult for multiple

reasons.

Firstly, it is hard to procure. There are a lot of plants that are integrated in Middle

East, Africa, North East Asia and North America. What these plants do is that they produce

ethylene but use it internally. Product availability for trade is low which is why EPCL’s supply

chain has to go out in the market to procure a commodity that is rare.Secondly, it requires

cryogenic vessels that can cool at the level of -104 degree Celsius. These vessels are hard to

come by. Storage is another problem since its requires high levels of cooling. EPCL has the

capacity to only store one month’s raw material supply so the team is always working

towards securing a supply.

3.6 Health, Safety and Environment

The company is ISO-14001 certified which is an environment management system.

After moving to the new head office, initiative on Green Office Certification by WWF for

head office was taken. An audit was carried on in December 2018 which was found

satisfactory by WWF and head office was green office certified by WWF. In 2018, EPCL was

audited by consultant for BSC Five Star Environment in which EPCL secured a score of 89%

and “Four Star” rating. It is a jump from the previous rating of “Three Star”.The company

met all its safety KPIs defined for 2018. The total recordable injury rate was at 0.05 which

was below the target of 0.17 for 2018. Fleet accident frequency rate was at 0.994 and

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process safety total incident rate was 1.6 for 2018. Since the annual report does not outline

what that targets were, it is hard to gauge whether the numbers met the target or were

above targets. Automation and digitization of major business process and significant

reduction in paper usage. Their strategy has 5 aspects: 1) paperless, 2) wireless systems

upgrade, 3) workplace agility enhancement, 4) automation of sales operation and 5)

development of business information dashboards. Milestones have been set and are being

monitored on a regular basis to ensure timely and successful completion.

4.0 External Analysis

4.1 Global
In South Asia, namely India, Pakistan, Bangladesh, and Sri Lanka, PVC demand

growth has seen strong trends. In 2017, PVC demand in the region stood approximately at

3.5 million tons while supply gap was 1.8 million tons, creating a gap between demand and

supply of nearly 100 percent. This makes the region a net importer and provides potential

for excess domestic production to be exported.

Globally, the prices of caustic soda remained volatile during 2018. In Asia, new

import regulation on caustic soda has increased the inventory level for Japanese producers,

resulting in availability of export cargos and decline in prices. Going forward, strong

downstream expansion is expected to come online in South Korea which will support

Caustic Soda demand in the region.

4.2 Political
There are two main domestic political factors that influence EPCL’s operations and

profitability. On one hand is CPEC projects pertaining to infrastructure and PTI’s promise to

build new houses. If the houses materialize, there will be a huge boost for EPCL since it is

part of the construction chain and pipes are used in all homes. Similarly, construction of

more roads requires laying of pipes for wires and would resultantly increase demand. The

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other major political factor is anti-dumping duties. While the company has successfully

imposed anti-dumping duties on China, Taiwan, South Korea and Thailand, it still faces

competition from Indonesia, Belgium, US and Germany.

International politics impact availability and price of gas in the country. Talking to an

analyst from BR Research regarding the gas supply, the situation appeared bleak. Iran

Pakistan pipelines would ensure a secure gas supply but given US sanctions, that project is a

pipe dream. The other project is TAPI but since it involves Afghanistan, the project may not

materialize in its timeline of 2025, especially if US troops are pulling out of Afghanistan.

4.3 Economic

From PML-N to PTI the economy has gone through a bit of a roller coaster. The start

of 2018 started off on a high note with strong project spending driving domestic sectors. But

with the devaluation of the rupee, rising fiscal deficit, and contractionary cycle that the

economy is in currently, demand fell.

While EPCL import substitutes to about $150 million, TradeMap data indicates $75

million of imports in Pakistan 2017 of PVC which indicates a more potential for further

import substitution. Though it’s a small percentage of total imports, given the current trade

deficit it would aid in reducing pressure on foreign exchange reserves. In the last quarter of

2018, the government raised gas prices by 30% which increases EPCL’s cost. While EPCL has

multiple times tried to convince the government that as caustic soda is part of the textile

chain, therefore the gas rates extended to the export-oriented sector should be extended to

the company as well but with no avail.

Going forward, Pakistan is most likely to enter into the IMF program in the next few

months, reports Dawn. It is expected that gas tariff will be increased by 15-22%,

notwithstanding gas companies’ demand for up to 145% increase. While the latter scenario

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is likely to materialise, needless to say that the higher gas rates not only impact EPCL’s

profitability but also the textile sector that consumes caustic soda. Thus higher gas prices

will reduce EPCL’s profit hence impact the bottom line directly, while decreasing demand for

its product hence decreasing topline which will have a trickle down impact on the bottom

line.

Another aspect is the removal of 2% FD on PVC resin which makes imports, the

company’s main competition, more competitive. A report by Arif Habib estimates a 6.3%

decrease in EPCL’s 2019 estimated earnings. This news, along with higher gas prices and

reduction in overall demand in the economy indicates that the economic environment is not

favorable for EPCL.

4.4 Social
EPCL has undertaken several initiatives as part of its corporate social responsibility.

Their worth for 2018 was Rs.85 million which were used for the development and

emancipation of the underprivileged. EPCL collaborated with Citizen’s Foundation to build

two schools that will provide education to 1,200 children. An agreement has also been

signed with SINA to establish heath care unit for nearby community residents.

4.5 Technological
Being a manufacturing company EPCL works with different machines, equipment’s

and even processes which are a part of technology. EPCL will have to keep itself updated

with the latest PVC manufacturing technology to avoid any technology obsolescence risk.

EPCL is producing PVC with the raw material known as VCM which is the common

international technology; the other traditional method was the production of PVC resin

through calcium carbide. EPCL has to keep track of the PVC manufacturing technology to

prevent itself from operating on less efficient technologies.

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5.0 SWOT
5.1 Strengths
 The parent brand name of Engro Group lends the market a financial strength to all its

subsidiaries including Engro Polymer and Chemicals Limited.

 EPCL is the sole producer and marketer of PVC (Poly Vinyl Chloride) resin in the

market, thus operating as a monopoly. It covers 70%-80% of the total market for PVC

resin.

 Chlorine, Ethylene di Chloride and Vinyl Chloride Monomer manufacturing facilities

which are the basic raw material in the production of PVC. These raw material

facilities are achieved through backward integration plan of EPCL, which means that

at least part of its supply chain of raw material is in their control, assured, and of the

required quality.

 Loyal customer base established through years of strategic long term relationship

building.

 High entry barriers in the PVC manufacturing market also serve as one of the major

strengths of EPCL. Petro chemical businesses are extremely capital intensive

investments and since EPCL services most of the market, there is little threat of a

rival setting up shop in Pakistan.

 Diversification with emphasis not on PVC alone, in line with its vision statement.

 EPCL has over the years built unique technical expertise in Chlor-Vinyls which allows

it to be able to access a pool of specialized labour attuned to its needs.

 Despite the financial crunch of past years, EPCL now has a strong credit rating.

5.2 Weaknesses
 Dependence on specialized raw material ethylene creating supply chain and storage

constraints

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  Increased exposure due to volatility in international commodity prices for ethylene

 Oversupplied caustic soda market while textile have not shown strong growth

 Increase in gas prices resulting in reduced margins as manufacturing PVC is an

energy intensive process

5.3 Opportunities
 Low consumption per capita of PVC in Pakistan with limited uses of PVC means that

there is a lot of room in the sector for growth

 PTI’s housing scheme – though it may not be possible to build 5 million houses in 5

years, even a proportion of the promise fulfilled would give a boost to EPCL since

PVC is used for making pipes and all homes require pipes.

 Construction within CPEC, especially of roads would be a boost for EPCL since roads

are laid down with pipes

 The region is a net importer of PVC which means it has some opportunity to export

PVC. (EPCL’s exports however have been limited as yet – 2.2% of net sales in 2018)

 Increased awareness of water shortage, thus a shift in agriculture from flood farming

to drip irrigation system. This drip irrigation system includes PVC pipes as a major

part of the system thus directly increasing the demand for PVC pipes and indirectly

increasing the demand for PVC resin.

 While a weaker rupee makes ethylene more expensive, it also makes EPCL’s

competition imports more expensive. Whether the price hike of a more expensive

ethylene will be offset by more expensive PVC imports due to devaluation is hard to

gauge.

 EPCL also has plans to introduce a variant of caustic soda, namely, caustic flake in its

chlor-alkali segment. The production capacity will be 20,000 tons. With this new

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 product addition, the company can also tap in to export markets, in addition to the

local industry, enhancing its market share. The new variant is expected to be offered

at a price of 10-15% above that of caustic soda.

5.4 Threats
 Ethylene prices in the international market pose as major threat to EPCL as the

prices are volatile and influence by oil prices since ethylene and PVC are part of

petro chains

 Current economic downturn may result in lower demand of PVC resin by the

industries that use PVC as a raw material.

 High depreciation and interest charges due to recent facility expansion also serve as

a major threat to EPCL. In case of any further breakdowns on the plant EPCL can

have irreversible damages to the balance sheet and income statement.

 Repeated bouts of PKR devaluation makes importing ethylene more expensive and

harder to compete against imports.

 Rise in gas prices in Pakistan which impact its bottom line as well as reduce demand

from industries such as textiles

 Imports of PVC from regions where anti-dumping duty has not been imposed is a

major threat to EPCL because it can easily undercut EPCL’s prices as explained above.

 Increase in interest rates due to economy’s contractionary cycle could put further

pressure on EPCL’s financials as raises capital for its Rs.10.3 billion expansion plans.

 Sitara Peroxide and DesconOxychem are the main players within the hydrogen

peroxide market. They have 60-70% market share with the rest being supplied from

imports. Both are intending to expand as well so the hydrogen peroxide market may

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 get oversupplied with EPCL’s expansion and therefore not generate the returns

expected from the investment.

 If there was a catastrophic loss in supply (e.g. catastrophic Property Damage event at

Jubail -Kingdom of Saudi Arabia) the continued global demand for ethylene versus a

reduction inproduction could drive the price higher and lead to increased cost of

sales for Engro Polymer.

 There could also be an initial period in which Engro Polymer may be unable to find

replacement cargoes for the materials supplied by the long-term agreement with

their suppliers as there may be limited spot cargoes available for purchase. This may

result in an unplanned reduction in operations due to uncontrollable, external

factors. Additional shipping costs may need to be paid to open the arbitrage for

cargoes loading within Europe and the United States of America to disport in

Pakistan. Should the price of raw materials increase, the marginal economies to

manufacture PVC would diminish which may lead toeconomic sparing of Engro

process units and a loss of revenue

6 Analysis – Strategic Group Map & SPACE Matrix

PVC contributed to 84% of EPCL’s revenue as shown in Annexure C.

6.1 Strategic Group Map

The strategic group map is used to display EPCL’s position in the industry. As PVC is a

commodity, and its quality (excluding hazardous scrap) is consistent among international players as

well EPCL, the two factors being considered are price and quality, but quality here has multiple

dimensions. Excluding scrap, which is hazardous, quality is roughly the same since PVC is a

commodity and a petrochemical. There is limited or no point of differentiation between quality of

EPCL versus quality of imports from, for example, Belgium. However, EPCL claims its point of

difference is in providing quality customer service from taking on exposure of inventory and delivery,

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to aiding downstream industries to develop new markets and providing technical expertise for

troubleshooting. Therefore, the x-axis dimension of quality includes customer service in the below

graph.

The graph shows that imported scrap are lower priced and also have a far lower quality,

given that it is hazardous waste that should be destroyed. Competition from countries that have

anti-dumping duty imposed on them have a higher price point and a lower quality in terms of

customer service. Similarly, countries that do not have anti-dumping duties imposed on them have a

lower price point than EPCL but also a lower quality in terms of customer service. EPCL is priced

higher than imports from countries that do not have anti-dumping duties but its level of quality is

higher as well. EPCL’s main competition is from the green strategic group since it beats EPCL on

price. If the price difference increase or customers do not value superior service from EPCL than the

company would lose market share to the green strategic group.

6.2 SPACE Matrix: As per Annexure B

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6.2.1 Space Matrix – Diagram
Conservative Aggressive

0.6
0.5
0.4
0.3
0.2
0.1
1 2

Defensive Competitive

The SPACE matrix shows that EPCL has the internal strengths and competitive

advantage to continue to pursue its aggressive strategies. With its strong brand name,

relationships in the market, monopolistic characteristic, and advantage of home market,

EPCL can continue to expand as per its current path. They can opt for strategies such as

expansion, market development and market penetration.

7.0 Problems and Alternate Strategies

7.1 Major Problem – Devaluation and Current Economic Climate
With a 27 percent increase in the topline, EPCL has been doing well. It has been

anticipating increase in market demand and therefore has Rs.10.3 billion plans in the

pipeline to expand. These plans accommodate a double digit growth in PVC demand for

which capacity is to be increased by 50%. Furthermore, these plans include expansion in

other segments such as hydrogen peroxide and caustic flakes. However, those plans were

made before the contractionary economic cycle and repeated bouts of devaluation. Since

the machinery required for expansion has to be imported, and therefore will cost in dollars,

EPCL may face major financial crunch in the months and years to come as the rupee

21
devalues. It could derail the entire expansion plan and leave EPCL with a huge debt on its

hands.

7.2 Minor Problems

7.2.1 Minor problem 1 – Managing Cash Flows
Linked to the major problem would be the problem of managing cash flows at a time

when earnings are in rupees but purchases are in dollars. Some of the interest payments will

be in dollars as well since the company has taken $35 million loan for International Finance

Corporation (member of the World Bank Group).

7.2.2 Minor problem 2 – Market Size

The premise of the expansion plan is that the market will increase. But if the

economy does not improve, the market size may at best remain stable or decrease which

may leave the company with excess capacity and limited export potential.

7.2.3 Minor problem 3 – Competition from Imports

Even if the market size increases, EPCL needs to ensure that it is protected or at least

more competitive than imports from other countries that do not have anti-dumping duties

imposed on them and can undercut EPCL’s prices.

7.2.4 Minor problem 4 – Managing Ethylene Supply

Ethylene, the core raw material, is hard to procure and hard to supply. It is hard to

procure because countries producing it consume it domestically. It is hard to store because

it requires cryogenic storage of below 104 degrees Celsius. Increasing capacity would

require enhanced supply chain management and storage facilities which are limited in

Pakistan.

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7.3 Strategic alternatives and choice
There could be a revenue shortfall in being able finance the debt for expansion. In that

case the options are:

 Increase efficiencies to boost production and bring down cost, which as mentioned

may be hard because they are approaching optimal levels

 Increase in price of PVC as a monopoly but that would lead them more vulnerable to

competition from imports

We propose that EPCL works actively and aggressively on pushing non-traditional sectors

of PVC consumption. Higher urbanization rates would help drive demand and revenue

would be supported since décor could potentially have higher margins than pipes. Since

EPCL will be working closely with downstream sectors in providing support and technical

expertise it could have a captive market to absorb its excess PVC. During one of the

interviews we were informed that EPCL is going to unveil some important plans to develop

downstream markers. The information could not be shared with us because it was

confidential but it was asserted that before the end of the semester it will be public

knowledge. However, the end of the semester is here but no news has come to light

indicating a lag and a delay in plans. To overcome these obstacles, EPCL needs to get out of

its analysis paralysis and be more proactive in developing alternate and non-convention

markets for PVC.

Furthermore, the company’s proportion of exports is limited. EPCL should identify

international and work towards strengthening its exports abroad to support its revenue

streams. Currently, it has capacity to store only one’s month’s ethylene. It needs to invest in

enhancing its storage capacity.

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7.4 Recasted Financial Statements:As per Annexure E

8.0 Distribution of work

Company Overview and Introduction
Organization Structure
Financial Analysis, Future Projections
Internal Analysis
External Analysis
SWOT Analysis
SPACE Matrix
Strategic Mapping
Identification of Problems
Strategic alternatives
Arrangement of Interviews
Final Compilation of Report

9.0 Interviews taken:As per Annexure F

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ANNEXURES
ANNEXURE A
Table 1
Cumulativ
Additio Estimated e Capital
nal Commenc Capital Expenditur
Capacit ement Expenditure (in e (in PKR
Projects Planned Project Type y (ktpa) Date PKR bn) bn)
Sodium
Hypochlorite/chloride Debottlenecking - Sep-18 0.2 0.2
Caustic Soda Membrane
for Effeciency Effeciency - Sep-18 0.6 0.8
Gas Turbines Efficiency - Sep-18 0.2 1
Others Efficiency - Dec-18 1.4 2.4
Caustic Flakes Greenfield 20 Mar-19 0.3 2.7

Polyvinyl Chloride (PVC) Brownfield 100 Sep-20

Vinyl Chloride Monomer
(VCM) Debottlenecking 50 Sep-20 7.6 10.3
Hydrogen Peroxide (HP) Greenfield 25-30 Sep-20 3.1 13.4
VCM / Ethylene Di
Chloride (chloride to
Oxygen) HCL Efficiency 0 Dec-20 1.2 14.6

Graph 1
Graph 1 - Per capita PVC consumption
Pakistan
kg per capita

Bangladesh
Indonesia
Malaysia
Thailand
South Korea
World
India
China
0 5 10 15 20 25
Source: EPCL annual reports and plastics insight

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Annexure B
SPACE Matrix
S. no: Particulars Ratings
Financial strength (FS)
1 Profitability 4
2 Revenue 4
Average 4
Industry Strength (IS)
1 Growth potential 5
2 Profit potential 5
3 Ease of entry into market 1
4 Capacity utilization/productivity 5
Average 4
Environmental Stability (ES)
1 Competitive pressures -3
2 Gas prices -3
3 GDP growth -3
4 Demand variability -2
5 Ease of exit from the market -6
Average -3.4
Competitve Advantage (CA)
1 Market share -1
2 Control over suppliers -5
3 Customer loyatly -2
4 Product quality -2
Average -2.5
Directional vector coordinates: x-axis: IS +CA = +4+(-
Results 2.5)=+1.5
y-axis: FS+ES = +4+(-3.4) = +0.6

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 Annexure C

Graph 2 - Revenue break-up of EPCL - 2018

16%

84%

PVC and allied chemicals

Source: EPCL annual report 2018

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Annexure D

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 Annexure E
Income statement
Rs. Mn 2018 2017 2016 2015 2014 2013
Net revenue 35,272 27,731 22,854 22,264 23,619 24,592
Cost of sales (26,536) (21,665) (18,919) (19,490) (21,998) (19,681)
Gross profit 8,736 6,065 3,935 2,773 1,821 4,911
Distribution expenses (1,375) (1,328) (1,180) (1,211) (1,428) (1,344)
Administrative expenses (669) (584) (519) (515) (628) (606)
Other operating expenses (872) (356) (149) (325) (309) (521)
Other income 1,234 133 20 57 174 278
Operating profit 7,055 3,930 2,107 778 (370) 2,718
Finance costs (606) (821) (927) (1,144) (1,065) (1,374)
Profit before tax 6,449 3,109 1,180 (366) (1,435) 1,344
Tax (1,531) (1,060) (525) (283) 419 (627)
Profit after tax 4,917 2,049 655 (649) (1,016) 717
EPS 6.21 2.93 0.99 (0.98) (1.53) 1.08
Gross profit margin 25% 22% 17% 12% 8% 20%
Net profit margin 14% 7% 3% -3% -4% 3%

Balance Sheet
Rs. Mn 2018 2017 2016 2015 2014 2013
Assets
Non-current assets 19,639 16,203 16,719 17,363 18,058 17,740
Current assets 16,331 8,162 7,702 6,879 8,244 7,500
Total Assets 35,970 24,364 24,421 24,242 26,301 25,240

Equity and liabilities

Equity 16,744 7,760 6,004 5,303 5,939 6,934
7,890 8,750 8,750 5,280 6,143 7,575
Non-current liabilities
Current liabilities 11,337 7,854 9,667 13,659 14,219 10,731
Total Equities and Liabilities 35,970 24,364 24,421 24,242 26,301 25,240

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 Annexure F

Interview Details of Person Discussion

1 Name of person:
Designation:
Place of meeting:
Time of meeting:
Duration of the meeting:
2
3
4
5
6
7
8

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