Chemicals and Life Sciences: ICI PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002 - Quarterly 2003-2007
ICI Pakistan Limited is 75.81% owned subsidiary of ICI Plc, UK. It was set up as a public limited company in Pakistan in 1952. ICI's presence in this part of the world, however, predates the formation of the public limited company and indeed, Pakistan itself.
The Khewra Soda Ash Company, a predecessor of ICI Pakistan Limited, set up a soda ash manufacturing facility in Khewra in 1944 with a capacity of 18,000 tonnes per annum. This facility was sited next to the salt range as rock salt and limestone; two key raw materials for manufacturing soda ash were available here in abundance.
Presently, ICI Pakistan's five businesses, polyester, soda ash, paints, chemicals and life sciences manufacture and sell a range of industrial and consumer products.
These include polyester staple fibres, POY chips, light and dense soda ash, sodium bicarbonate, paints for the decorative, automotive, refinish segments, for industrial use and projects, specialty chemicals, polyurethanes, and adhesives and the company also arranges manufacture on a toll basis of pharmaceutical and animal health products. It also markets seeds as well as engaged in trading in various specialised chemicals for use in industries in Pakistan.
ICI Plc UK, parent company of ICI Omicron BV has been acquired by Akzo Nobel NV. With this acquisition, Akzo Nobel becomes the ultimate holding company, although ICI Pakistan Limited remains a direct subsidiary of ICI Omicron BV.
RECENT RESULTS (Q3'07):
Overall, the company strongly performed and achieved the double-digit growth in its operating results up to third quarter and nine months of 2007 compared with the same periods in 2006, due to strong performance of all the businesses except polyester and chemicals.
The company's operating result for the quarter and nine months at Rs 750.2 million and Rs 1,988.8 million was 16% and 10% higher than the corresponding periods last year. Though business conditions in the textile chain has put PSF profitability under severe pressure.
Sales volume for the quarter increased across all the businesses. For nine months all businesses achieved growth in sales volume except soda ash. Gross profit was higher by 13% and there was 10% growth in net sales income across all businesses.
Selling and administration expenses increased compared to the same quarter last year in order to support business development and growth in the paints, life sciences and chemicals. With the expansion of plant capacity by additional 50,000 tonnes per annum in the soda ash business, production in Q3 2007 increased by 17% compared to the same period last year.
Financial charges for the quarter and nine months at Rs 29.1 million and Rs 101.7 million were 69% and 60% lower than the comparable periods last year due to buyout of the Fayzan Manufacturing Modaraba's plant in September 2006.
With improved operating results and lower financial charges, profit before tax for the quarter and nine months at Rs 742.3 million and Rs 1,868.1 million was 35% and 23% higher than the same periods last year. Profit after tax for the quarter and nine months at Rs 437.4 million and Rs 1,178.3 million was higher than the comparable periods by 8% and 19% respectively. Earnings per share for the quarter at Rs 3.15 and for the nine months at Rs 8.49 increased by 8% and 19% respectively over the same periods last year.
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Recent Results Q3 '07 Q3 '06 % chg
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Turnover 18,164,473 16,237,018 11.87%
Sales tax, commission and discounts 2,101,656 1,796,138 17.01%
Net sales and commission income 16,062,817 14,440,880 11.23%
Cost of sales 12,796,981 11,478,730 11.48%
Gross profit 3,265,836 2,962,150 10.25%
Selling and distribution expenses 719,506 650,479 10.61%
Administration and general expenses 557,487 511,078 9.08%
1,988,843 1,800,593 -
Financial charges 101,731 255,280 -60.15%
Other operating charges 154,061 120,948 27.38%
255,792 376,228 -
Other operating income 135,052 93,018 45.19%
Profit before taxation 1,868,103 1,517,383 23.11%
Taxation 689,816 529,080 30.38%
Profit after taxation 1,178,287 988,303 19.22%
Earnings per share - Basic and diluted 8.49 7.12 -
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Financial performance (FY'02-Q3'07):
As far as the gross profit margin of ICI Pakistan is concerned, a commendable trend was witnessed since 2003. This can be majorly attributed to a rise in commission income, which had to play a significant role in the impressive gross profit of the company. However, owing to high administrative expenses and other operating charges, the net margin did not tell an equally awe-inspiring story. A higher tax charge can also be held responsible for the declining net margin.
However, the tax charge of 2006 was primarily on account of a partial write-off of deferred tax asset and does not involve any cash outflow. Accordingly, profit after tax for the year 2006 was 35% lower compared with the corresponding period of previous year. One can see the same trend being continued in 3Q'07 where the profit and gross margins are almost equal to that of FY06. One can expect them to be higher than last year at the year-end, in the light of above trend.
Interestingly, taxation for 2005 showed a credit of Rs 626.5 million due to utilisation of the un-recognised portion of the deferred tax asset. Financial charges for the company have been increasing for the last four years owing to higher exchange losses on imports and significant increase in interest rates. This can be another major reason for the declining net margin in spite of the rising trend in ICI's turnover. In 2004, other operating income from the sale of the PPTA shares resulted in a steep rise in profits that was reflected in the improved gross and net margins for the same year.
The return on assets and equity have also witnessed a declining trend over the last few years because of greater growth rate in assets and equity (equity grew because of an increase in the unappropriated profits) compared to the net profit which grew at a slower rate. The decline in turnover after 2003, translated into lower bottom line profits over the period under review.
The liquidity position of the company improved considerably after 2004. Before that, the company suffered from a less-than-sufficient liquidity situation with the current ratio less than 1. However, in 2004, due to the sale of the PPTA shares, together with operating cash flow enabled the company to achieve a cash surplus position. Medium loans of Rs 1.2 billion from the United Bank Limited, Rs 800 million from Habib Bank Limited and US dollars 35.0 million from Mortar Investments International Limited were also repaid in 2004.
Ever since, the current ratio of the company has been quite good, with an increase witnessed in 2006, primarily due to an increase in the company's cash balances and due to more receivables. The increase in receivables can be attributed to increased marketing efforts in the paints sector which attracted a number of prospective clients. The rising CA in Q3'07 on the other hand is attributed to higher inventory and receivables as its cash balance has declined compared to that in FY06.
The trend in the company's asset management ratios till FY06 is very encouraging and note-worthy. There has been a decline in the inventory turnover ratio, the days sales outstanding and the over all operating cycle, demonstrating that the company has been efficient in selling off its inventories and receiving cash against its receivables. A great marketing effort by the company is a major reason for its commendable asset management as the company can easily sell off its products to the clients. Improved credit terms can be responsible for a decline in the days sales outstanding, hence reflecting a good performance of the company on the asset management platform. A slight deviation can be seen in the 3Q of FY07 where the operating cycle is increasing, however, one must wait for the year-end figures to comment on its overall asset management.
Owing to a significant rise in the total assets for the past few years, the total assets turnover ratio has seen a decline in spite of an increasing turnover. In 2003, work was initiated on the Refined Sodium Bicarbonate Plant, which was completed in 2004, hence explaining the rise in total assets of the company during these two years.
The company spent Rs 396.6 million as sustenance capital in 2005 to maintain its existing assets and, in 2006, investment was made in three major projects at a cost of Rs 3.3 billion. These projects include the Asset Modernisation and Improvement Project (AMIP) in polyester, soda ash 50 ktpa expansion and acquisition of the manufacturing facility of Fayzan Manufacturing Modaraba (FMM). Consequently, ICI Pakistan's assets have generally been high. However, the company needs to manage these fixed assets more efficiently so that the total assets turnover ratio also shows a rise.
ICI has invested Rs 600 million in a co-generation project undertaken by ICI Pakistan's wholly owned subsidiary ICI Pakistan PowerGen, at Sheikhupura. This project will improve fuel efficiency; reduce costs and support ICI Pakistan's polyester staple fibre plant's power requirement. Since massive investments are taking place, one can expect that it will be a while for the asset turnover ratios to pick up.
Owing to a remarkable growth rate in the turnover in 2003, primarily because regional PSF demand grew by 6%, the sales to equity ratio showed a rise from 02 to 03. However, 2003 onwards a declining trend was witnessed because of slow rate of growth of the company's turnover, largely because the latter years were tough for the polyester industry of Pakistan on account of rising oil prices and China's continued additions to PSF capacities resulting in a supply overhang in the region. Consequently, the demand for PSF in Pakistan grew at a very low rate of 3%, and with a larger percentage increase in the company's equity because of greater unappropriated profits, the overall trend in the sales to equity ratio was declining and continued being so till Q3'07.
ICI's D/A and D/E ratios clearly show that it is reducing its reliance on debt financing and has lower ratios compared to the industry. Furthermore, long term debt to equity ratio shows us that now ICI is relying more on its short term financing as this ratio is now almost negligible.
However, the TIE ratio shows a rising trend in Q3'07, owing to lower EBIT and considerably higher financial charges in FY06. Financial charges were higher in FY '06 mainly due to the higher utilisation of running finance facilities. Financial charges were 69% lower in 3Q '07 than last year due to buyout of the Fayzan Manufacturing Modaraba's plant in bSeptember 2006.
The book value of ICI Pakistan Limited has consistently shown a rising trend since 2002. This is because the company has been witnessing a rise in unappropriated profits that have resulted in a steady rise in the company' equity. The earnings per share, however, have declined over the past few years mainly because the profits of the company, because of reasons mentioned above in the analysis, have been declining.
A noteworthy trend is witnessed with regard to the average market price of the company, which has steadily increased since 2002. This can be attributed to the expansion plans of the company, as well as greater marketing efforts by the organisation, which led to greater investor confidence and a consequent rise in the market value of the company.
FUTURE OUTLOOK: The domestic PSF industry is under pressure due to cost push, poor health of domestic textile industry and business failures. The company will continue to focus on improving the revenue stream through higher utilisation of assets and control over costs. Also and more importantly, consistent and stable government policies are imperative for the future prospects of the PSF and textile industry.
Demand from the silicate segment is expected to remain subdued on account of raw material issues faced by the soap industry. Soda Ash Business is also evaluating export opportunities to partially offset the impact of weak demand. Paints Business is expected to maintain its performance with the launch of innovative/new products and customised solutions.
Kansai Paints Company Limited, Japan, has served a notice on ICI Pakistan Limited expressing its intention to terminate its Technical Services Fee Agreement with ICI Pakistan Limited relating to automotive paints business, because of the acquisition of ICI Group by Akzo Nobel N.V. Should the Agreement terminate as proposed by Kansai, ICI Pakistan's automotive paints business will be affected, as the automotive paints business constitutes approximately 6.8% of the company's operating result. There will be no impact of the termination on the Company's operating result for 2007.
Overall, ICI Pakistan has shown a noteworthy performance for the past couple of years. Even though the profitability of the company has been declining, in the facets of asset management, liquidity, and market worth, the company indeed deserves a commendable remark. ICI continues to aggressively grow its Paints Business in a fast growing coatings market. Growth is expected in the Chemicals and Life Sciences Businesses. Hence one expects a bright future for the company.
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ICI Financials
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INCOME STATEMENT 2002 2003 2004 2005 2006 Q3'07
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Turnover 15,073,813 22,156,265 21,303,498 21,054,298 21,947,688 18,164,473
Gross Profit 2,327,095 2,664,367 2,755,709 3,351,698 4,083,210 3,265,836
Operating Profit 1,077,114 1,087,681 1,346,788 1,842,542 2,480,998 1,988,843
Profit Before Tax 723,094 806,552 2,898,950 1,612,401 2,117,797 1,868,103
Net Profit 1,854,732 766,244 2,846,368 2,253,257 1,455,628 1,178,287
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BALANCE SHEET 2002 2003 2004 2005 2006 Q3'07
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Total Equity 4,591,014 5,114,863 8,053,980 9,493,072 10,265,010 10,764,109
Current Liabilities 6,932,541 8,262,583 5,194,379 5,891,930 5,436,275 5,091,077
Non-current Liabilities 1,478,895 74,568 82,601 90,604 104,079 115,895
Current Assets 4,618,700 5,305,892 7,179,045 6,500,138 7,023,855 7,482,571
Non-current Assets 9,168,174 8,825,935 6,738,979 9,469,783 9,905,729 9,528,505
Total Assets 13,786,874 14,131,827 13,918,024 15,969,921 16,929,584 17,011,076
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LIQUIDITY 2002 2003 2004 2005 2006 Q3'07
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Current Ratio 0.67 0.64 1.38 1.1 1.29 1.47
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 Q3'07
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Inventory Turnover 57.09 43.85 60.43 54.73 50.08 54.45
Days Sales Outstanding 16.06 10.46 13.78 11.06 11.99 20.46
Operating Cycle 73.15 54.3 74.21 65.79 62.07 74.91
Total Asset Turnover 1.09 1.57 1.53 1.32 1.3 1.07
Sales/Equity 3.28 4.33 2.65 2.22 2.14 1.69
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 Q3'07
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Debt to Asset Ratio 0.61 0.59 0.38 0.37 0.33 0.31
Debt to Equity Ratio 1.83 1.63 0.66 0.63 0.54 0.48
Long Term Debt to Equity 0.32 0.01 0.01 0.01 0.01 0.01
Times Interest Earned -6.42 -7.77 19.55
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PROFITABILITY 2002 2003 2004 2005 2006 Q3'07
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Gross Profit Margin 15.44 12.03 12.94 15.92 18.6 17.98
Profit Margin 12.3 3.46 13.36 10.7 6.63 6.49
Return on Assets 13.45 5.42 20.45 14.11 8.6 6.93
Return on Equity 40.4 14.98 35.34 23.74 14.18 10.95
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MARKET VALUE 2002 2003 2004 2005 2006 Q3'07
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EPS 13.36 5.52 20.51 16.23 10.49 8.49
Price/Earnings 3.3 11.66 4.21 6.36 12.02 18.22
Book Value 3.31 3.68 5.8 6.84 7.4 7.76
Average Market Price 44.14 64.34 86.3 103.23 126.14 154.7025
Dividend per share 0.22 0 0.25 0 3 0.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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