Sitara Chemical Industries Limited

Sitara Chemical Industries Limited (PSX: SITC) was incorporated in Pakistan as a public limited company in 1981. The company is engaged in operating a Chlor Alkali plant, Oleo Chemical plant and a yarn spinning unit.

Pattern of Shareholding

As of June 30, 2022, SITC has a total of 21.429 million shares outstanding which were held by 1703 diverse shareholders. The company’s leadership including its Directors, CEO, their spouse and minor children formed the largest shareholding category of SITC with around 65.5 percent shares. This is followed by Banks, DFIs and NBFIs accounting for 9.89 percent shares of SITC. Local general public had 8.58 percent stake in the company while joint stock companies held 4.48 percent shares of SITC. Insurance companies and mutual funds owned 4.22 percent and 3.42 percent of SITC’s outstanding shares while around 2.3 percent of the company’s shares were held by its associated companies, undertakings and related parties. The remaining ownership was distributed among other categories of shareholders.

Financial Performance (2018-23)

Barring a marginal dip in 2020, SITC’s topline has by and large followed an inclining trend since 2018. Conversely, its bottomline couldn’t follow the suit and plunged thrice during the period under consideration i.e. 2019, 2020 and 2022. SITC’s margins have been fluctuating since 2018 to peak in 2021. In 2022, the dire economic and political conditions squeezed SITC’s margins which rebounded in 2023, however, couldn’t reach the height last witnessed in 2021 (see the graph of profitability ratios). The detailed performance overview of each of the years under consideration is given below.

In 2019, SITC’s topline grew by only 4 percent year-on-year. During the year, the overall economic environment remained stressed with a downtick in GDP and LSM growth. Owing to demand destruction, the company’s production and sales volume dropped across various product categories. The uptick in net sales can be attributed to upward revision in the prices of Caustic Soda, the main revenue driver of SITC. Cost of sales grew by 3 percent year-on-year on account of a hike in inflation, Pak Rupee depreciation as well as spike in energy tariff during the year. Gross profit inched up by 5 percent year-on-year in 2019 with a slight change in GP margin from 21.5 percent in 2018 to 21.7 percent in 2019. During the year, SITC overhauled its electrolyzer and replacement of old machinery with new Swiss machinery in the textile division which resulted in cost efficiency in terms of electricity savings and also drove up the production capacity of SITC by 20 MTPD. On account of increased prices of petroleum, freight charges greatly escalated during the year, pushing up the distribution expense by 28 percent year-on-year in 2019. Despite a drop in the HR count from 2327 in 2018 to 2172 in 2019, payroll expense continued to elevate on account of inflation. This drove up the administrative expense by 12 percent year-on-year in 2019. SITC incurred a net other expense of Rs.23.81 million in 2019, up 401 percent year-on-year on account of loss incurred on the disposal of fixed assets in 2019. All these factors squeezed the operating profit by 3 percent year-on-year in 2019 with OP margin marching down to 13.4 percent from 14.3 percent in 2018. Finance cost spiked by 46 percent year-on-year not only because of high discount rate but also because of increased borrowings to finance the capital expenditure during the year. Net profit slid by 18 percent year-on-year in 2019 to clock in at Rs.885.46 million with NP margin of 7 percent versus 8.9 percent in 2018. EPS also tapered from Rs.50.69 in 2018 to Rs.41.32 in 2019.

The economic woes further spiraled in 2020 with the outbreak of COVID-19 which resulted in the lockdown in the 4QFY20, resulting in a decline of 0.38 percent in GDP and 10.12 percent in LSM growth. The shutdown of industries further constricted the demand of SITC’s products, resulting in a 7 percent year-on-year shrinkage in its topline in 2020. Cost of sales dipped by 4 percent year-on-year. Despite the BMR projects undertaken last year, which were expected to fully materialize in 2020, hike in electricity, RLNG, coal and cotton bale prices reduced the gross profit by 17 percent year-on-year in 2020 with GP margin slipping to 19.3 percent in 2020. Another major reason for high cost of sales was a switch from combination of natural gas and RLNG tariff to only RLNG tariff in 2020. Lower sales resulted in low freight charges. This coupled with considerably lower advertisement budget allocated for the year pushed the distribution expense down by 7 percent year-on-year in 2020. Number of employees dropped to 2123 in 2020 which slightly reduced the payroll expense. This coupled with electricity savings on account of lockdown translated into a 5 percent dive in administrative expense in 2020. SITC registered a net other income of Rs.97.10 million in 2020 which was primarily the result of lower provisioning against WWf and WPPF in 2020. Moreover, unwinding of deferred consideration receivable and high dividend income on investments also contributed towards net other income. Operating profit plummeted by 18 percent year-on-year in 2020 with OP margin sliding down to 11.9 percent. Finance cost magnified by 55 percent year-on-year in 2020 due to high discount rate for most part of the year coupled with high short-term borrowings. Net profit measured down by 66 percent year-on-year in 2020 to clock in at Rs.298.76 million with NP margin of 2.5 percent – the lowest among all the years under consideration. EPS also bottomed out to Rs.13.94 in 2020.

SITC’s unabated journey of topline growth began in 2021 whereby SICL posted a 25 percent year-on-year growth in its net sales. Both chemicals and textile segments performed well during the year as the routine business activity resumed after the lockdown period. GDP and LSM registered higher than anticipated growth of 3.94 percent and 9.29 percent respectively in 2021. The revival of economic activity instilled growth momentum in the demand of SITC’s products in 2021 resulting in higher production. Cost of sales also magnified by 25 percent year-on-year in 2021. This could’ve been even higher had the energy prices not stabilized during the year. Gross profit recoiled by 29 percent year-on-year in 2021 with GP margin climbing up to 19.8 percent. Significantly less advertisement expense coupled with lower freight charges resulted in 9 percent contraction in distribution expense in 2021. Administrative expense moved up by a nominal 3 percent due to curtailed payroll expense and electricity charges. Payroll expense slid despite an increase in the number of employees to 2280 in 2021. SITC posted a net other income of Rs.332.28 million in 2021, up 242 percent year-on-year primarily due to tremendous gain on sale of fixed assets in 2021. Operating profit picked up by 62 percent year-on-year in 2021 with OP margin touching the level of 15.4 percent – the highest since 2018. Finance cost also gave some breather in 2021 as it contracted by 39 percent year-on-year in 2021 due to monetary easing. This was despite increased borrowings during the year to meet working capital requirements as well as finance the ongoing capital expenditure. Net profit ascended by 351 percent year-on-year in 2021 to clock in at Rs.1347.69 million with NP margin of 9.1 percent and EPS of Rs.62.89.

Among all the years under consideration, 2022 witnessed the highest topline growth of 46 percent year-on-year. The economic rebound that began in 2021 continued in 2022, however, it created financial imbalances in the economy due to high imports, diminishing foreign exchange reserves, mounting current account and fiscal deficit. The volumetric sales as well as prices of chemicals posted growth in 2022, however, the sale of yarn and fabric nosedived during the year. Cost of sales mounted by 58 percent year-on-year in 2022 on account of commodity super cycle in the international market in response to economic rebound and robust demand. Russia-Ukraine war added to ado. This coupled with high indigenous inflation, sharp rise in electricity, petroleum and RLNG prices cut down gross profit by 2 percent year-on-year in 2022 with GP margin drastically falling to 13.3 percent. High POL prices culminated into a 37 percent year-on-year hike in distribution expense. Administrative expense also enlarged by 18 percent on account of high payroll expense as the company hired additional human resources taking the tally to 2380 in 2022. Net other income narrowed down by 42 percent year-on-year in 2022 on account of lesser gain on the sale of fixed assets. Operating profit measured down by 21 percent year-on-year in 2022 with OP margin shrinking to 8.3 percent. 48 percent spike in finance cost was the effect of monetary tightening during the year. Net profit contracted by 51 percent year-on-year in 2022 to clock in at Rs.655.44 million with NP margin of 3 percent and EPS of Rs.30.60.

Recent Performance (2023)

SITC’s net sales grew by 27 percent year-on-year in 2023. While the detailed financial statements are awaited to comment on the sales volume of the company, a glance at the financial statements of 9MFY23 reveal that the company curtailed its production activities during the year on account of import restriction. The improvement in topline was the result of upward revision in the prices of SITC’s products to pass on the effect of cost spike to the consumers. Moreover, export sales also escalated amid sharp depreciation of Pak Rupee. The company greatly focused on export sales during the year to achieve robust net sales. Cost of sales grew by 23 percent year-on-year in 2023. As a consequence, gross profit grew by 56 percent year-on-year in 2023 with GP margin rebounding to 16.3 percent. High export volumes coupled with a hike in ocean freight charges due to exorbitant prices of POL resulted in a 68 percent growth in distribution expense in 2023. Administrative expense also grew by 28 percent year-on-year in 2023 due to inflation. Net other income recoiled by 22 percent year-on-year in 2023 maybe on account of exchange gain due to elevated export sales. Operating profit posted a growth of 72 percent in 2023 with OP margin jumping up to 11.2 percent. Finance cost magnified by 80 percent in 2023 due to unprecedented level of discount rate coupled with increased borrowings. This somewhat diluted the bottomline growth in 2023. However, SITC was still able to register a 52 percent year-on-year growth in net profit with NP margin of 3.6 percent and EPS of Rs.46.35 in 2023.

Future Outlook

With increased focus on export sales coupled with upward price revisions to pass on the onus of cost hike, SITC net sales may pick up in the coming times. Moreover, the expansion of coal fired power plant may result in cost efficiencies resulting in improved or at least stable gross margin. However, high distribution cost on account of high POL prices and export sales as well as high finance cost as a consequence of increased borrowings to finance the BMR projects may impede the bottomline growth.