Nimir Industrial Chemicals Limited

Nimir Industrial Chemicals Limited (PSX: NICL) was incorporated in Pakistan in 1994 as Ravi Alkalis Limited and was listed on PSX in 1996. The company changed its name in 1998 after its ownership was taken over by a Saudi Group. In 2004, the ownership was sold to an American Group; Knightsbridge which was later bought back by the company in 2011 under management buyout scheme. The principal activity of the company is the manufacturing and sale of chemical products including wide range of oleo chemicals, aerosols, and chlor alkali as well as personal and home care products.

Pattern of Shareholding

As of June 30, 2023, NICL has a total of 110.59 million shares outstanding which are held by 1867 shareholders. General public has the highest stake of 58.39 percent in the company followed by Directors, CEO, their spouse and minor children who collectively hold 38.51 percent shares of NICL. Joint stock companies account for 1.61 percent shares of NICL. The remaining shares are held by other categories of shareholders.

Performance Trail (2019-23)

The topline of NICL is attaining new heights with each passing year. The bottomline is also following the similar trajectory except in 2022 where it marginally dipped despite the highest ever topline growth. The margins also rode an upward journey until 2021 followed by a downtick in 2022. In 2023, gross margin operating margin rebounded, however, net margin continued to descend. The detailed performance review of the period under consideration is given below.

In 2019, NICL’s topline ascended by 22.82 percent year-on-year which came on the back of increased volumes as well as upward revision in prices. Increased production to meet robust demand coupled with the inflationary effect pushed the cost up by 21.62 percent year-on-year in 2019, however, GP margin ticked up from 12.81 percent in 2018 to 13.67 percent in 2019 with 30.99 percent year-on-year rise in gross profit. Distribution expense was ballooned by 18 percent year-on-year on account of outward freight charges as well as salaries and wages. Administrative expense also inched up by 15.68 percent in 2019 on account of higher payroll expense as the number of employees increased from 150 in 2018 to 161 in 2019. Despite mounting expenses, vigorous topline resulted in 33.84 percent year-on-year growth in operating profit with OP margin of 11.67 percent in 2019 up from 10.71 percent in 2018. Other expense dwindled by 34.77 percent because of high-base effect as the company booked impairment loss on property, plant and equipment as well as provision against refundable sales tax in 2018. Other income almost stayed constant in 2019. Pak Rupee depreciation resulted in 64.98percent year-on-year rise in foreign exchange loss incurred by the company. Finance cost also escalated by 76 percent year-on-year on the back of higher discount rate. NICL’s total debt stands at a whopping 1.8 times of its equity in 2019 as against 1.9 times in 2018. The bottomline flourished by 16.47 percent year-on-year in 2019 to clock in at Rs.810.10 million with NP margin of 5.46 percent which was slightly lower than last year’s NP margin of 5.75 percent on account of reduction in tax rebate on BMR on new capital investments. Barring the effect of taxation, the PBT margin in 2019 was higher than in 2018.

In 2020, the topline further inclined by 15.64 percent year-on-year as the company being the producer of soap, an essential ingredient to fight against COVID-19, didn’t shut down its operations during the lockdown period. The topline growth was backed by prices as well as volumes. The cost of sales ticked up by 14 percent on the back of supply chain bottlenecks due to restrictions on the movement of people and goods within and across the borders. Yet gross profit posted healthy 25.46 percent year-on-year rise with GP margin climbing up to 14.83 percent in 2020 due to better pricing and volume. Outward freight severely rose during 2020 which pushed the distribution cost up by 37.3 percent year-on-year. Administrative expense also enlarged by 17.83 percent year-on-year on the back of rising inflation and also because of workforce expansion which stood at 178 employees in 2020. Operating profit magnified by 25.61 percent year-on-year in 2020 with OP margin marching up to 12.68 percent. Other expense grew by 30.62 percent year-on-year on the back of higher provisioning for WWF and WPPF. Foreign exchange loss weighed down by 9.96 percent year-on-year in 2020. Finance cost grew by a massive 67.33 percent on account of higher discount rate for most part of the financial year. The total liabilities of NICL surged to 2 times of its equity in 2020 as the company undertook aggressive investment plans which include expansion of caustic soda plant and solid fuel based power plant coupled with the completion of aerosols project.Gearing ratio stood at 56 percent in 2020 as against 55 percent in 2019. Net profit rose by 14.37 percent year-on-year in 2020 to clock in at Rs.926.48 million with NP margin of 5.4 percent. EPS climbed to Rs.8.38 in 2020.

Economic activity started resuming which resulted in a staggering 34.48 percent growth in the net sales revenue of NICL in 2021. Gross profit also exceeded by 39.17 percent while GP margin slightly grew to 15.34 percent in 2021. High cost of feedstock and utilities inflated the cost of sales and impeded the GP margins to grow further. Distribution augmented by 29.65 percent due to massive upsurge in freight, salaries and promotional expense. Administrative cost escalated by 38.32 percent in 2021 due to continuous expansion in NICL’s workforce which stood at 205 in 2021. Operating profit grew by 39.88 percent year-on-year with OP margin clocking in at 13.19 percent in 2021. Other expense more than doubled during the year not only because of higher provisioning for WWF and WPPF but also because of expected credit losses on trade debts as well as provision for slow moving stores and spares. Finance cost eased down by 22.86 percent year-on-year in 2021 due to lower discount rate although NICL’s borrowings massively increased during the year pushing the gearing ratio up to 62 percent. The rise in borrowings was the result of instigation of new projects including new boiler, turbine, chlorine liquefaction, chlorinated paraffin wax plant etc. The bottomline posted an impressive 82.89 percent year-on-year growth to clock in at Rs.1694.43 million in 2021 with NP margin of 7.34 percent. EPS mounted to Rs.15.32 in 2021.

2022 was characterized by a massive 46.3 percent growth in net revenue of NICL, however record high inflation drove up the cost of sales by 50.87 percent year-on-year suppressing the GP margin to 12.7 percent. Gross profit grew by 21 percent in 2022. 24.88 percent year-on-year escalation in distribution expense was the result of higher freight charges incurred during the year. AS NICL added new insect killer spray production plant in 2022, increased the annual capacity of chlor alkali and oleo chemical plant, additional resources were required which drove the workforce up to 254 employees in 2022. This resulted in 19.57 percent higher administrative expense incurred during the year. High operating expenses also pushed the OP margin down to 10.91 percent despite 21 percent year-on-year growth in operating profit. Other expense provided some breather as it inched down by 36 percent year-on-year in 2022 as the company made reversals against the provisions booked on slow moving stores and spares and expected credit losses coupled with the recognition of exchange gain in 2022. Finance cost multiplied by 142.86 percent in 2022 due to upward revision in discount rate during the year coupled with exorbitant rise in both short-term and long-term borrowings in 2022. The gearing of NICL surged to a whopping 75 percent in 2022. High cost and expenses didn’t allow the topline growth to trickle down. The result of which was 5.83 percent year-on-year fall in net profit which clocked in at Rs.1595.63 million in 2022 with NP margin of 4.72 percent. EPS also plunged to Rs.14.43 in 2022.

In 2023, NICL’s net sales grew by 29.72 percent year-on-year as the projects initiated in the last two financial years started bearing results in 2023, resulting in improved volumes. Besides, better pricing due to uptick in export sales particularly to Central Asia as well as cost optimization resulted in 49.48 percent higher gross profit in 2023 with GP margin climbing up to 14.63 percent. Distribution expense spiked by 79.57 percent in 2023 due to higher freight expense as well as payroll expense incurred during the year. NICL enlarged its workforce to 274 employees in 2023, resulting in 28 percent higher administrative expense incurred during the year. Operating profit multiplied by 49.81 percent in 2023 with OP margin climbing up to 12.6 percent. 44.75 percent higher operating expense incurred in 2023 was the effect of increased profit related provisioning made during the year. However, it was almost counterbalanced by 239.98 percent higher other income recorded by NICL in 2023 on the back of grant income received as loans were received at below market rates under SBP TERF scheme for setting up of new projects. Foreign exchange gain and write off of loan from directors/sponsors also buttressed other income in 2023. Finance cost surged by 139.54 percent in 2023 due to higher discount rate. This was despite the fact that NICL’s gearing ratio ticked down to 70 percent in 2023 from its peak level of 75 percent in 2022. Net profit grew by 15.17 percent in 2023 to clock in at Rs.1837.65 million with EPS of Rs.16.62 and NP margin of 4.19 percent.

Recent Performance (9MFY24)

Economic and political headwinds took its toll on the purchasing power of consumers which greatly affected NICL’s core business of oleo chemicals and resulted in 3.29 percent decline in its net revenue in 9MFY24. Cost reduction measures including technological advancements and commissioning of a new power plant helped the company attain 16 percent higher gross profit in 9MFY24 with GP margin clocking in at 14.67 percent versus 12.22 percent in 9MFY23. Distribution expense and administrative expenses escalated by 39.82 percent and 37.91 percent respectively in 9MFY24 supposedly on account of increased freight charges and payroll expense. Operating profit improved by 12.22 percent in 9MFY24 with OP margin of 12.14 percent versus 10.47 percent in 9MFY23. Other expense tumbled by 5 percent in 9MFY24 which may be on the back of lower profit related provisioning. Other income multiplied by 98.86 percent in 9MFY24 which may be on account of higher exchange gain as depressed demand in the local market is pushing the company to look for new export avenues, resulting in higher export sales of-late. Moreover, gain on sale of NICL’s stake in Nimir Resins Limited (NRSL) may also have contributed to higher other income in 9MFY24. NICL’s other income completely offset NICL’s other expense in 9MFY24. Finance cost magnified by 42.49 percent in 9MFY24 due to higher discount rate. Elevated gearing and unprecedented level of discount rate pushed NICL’s net profit down by 28.38 percent to clock in at Rs.780.368 million in 9MFY24 with NP margin of 2.37 percent as against 3.2 percent in 9MFY23. EPS also marched down from Rs.9.85 in 9MFY23 to Rs.7.06 in 9MFY24.

Future Outlook

Company’s sales are expected to recover as the economic and political dust begins to settle. Furthermore, higher export sales will also buttress NICL’s financial performance. However, finance cost continues to be the main culprit squeezing its net profit. Recently, the company has entered into an agreement with Proctor & Gamble Pakistan (Private) Limited for the purchase of its soap manufacturing facility located in Hub, Baluchistan. This will strengthen NICL’s footprint in the southern region and also support export via sea.