Sitara Chemical Industries Limited

Sitara Chemical Industries Limited (PSX: SITC) was established in 1981 as a public limited company under the Companies Act, 1913 (now Companies Act, 2017). It is part of the larger Sitara group.

The company has several business operations; one is the chemical division under which it manufactures caustic soda and allied products. The second division is textile under which it manufactures yarn and trading of fabric. The spinning unit produces polyester/cotton (PC) and polyester/viscose (PV) while it sells the product under the brand name ‘Rajah’. The products of gas division include nitrogen and carbon dioxide.

Shareholding pattern

Over two-third - 64 percent – shareholding is in the hands of Mr. Muhammad Adrees, the CEO of Sitara Chemical. Next in the line are the banks, DFIs and NBFIs that hold around 9 percent while about 6 percent is held with mutual funds. The local general public owns close to 8 percent and a little over 4 percent of shares are owned by the insurance companies.

Historical operational performance

Since 2011, the company has experienced a decline in its topline only once, in FY15; that too, was a marginal decline of almost 1 percent, due to subpar performance by textile division. The production of yarn was subdued in FY15 (8.8 million kgs) compared to FY14 when it was 9 million kgs.

Gross margins were significantly affected during the year with costs taking up nearly 82 percent of the revenue. Of this, a major increase was observed in fuel and power which made up more than 50 percent of the total cost of goods manufactured.

That year, ‘other income’ also experienced a significant jump from Rs 55 million in FY14 to Rs 632 million in FY15. This was thanks to one off gain on disposal of investment property and ‘gain on sale of available for sale investments.

The company recovered its growth rate in revenue during FY16, growing year on year by 12.5 percent. To this, the chemicals division made a larger contribution. In addition, Sitara Chemical added a 40MW coal fired power plant to its business which also started production the same year. At the time the company hoped that the addition of the coal fired power plant will enable them to become self-sufficient for its energy requirements. and ensure energy availability at reasonable rates which would add to profitability in the future. The decline in net margins was a result of abnormal profits seen last year as a result of factors under ‘other income’.

In FY17, topline registered a marginal year on year growth rate of 2.7 percent with chemical and textile divisions, both depicting slightly higher sales figures. According to company’s annual report, the reduction in costs is a result of the addition of the coal fired power plant.

This not only resulted in savings in energy costs but also ensured uninterrupted power supply round the year. Net margins improved notably due to “recording of tax admissible under the Income Tax Ordinance, 2001 on investment in plant and machinery of coal fired power plant, and extension/expansions/BMR of other chemical plants”.

During FY18, Sitara Chemical witnessed the highest year on year growth rate in topline - almost 22 percent. This can be attributed to higher sales in both, the domestic market as well as the international market. As before, the chemical division made a larger contribution to this increase in topline. Despite this, margins reduced across the board; while gross and operating margins experienced a slight decline; net margin fell from 11.6 percent in FY17 to 8.9 percent due to a high deferred taxation figure.

During FY19, Sitara Chemical managed to grow its topline, albeit at a lower rate than before - of 3.5 percent year on year. The share of costs in revenue remained similar; however, a notable decline was seen in net margins. This was due to elevated finance costs as a result of high bank borrowing rates. Payments for short term borrowing made a large part of the total finance costs, while total short-term borrowings stood at Rs 4.3 billion. Sitara Chemical’s long term liabilities also almost doubled during the year.

Quarterly performance and future outlook

Topline witnessed a year on year decline of 1.3 percent between 1HFY20 and 1 HFY19. The economic slowdown in the country hampered production, while the full effect of increase in cost of production could not be passed on to the consumer; selling price could be increased only slightly. The cost of sales was higher due to ‘hike in WAPDA tariff after withdrawal of Industrial Relief Package on off-peak hours’ consumption and levy of Quarterly Tariff Adjustment and Distribution Margin Charges by the government’. Finance costs also remained elevated due to high interest rates during the period.

According to the Economic Survey of Pakistan, overall production of caustic soda has declined, as suggested by the July-March 2017-18 and 2018-19 figures. Moreover, the chemical industry overall had also experienced a decline. Given these circumstances, some of the possible risks for the company include an increase in international coal prices, interest rate, electricity tariffs, RLNG prices and currency devaluation.

However, the company is trying to diversify its portfolio in order to hedge against industry specific risks. The company has planned to set up a soup noodles plant with a production capacity of 35,000 MT and is hoping to make it operational by the third quarter of the next fiscal year.