Chemicals: DAWOOD HERCULES CHEMICALS LIMITED - Analysis of Financial Statements December 2002 to December 2006

Dawood Hercules Limited was incorporated on 17th April 1968, as a public limited company. It is a joint venture of Dawood Group of Industries and Hercules Inc., USA. At the time of its inception, it was the largest ammonia/urea plant in the country.
DHCL manufactures and markets urea under the brand name of 'Bubber Sher'. Moreover, it also provides Anhydrous Ammonia for the manufacture of soda ash, fructose and other miscellaneous chemicals. The major customers of the company are ICI Pakistan, Sitara Chemicals, Olympia Chemicals and Kamal International.
The fertilizer off-take in Pakistan for FY06 remained the same such as the FY05, whereas Urea off-take increased by 5.6% over the last year. Domestic production of fertilizer for FY06 remained steady over the previous year's level, increasing by only 2.2%. However, there still remains substantial demand-supply gap in the industry, which is bridged by imports. During the FY06, the imports of urea were 23% higher than the FY05, resulting an increase of 4% in availability of fertilizer in current fiscal year.During FY06, DHCL carried out its second BMR (Balancing, Modernization and Replacement) activities since its inception in 1971. This BMR was aimed at providing for future capacity enhancement, critical equipment replacement, installation of the latest Distributed Control System and energy conservation. The BMR 2006 was conducted with a view to allow for the exploitation of greater production loads in future. Moreover, during the process, the company replaced critical equipment, which had previously acted as a bottleneck, allowing the company to operate at higher production loads and enabled to exceed its production targets for the first time.
The FY06 was a milestone for the company as it achieved highest-ever production level, which was 4% higher than the FY05. The graph illustrates the production levels and capacity utilization for the last 10 years. In the FY06, for first time over the decade, the company managed to achieve 100% capacity utilization.
Despite the increase in sales in FY06, the profitability of the company was on decline. The sales volume grew by 8% and net sales grew by 18% over FY05 whereas the nationwide off-take of urea fell by 1% in the same period. Despite the increase in sales value, the gross and net profit margins registered a decline. However, the decline was in line with the industry trend of lower profit margins. Even after suffering the slump, the profit margin remained well above the industry average.
The recession in profit can be justified on account of the BMR activities undertaken during the year, which increased depreciation charges and the plant maintenance expenses. The increase in gas prices should also be borne in mind when considering the decline in profit margins. In addition, the portion of revenue from other income also declined during the year and also contributed to the lower profits in the year. The decline in other income came from smaller gains on the sales of short-term investments.
The ROE and ROA followed the negative trend of the profit margin. The ROA continued to linger above the average while ROE remained below the average.
The liquidity position of the company also suffered a setback in the FY06 as per the industry trend. DHCL managed to retain its above average standing.
The company's inventory turnover in days continued upward trend in FY06 against the declining trend experienced by the rest of the industry. This further widened the gap between average inventory turnover of the industry and DHCL's inventory turnover so that DHCL's inventory turnover now lingers much higher above that of its competitors.
All major players except one also recorded higher levels of closing inventory balances caused by the oversupply situation brought about by excessive imports of fertilizer by the TCP.
DHCL has traditionally maintained a very low level of debt. The FY06 saw the lowest level of closing debts over the five-year period under review. This low level of debt and higher sales revenue was reflected in the lowest DSO over the period.
The total assets turnover for the company was also low as compared to the other major players but an overall dip in the ratio was registered in the industry. This decline for DHCL occurred despite a capacity utilization of 100% as compared to 96% last year. This decline in TATO may then be attributed to an increase in total assets as a result of the BMR activities during the year. The sales to equity increased in FY06 but remained well below the average industry. However, this increase was partly due to decline in the fair value reserve on short-term investments and not entirely due to an increase in sales.
In the FY06, DHCL acquired significant additional short term financing, which resulted into an increase in the debt to assets and debt to equity ratios. Historically, the ratios have stood below average and the trend persisted in FY06 despite the increases. The long-term debt to equity is very low. The company does not acquire long-term loans, instead of it relies largely on short-term financing. The TIE for DHCL had been better than the average firm in the industry up to FY03 after which it weakened and dropped below the average. The company has not yet been able to redeem its former position of superiority. The increase in short-term financing in FY06 resulted in a further decline in the TIE.
The EPS diminished in FY06 after rising for two years. In spite of this decline, DHCL stands way above the industry average in terms of EPS. The book value also fell over the last year but once again DHCL came out superior than its rivals. DHCL's price earnings ratio not only managed to catch up with the industry but slightly exceeded in FY06 after remaining below the average for two years. The DPS declined marginally.
DHCL has suffered due to decline in profits in the last year but surpassed its rivals in terms of market value.
The demand of urea in the country also continues to exceed the domestic production, hence it is expected that the company would be able to sell all its produce in the following year. Besides this, completion of the recent BMR projects of the company will increase the production capacity and at the same time increase fuel efficiency. This will broaden the horizons for the company, as it would be able to cater to a large portion of the expanding market. Moreover, as a result of the enhanced fuel efficiency and energy conservation, the costs for the company will decline and hence profitability may improve in the future.
In addition, in line with the general investment climate of the country, the company is considering various projects for production enhancement or diversification and energy conservation.
However, the recent developments in the industry were not very pleasing. The first four months of the FY07 saw a decline in urea off-take of 34.7% compared to last year. This was a result of excessive rainfalls, which hampered the distribution of urea on a countrywide basis. Production, on the other hand, increased by 2.7% over the same period last year. The urea price trend for the four months is illustrated in the graph.
Lastly, the industry is likely to become more competitive with the commencement of operations from the proposed new plants and expansions in the country. But in light of the close correlation between GDP growth and fertilizer consumption, the higher expected GDP growth rate in the current fiscal year will likely translate into higher fertilizer consumption and hence fertilizer demand. Therefore, even as the additional capacities come online, the demand supply gap may persist, providing room for growth of the industry.

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INCOME STATEMENT                               FY'02             FY'03             FY'04             FY'05             FY'06

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Sales                                  2,809,921.239     2,983,374.808     2,699,135.306     3,290,547.342     3,881,750.000

Cost of goods sold                   (1,799,980.351)   (1,923,297.071)   (1,881,389.746)   (2,030,603.390)   (2,570,246.000)

Gross profit                           1,009,940.888     1,060,077.737       817,745.560     1,259,943.952     1,311,504.000

Selling and Administrative Expenses    (122,998.028)     (171,729.553)     (164,999.669)     (202,522.869)     (236,129.000)

Financial Charges                          (918.028)      (34,920.815)      (82,776.050)     (258,059.216)     (555,469.279)

Other Income                             309,854.058       892,429.605       563,638.222     1,775,777.364     1,047,260.406

Profit after taxation                    793,298.823     1,378,800.480     1,240,134.925     2,867,944.955     2,054,207.349

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BALANCESHEET                                   FY'02             FY'03             FY'04             FY'05             FY'06

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Share capital                                480,384           720,576           720,576           720,576           828,662

Revenue reserve                            2,480,554         3,138,779         4,617,085         6,728,425         8,204,370

Total Equity                               4,489,956         6,365,490         7,834,082         9,355,240         9,273,144

Non Current Liabilities                       78,241            42,778            86,709            87,099           217,893

Total Current Liabilities                    520,379         2,689,737         4,379,231         3,344,831         6,671,654

Total Liabilities                            598,620         2,732,515         4,465,940         3,431,930         6,889,547

Property, Plant And Equipment                297,206           409,483           530,447           690,300         1,347,373

Long Term Investments                      2,487,010         2,758,001         2,000,957         5,732,603         6,292,387

Total Current Assets                       2,266,729         5,875,491         9,756,938         6,363,623         8,510,130

Total Assets                               5,088,578         9,098,006        12,300,021        12,787,170        16,162,690

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PROFITABILITY                                  FY'02             FY'03             FY'04             FY'05             FY'06

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Gross Profit Margin                           35.94%            35.53%            30.30%            38.29%            33.79%

Profit Margin                                 28.23%            46.22%            45.95%            87.16%            52.92%

Return on Asset                               15.59%            15.15%            10.08%            22.43%            12.71%

Return on Equity                              17.67%            21.66%            15.83%            30.66%            22.15%

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LIQUIDITY                                      FY'02             FY'03             FY'04             FY'05             FY'06

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Current Ratio                                   4.36              2.18              2.23              1.90              1.28

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ASSET MANAGEMENT                               FY'02             FY'03             FY'04             FY'05             FY'06

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Inventory Turnover (Days)                      84.05             91.00             84.44             88.72             92.49

Day Sales Outstanding (DSO)                     0.90              0.66              1.25              0.42              0.23

Operating Cycle (Days)                         84.95             91.66             85.68             89.14             92.72

Total Asset Turnover                            0.55              0.33              0.22              0.26              0.24

Sales/Equity                                    0.63              0.47              0.34              0.35              0.42

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DEBT MANAGEMENT                                FY'02             FY'03             FY'04             FY'05             FY'06

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Debt to Asset (%)                               0.12              0.30              0.36              0.27              0.43

Debt/Equity (Times)                             0.13              0.43              0.57              0.37              0.74

Times Interest Earned (Times)                 966.14             25.44              7.89              4.10              1.94

Long Term Debt to Equity (Times)                0.02              0.01              0.01              0.01              0.02

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PER SHARE                                      FY'02             FY'03             FY'04             FY'05             FY'06

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Earning per share                             16.514            19.135            17.210            39.801            24.790

Price earning ratio                            12.17              9.18             11.42               7.4              11.9

Dividend per share                              9.50             10.00             10.50              8.50                 8

Book value                                     93.47             88.34            108.72            129.83            111.91

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