Chemicals: ICI PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002 - 1 H 2010
ICI Pakistan Limited is a 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.
ICI Pakistan at present, has five businesses - polyester, soda ash, paints, chemicals and life sciences manufacturing - besides it sells a range of industrial and consumer products. These include polyester staple fibre, POY chips, light and dense soda ash, sodium bicarbonate, paints for decorative, automotive and 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 and in addition, is engaged in the trading of various specialised chemicals for industrial use in Pakistan.
FINANCIAL PERFORMANCE (1H10)
Turnover for the first half of 2010 was Rs 19.29 billion, which was up by 22 percent due to strong volume growth in all businesses and better pricing in the second quarter of 2010.
Operating profit for the first half of 2010 stood at Rs 1.77 billion which was up by 18 percent led by margin expansion. Profit after tax stood at Rs 1.17 billion, up by 14 percent Business conditions remained tough on account of the gap between supply and demand of energy in the country and a fluid security movement. Despite this, the double-digit increase in the bottom line reflects ICI Pakistan's diversified portfolio, a strong footprint in the relevant markets where it operates and a healthy balance sheet. A summary of the first six months financial performance of ICI Pakistan is as follows:
POLYESTER STAPLE FIBREThe regional yarn markets remained bullish. The robust activity in the domestic downstream yarn market continued in Q2.
SODA ASH The global soda ash market showed some signs of stability in Q2, though it still remains in an oversupplied position. Domestic demand improved somewhat during the quarter, which helped to increase domestic sales.
PAINTS
Despite continuing weakness in the construction sector, lengthening of maintenance painting cycle, down trading of products, and liquidity constraints in the market, decorative segment showed double-digit growth of 22 percent in volumes during the quarter. The refinish and industrial segments together posted a volume growth of 5 percent during the quarter.
LIFE SCIENCES
Overall, NSI during the quarter was 11 percent higher over the same period last year. Operating Profit for Q2 at Rs 93 million was up 39 percent over the same quarter last year, compensating for the weaker performance in Q1, in the seeds segment. For the half year operating profit at Rs 180 million was higher by 2 percent as compared to the corresponding period of 2009.
Outcome in the second half shall be influenced by farm economics of wheat vs sunflower. The impact from recent floods is also likely to slow down the economic activities.
CHEMICALS
Demand showed an improvement in the quarter, resultantly NSI was up 25 percent, partially compensating for the weak performance in Q1.
Higher volumes and intense margin management led to an increase in operating profit by 23 percent during the quarter. Operating profit for the half year at Rs 130 million was up 13 percent over the same period last year.
Outcome in the second half is likely to be influenced by the recent hike in interest rates and negative impact of recent floods.
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Polyster Soda Paints Life Chemicals Power
Ash Sciences Gen
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For the six months ended June 30, 2010
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Amount in Rs '000
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Turnover 8,435,694 3,957,230 3,589,993 1,816,670 1,704,476 476,809
Gross Profit 975,400 671,625 764,844 466,634 267,984 58,770
Operating Profit 854,246 418,432 189,072 180,038 129,865 57,847
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Polyester business led to the highest turnover of Rs 8.435 billion in 1H10, followed by soda ash of Rs 3.957 billion. The lowest contribution to turnover was made by power generation business of Rs 476 million.
Polyester business recorded the highest gross profit of Rs 975 million and paints business recorded a gross profit of Rs 764 million. The lowest contribution to gross profit was made by power generation business of Rs 58 million.
Polyester business recorded the highest operating profit of Rs 854 million, soda ash business recorded an operating profit of Rs 418 million.
FINANCIAL PERFORMANCE (FY09)
During FY09, the company faced concurrent headwinds notably, recession in the developed world, significant decline in large-scale domestic manufacturing worsened by energy shortages as well as increase in electricity and gas tariffs. In addition, continual inflation and high interest rates constrained the demand particularly in the construction and automobile sectors. When looking sector wise, the most profitable remained the polyester, on the other hand, Chemicals and Paints operating results were negative. This showed the decline in the total aggregate demand and hence resulting in lower turnover comparative to FY08.
Despite this, company demonstrated growth in earnings over 2008. Focus on customers, cash, costs and strength of a diverse portfolio helped to protect margins and limit the decline in volumes in a contracting economy.
Profit after tax of Rs 2.04 billion for FY09 was up by 10 percent compared with FY08. Earnings per share at Rs 14.73 in FY09 was up by 10 percent over FY08.
In FY09, the company did face profitability issues. The ratios slightly declined over the period, attributing to the economic slowdown and market conditions resulting because of it. We see a slender decline in gross profit ratio from 17.63% in FY08 to 17.52% in FY09. The main explanation is because of the cost of goods sold increased marginally with less proportionate increase in the sales revenue. Again, the economic condition and high power tariffs resulted in such slight decline.
Similar result was observed when both ROA and ROE showed decline from 11.08% in FY08 to 9.54% in FY09, similarly ROE decreased from 16.31% to 15.17%
It can again be traced back to the net income, which just increased by 9% in FY09 comparatively to the assets employed, which increased by 16%. Hence the outcome of the ROA and ROE remained low for FY09.
In FY09 the current ratio tends to be static compared to FY08. The ratio remained at 1.92x.
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Cash and Bank Balances FY'09 FY'08
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Short term deposits Rs 3,350,000 Rs 120,000
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The trend in the company's asset management ratios till FY08 is very encouraging and noteworthy. There has been a decline in the inventory turnover ratio, the days sales outstanding (except in FY07 where it rose due to higher trade debts) 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 greater 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. Easy credit terms can be responsible for a rise in the days sales outstanding after 2005, which has now been controlled by the company, with the DSO finally reducing in FY08, for the first time since 2005. Hence this reflects a good performance of the company on the asset management platform.
Owing to a significant rise in the total assets for the past few years, the total assets turnover ratio has seen a decline till FY06 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 for 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 Modernization 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, FY07 TATO ratio shows that the company has managed these fixed assets more efficiently due to which total assets turnover ratio has shown a rise.
The rise in TATO in FY08 is more due to the low growth in assets, coupled with the rise in net sales, showing that the company has managed its growth plans well, also the current losses in cash balances led to low asset growth, thus this performance could not be depicted as entirely satisfactory and further efforts are needed to manage the asset turnover in the future.
In addition to this the nine months ended accounts showed a considerable performance in the asset management ratios. The only area that a saw decline was the sales/equity ratio, which was 0.61 compared to 2.32 in 2008.
For the period FY09, the asset management ratios too declined. The operating cycle increased from 50days in FY08 to 60days in FY09. This is explained by increase in the inventory turnover from 39 days to 49 days in FY09. As again the current market condition led to low demand and hence resulting in lower asset management.
A slight deterioration is observed in FY09 as the company's liabilities increased for the period. Debt to Equity reduced to 0.52 and Debt to Asset decreased to 0.33. As no further debt was issued for the period and Term Finance mounting to Rs 550 million was considered nil for the FY09, these deteriorations show that the other liabilities such Trade Payables and in Non-Current Liabilities, the tax liability was a huge increase which led to the weakening of the ratios.
Leverage condition remained stable in 3Q09, with its gearing ratios constant. TIE ratio decreased from 25.32 days to 26.23 days. The reason for this marginal decrease was a decline in the EBIT that had resulted in the lower revenues this year. The company was able to increase its earnings for the period as EPS for FY09 was Rs 14.73 compared to Rs 13.42 in FY08. This is mainly attributed to the increase in the net income for the year, which augmented by 10% in FY09.
The P/E multiple showed a great confidence in the company as the Market Price of the Stock increased Rs 169.34 at year end comparatively to Rs 68.71 in FY08. Thereby, increasing the P/E multiple to 11.40 in FY09. The increment in stock price shows the level of confidence in the investors even though the market conditions and economic conditions tend to hamper the growth and profitability of various sectors. The company paid out dividends to its shareholders, which was 40% of its earnings bringing it about to nearly Rs 7/share.
FUTURE OUTLOOK
Prospects of a global recovery in 2010 remain mixed. On the domestic front, there are signs of macroeconomic stability, however this hard gained recovery is threatened by the pressures building up on fiscal account, further increase in energy shortages and the unease on continued security incidents. Other than this, the market conditions remain competitive and tough to operate and post challenges for various industries. One major area that remains inevitable is the energy crisis and fares related to it, this would impede efficiency and drive up costs for the firm
Globally, the revival of economies are taking at slower pace or remained stagnant however the debt crisis still remains issue which led to downturn of the various economies on the European front. Business environment is therefore expected to remain tough in 2010.
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ICI Financials
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INCOME STATEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Turnover 15,073,813 22,156,265 21,303,498 21,054,298 21,947,688 25,973,009 31,921,873 32,399,181
Gross Profit 2,327,095 2,664,367 2,755,709 3,351,698 4,083,210 4,806,120 5,647,341 5,675,892
Operating Profit 1,077,114 1,087,681 1,346,788 1,842,542 2,480,998 2,622,102 2,910,600 3,027,654
Profit Before Tax 723,094 806,552 2,898,950 1,612,401 2,117,797 2,768,523 3,129,908 3,072,506
Net Profit 1,854,732 766,244 2,846,368 2,253,257 1,455,628 1,784,800 2,068,872 2,044,738
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BALANCE SHEET 2002 2003 2004 2005 2006 2007 2008 2009
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Total Equity 4,591,014 5,114,863 8,053,980 9,493,072 10,265,010 11,398,450 12,683,880 13,482,796
Current Liabilities 6,932,541 8,262,583 5,194,379 5,891,930 5,436,275 6,276,103 4,281,110 5,799,898
Non-current Liabilities 1,478,895 74,568 82,601 90,604 104,079 119,571 739,900 1,208,117
Current Assets 4,618,700 5,305,892 7,179,045 6,500,138 7,023,855 9,058,107 8,232,427 11,125,168
Non-current Assets 9,168,174 8,825,935 6,738,979 9,469,783 9,905,729 9,748,184 10,435,258 10,297,489
Total Assets 13,786,874 14,131,827 13,918,024 15,969,921 16,929,584 18,806,291 18,667,685 21,422,657
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LIQUIDITY 2002 2003 2004 2005 2006 2007 2008 2009
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Current Ratio 0.67 0.64 1.38 1.1 1.29 1.44 1.92 1.92
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Inventory Turnover 57.09 43.85 60.43 54.73 50.08 40.43 39.36 49.02
Days Sales Outstanding 16.06 10.46 13.78 11.06 11.99 14.54 11.32 10.22
Operating Cycle 73.15 54.3 74.21 65.79 62.07 54.97 50.68 59.23
Total Asset Turnover 1.09 1.57 1.53 1.32 1.3 1.38 1.71 1.51
Sales/Equity 3.28 4.33 2.65 2.22 2.14 2.28 2.52 2.40
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Debt to Asset Ratio 0.61 0.59 0.38 0.37 0.33 0.34 0.27 0.33
Debt to Equity Ratio 1.83 1.63 0.66 0.63 0.54 0.56 0.40 0.52
Long Term Debt to Equity 0.32 0.01 0.01 0.01 0.01 0.01 0.06 0.09
Times Interest Earned 2.72 3.11 12.38 6.72 8.44 28.42 25.23 26.23
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PROFITABILITY 2002 2003 2004 2005 2006 2007 2008 2009
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Gross Profit Margin 15.44 12.03 12.94 15.92 18.6 18.50 17.69 17.52
Profit Margin 12.3 3.46 13.36 10.7 6.63 6.87 6.48 6.31
Return on Assets 13.45 5.42 20.45 14.11 8.6 9.49 11.08 9.54
Return on Equity 40.4 14.98 35.34 23.74 14.18 15.66 16.31 15.17
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MARKET VALUE 2002 2003 2004 2005 2006 2007 2008 2009
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EPS 13.36 5.52 20.51 16.23 10.49 12.86 14.91 14.73
Price/Earnings 4.04 15.4 4.37 8.85 11.01 15.29 4.61 11.50
Book Value 38.73 44.25 62.25 71.95 82.05 89.41 98.32 89.89
Year End Market Price 53.95 85 89.65 140.5 115.5 196.65 68.71 169.34
Dividend per share 2.25 2.5 4 5 5.5 5.50 6.00 7.00
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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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