Sitara Chemical Industries Limited

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

It manufactures caustic soda and allied products under the Chemical division of the company. Under the textile division, it manufactures yarn and trading of fabric. The spinning unit produces Polyester/Cotton (PC) and Polyester/Viscose (PV). Under the gases division, it produces Nitrogen and Carbon Dioxide.

Shareholding pattern

As at June 30, 2021, over 65 percent shares are owned by the directors, CEO, their spouses and minor children. Within this category, majority shares are held by Mr. Muhammad Adrees, the CEO of the company. About 9 percent shares are with the banks, DFIs and NBFIs, followed by close to 10 percent owned by the local general public. The remaining roughly 16 percent shares are with the rest of the shareholder categories.

Historical operational performance

Sitara Chemical has mostly seen a growing topline with the exception of FY15 and FY20 when it contracted. Gross and operating margins, in the last six years have mostly remained stable whereas net margin declined between FY17 and FY20, before rising again in FY21.

In FY18, the company witnessed the biggest growth in topline thus far, at 21.75 percent, to cross Rs 12 billion in value terms. This is attributed to the higher sales in the domestic market as well as the international market. Moreover, the chemical division contributes a major part of the revenue. This division registered a growth of over 21 percent. But cost of production increased marginally to 78.5 percent of revenue, therefore gross margin reduced from nearly 23 percent in FY17, to 21.5 percent. The decline in net margin was more pronounced due to a high deferred taxation figure. Net margin for the year stood at 8.8 percent compared to 11.6 percent in the previous year.

Topline growth in FY19 was relatively subdued at 3.5 percent. With production cost hovering close to 78 percent, gross margin and operating margin remained more or less flat at 21.7 percent and 13.4 percent, respectively compared to 21.5 percent and over 14 percent in the previous year. Net margin, on the other hand, fell to almost 7 percent, due to high bank borrowing rates that increased finance costs to consume 5 percent of revenue. Moreover, the company’s long-term liabilities too, nearly doubled year on year.

In FY20, topline contracted by 7 percent to fall below Rs 12 billion in value terms. This is attributed to lower sales volumes, in addition to the adverse impact created by the outbreak of the Covid-19 pandemic. Coupled with this was the increase in cost of production that grew to nearly 81 percent of revenue as electricity prices, RLNG tariff, coal prices and cotton bale prices increased. This was not matched by a corresponding rise in selling prices, thus gross margin declined to 19.3 percent, with net margin shrinking to an all-time low of 2.5 percent. The latter was due to finance cost growing to consume over 8 percent of revenue.

Topline registered the highest growth in revenue at over 25 percent to reach an all-time high of nearly Rs 15 billion. This is attributed to demand recovery and resumption of business activities as lockdowns eased. Sales volumes improved across all divisions. But with production cost remaining close to 80 percent of revenue, gross margin remained flat at around 19 percent. However, net margin inclined to 9 percent as operating and finance expenses reduced as a share in revenue, while other income increased. The latter was largely due to gain on disposal of property, plant and equipment. Thus, bottomline stood at its highest of Rs 1.3 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 16.4 percent year on year. While the company could not raise selling prices much, it saw an increase in its sales volumes. The textile division in particular, saw better margins during the period due to better yarn prices. Production cost, however, was significantly higher as a share in revenue that brought down overall gross margin to 12.3 percent, compared to 23.3 percent. This also trickled to the net margin that was down to almost 1 percent, compared to 8.7 percent in 1QFY21.

In the second quarter too, revenue was higher year on year, by 50 percent attributed to an improvement in volumes in the chemicals division. Production cost remained considerably higher year on year at nearly 87 percent. Thus, net margin was recorded at a lower almost 4 percent versus 12.7 percent in 2QFY21.

In the third quarter revenue was higher by over 52 percent year on year due to an increase in selling prices as well as volumes. However, the higher production cost continued to eat away profitability as net margin was recorded at 5.2 percent compared to almost 8 percent in 3QFY21. Overall, the company had seen nearly 41 percent growth in revenue in 9MFY22 year on year, however, the rising prices of input costs, in addition to an increase in SBP policy rate, have been major challenges for the company.