Lucky Core Industries Limited

Lucky Core Industries Limited (PSX: LCI) was incorporated in Pakistan as a public limited company as Khewra Soda Ash Company in 1953. In 1966, after a year of acquisition of Fuller Paints Limited, the company changed its name to ICI Pakistan Manufacturers Limited. Later Imperial Chemicals (Private) Limited was also merged into the company. In 2012, Lucky holdings Limited acquired majority shareholding of the company from AkzoNobel and became the holding company of LCI. The company changed its name from ICI Pakistan Limited to Lucky Core Industries Limited in December 2022. The company undertook other major acquisitions of Cirin Pharmaceuticals Limited, Wyeth Pakistan Limited and Pfizer Pakistan Limited in the subsequent years. The company is engaged in five diverse businesses i.e. Soda Ash, Polyester, Chemicals & Agri Sciences, Pharmaceuticals and Animal Health.

Pattern of Shareholding

As of June 30, 2022, LCI has a total of 92.359 million shares outstanding which are held by 9424 shareholders. Associated companies, undertakings and related parties are the major shareholders of LCI with 81.54 percent stake in the company. Within this category, Lucky Cement Limited tops the list with 55 percent shares. Insurance companies hold 5.84 percent shares of LCI followed by local general public with 4.54 percent shares. Directors, CEO, their spouse and minor children account for 2.78 percent of the outstanding share capital of LCI while Banks, DFIs and NBFIs hold 2.18 percent shares. Modarabas and Mutual funds have 1.53 percent shareholding of LCI. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

With the exception of 2020, LCI’s topline grew in all the years under consideration. Conversely, its bottomline posted a plunge in 2019 despite topline growth. LCI’s margins also shrank in 2019. In the subsequent two years, the margins took an upward flight, however, tumbled in 2022. In 2023, while gross margin further shed off its value in 2023, operating margin and net margin strengthened to boast their optimum values. The detailed performance review of each of the years under consideration is given below.

In 2019, LCI’s topline grew by 19 percent year-on-year which primarily came on the heels of Soda Ash and Polyester business. Soda Ash business grew by 32 percent year-on-year in 2019 on account of high demand from glass, silicate and paper industry w hich was met by 75 KTPA Light Ash expansion while a considerable increase in Polyester Staple Fiber (PSF) prices during the year buttressed the Polyester business which grew by 30 percent year-on-year. Chemicals and Agri Science business also grew by 4 percent year-on-year while pharmaceuticals and animal health business met a 5 percent decline in sales in 2019 on the back of restrictions on the import and marketing of rbST injections during the year. Cost of sales grew by 21 percent year-on-year in 2020 on account of inflation, Pak Rupee depreciation and a surge in the prices of raw materials across business segments. Gross profit grew by 10 percent year-on-year, however, GP margin inched down from 17.4 percent in 2018 to 16.2 percent in 2019. Distribution and administrative expense grew by 7 percent and 12 percent respectively in 2019 mainly on account of a rise in outward freight and handling expense and payroll expense respectively during the year. As the company expanded its operations during the year, the number of employees grew from 1663 in 2018 to 1729 in 2019. Other expense slid by 10 percent year-on-year due to lesser provisioning against WPPF as well as high base effect produced by impairment of fixed assets booked in the prior year. Other income couldn’t prove to promising and slashed by 35 percent year-on-year in 2019 on account of a substantial drop in dividend from associate companies. Operating profit grew by 7 percent year-on-year in 2019, however, OP margin inched down from 9.6 percent in 2018 to 8.7 percent in 2019. LCI’s financial cost posted a massive jump of 127 percent in 2019 which was the result of high discount rate coupled with a rise in the company’s liabilities due to conversion of Usance LC’s to sight in order to avoid exchange losses. Yet exchange loss grew by 2 percent in 2019. The bottomline dived by 25 percent year-on-year in 2019 to clock in at Rs.2304.91 million with an NP margin of 4 percent versus 6.2 percent in 2018. EPS also fell from Rs.33.13 in 2018 to Rs.24.96 in 2019.

In 2020, LCI’s net turnover plummeted by 8 percent year-on-year due to decline in the revenues from all the segments except Animal Health Business. This was on account of the country-wide lockdown of the non-essential industry in the later part of the year which resulted in reduced demand. Moreover, decline in petrochemical prices and Soda Ash prices as well supply chain disruptions also affected the overall business during the year. Cost of sales also inched down by 12 percent year-on-year in 2020 due to stringent cost control measures and revised product mix. This translated into a 12 percent rise in gross profit in 2020 with GP margin climbing up to 19.7 percent. During the earlier part of the year, the company expanded its Dense Ash plant by 70,000 tons per annum which resulted in the growth in human resource count to 1995 in 2020 which raised the payroll expense. This coupled with higher outward freight and handling charges were the main factors behind 7 percent and 11 percent growth in distribution and administrative expense respectively in 2020. Other expense also rose by 22 percent year-on-year in 2020 on account of higher provisioning against WWF and WPPF. Massive growth in dividend income from associated companies drove the other income up by 134 percent in 2020. Operating profit expanded by 24 percent year-on-year in 2020 with OP margin moving up to 11.7 percent. Finance cost multiplied by 10 percent in 2020 due to higher discount rate for the most part of the year. Exchange loss slightly dipped during the year. Best cost control measures and handsome dividend income resulted in bottomline growth of 34 percent year-on-year in 2020 despite constricted turnover. Net profit settled at Rs.3095.858 million with an NP margin of 5.8 percent. EPS grew to Rs.33.52 in 2020.

In 2021, LCI mustered a 17 percent year-on-year growth in its net revenues which came on the back of growth across all five business segments. Animal Health Business managed to top the list with 31 percent higher sales on account of revival in demand from both poultry and livestock segments. Pharmaceutical attained 27 percent growth in revenues on account of new and timely product launches and higher toll income. Polyester business also witnessed a 22 percent rise in revenues on account of revived demand from the textile industry. Moreover, increase in cotton prices due to supply chain disruptions from the US and China also proved to be a good omen for the Polyester business in 2021. Cost of sales grew by 12 percent year-on-year in 2021 which drove the gross profit up by 36 percent year-on-year in 2021. GP margin also surged to 22.9 percent – the highest ever posted by the company. Distribution and administrative expenses posted a 23 percent and 20 percent spike respectively in 2021 on account of higher payroll expense on account of inflation, higher advertisement and publicity charges as well as outward freight and handling charges. Other expense posted a steep 91 percent rise on the back of increased provisioning against WWF and WPPF. Higher profit on deposit accounts, higher scrap sales and higher dividend from subsidiary was offset by lower dividend from associate company resulting in a 5 percent increase in other income in 2021. Operating profit grew by 39 percent year-on-year in 2021 with OP margin escalating to 14 percent. Better cash generation across the business segments resulted in lower borrowings for working capital requirements. This coupled with monetary easing during the year translated into a 63 percent fall in finance cost in 2021. Unlike other years, LCI also made an exchange gain of Rs.55.98 million during the year due to stronger Pak Rupee. The bottomline boasted a staggering 92 percent year-on-year growth in 2021 to clock in at Rs.5959.446 million with an NP margin of 9.5 percent. EPS also ascended to Rs.64.52 in 2021.

2022 witnessed the highest year-on-year growth of 39 percent in LCI’s topline. While all the business segments registered robust sales growth during the year, Polyester and Soda Ash business were the star performers with 51 percent 50 percent year-on-year growth in net turnover respectively in 2022. Polyester business grew on the back of strong demand from textile industry while Soda Ash business banked on export market expansion as well as domestic demand recovery. Cost of sales grew by 42 percent year-on-year on the back of Pak Rupee depreciation coupled with commodity super cycle prevailing in the international market on account of Russia Ukraine crisis. Higher energy charges further fuelled the cost hike. This translated into GP margin descending to 21.4 percent in 2022 from its all time high of 22.9 percent in 2021. Distribution expense grew by 20 percent year-on-year due to higher sales volume, better advertising budget, increase in fuel prices, mounting sea freight and unavailability of vessels. Administrative expense grew marginally by 5 percent in 2022 despite inflationary pressure and increase in the employee headcount from 2030 in 2021 to 2182 in 2022. Other expense also tumbled by 11 percent in 2022 due to lower provisioning against WWF and WPPF. No dividend from associate and subsidiary companies pushed the other income down by 63 percent year-on-year in 2022. Operating profit grew by 32 percent in 2022, but OP margin dipped to 13.3 percent. Finance cost enlarged by 38 percent year-on-year in 2022 on the back of record high discount rate coupled with increased borrowings for working capital requirements and capital expenditure projects in Soda Ash and Polyester businesses. The company also incurred an exchange loss worth Rs.545.03 million in 2022 as against exchange gain in the previous year. Imposition of taxation further dampened the bottomline growth to 5 percent in 2022. LCI’s net profit stood at Rs.6248.587 million in 2022 with an NP margin of 7.2 percent. EPS slightly grew to Rs.67.66 in 2022.

Recent Performance (FY23)

In 2023, LCI’s topline grew by 26 percent year-on-year led by Soda Ash business on account of 135,000 tons per annum expansion in Soda Ash project undertaken during the year. Other segments also posted healthy revenues in 2023. Upward revision in the prices also buttressed the topline in 2023. Cost of sales grew by 28 percent year-on-year in 2023 on account of fluctuations in global commodity prices, Pak Rupee depreciation and import restrictions. GP margin slumped to 20.4 percent in 2023 from 21.4 percent in the previous year. Distribution and administrative charges surged by 7 percent and 25 percent respectively due to higher freight charges on account of fuel price hike as well as greater sales volume. Moreover, expansion in production capacity also resulted in increased human resource requirements which drove up the payroll expense. Inflation also came into play to push the operating expenses up. Other expense rose by 42 percent year-on-year. Other income posted a huge 449 percent growth in 2023. While the detailed financial statements are awaited to get further clarity on the other income front, this pushed the operating profit up 38 percent in 2023 with OP margin jumping up to 14.5 percent – the highest since 2018.

The company made an exchange loss of Rs.964.51 million in 2023 due to Pak Rupee depreciation. Furthermore, finance cost multiplied by 251 percent in 2023 due to higher discount rate and increased borrowings to manage working capital requirements. However, these were offset by a gain worth Rs.9842.15 million on the sale its stake in NutriCo Morinaga Private Limited (NMPL) which constituted 26.5 percent of the total issued and paid up share capital of NMPL. Consequently, net profit grew by 120 percent year-on-year in 2023 to clock in at Rs.13772.409 million with an NP margin of 12.6 percent – the highest since 2018. EPS also climbed up to Rs.149.12 in 2023.

Future Outlook

Recently, the company has entered into a sale purchase agreement with Lotte Chemicals Corporation for the acquisition of 75.01 percent of the issued and paid up capital of the company. The company also increased its shareholding in Morinaga Milk to 51 percent in 2023. While the company will continue to leverage on its well diversified business portfolio which will muster sales growth, mounting cost of doing business on account of Pak Rupee depreciation, high commodity prices, high interest rate, indigenous inflation, higher effective tax rate as well as high fuel and energy cost will dampen the margins and profitability of the company.