Ittehad Chemicals Limited (PSX: ICL) was set up as United Chemicals in 1962 as a manufacturer of caustic soda. It was nationalised in 1971 and renamed as Ittehad Chemicals. Ultimately denationalised in 1971, it was acquired by Chemical Group of Industries. Its produces a range of chlor-alkali products, which include caustic soda, sodium hypo chlorite and other allied chemicals.
Industry overview Caustic soda is the key product of the chlor alkali sector. The local industry is oligopolistic in nature with three main producers catering to the demand of the caustic soda, which is used in many industries but particularly the textiles sector. Sitara Chemicals Limited (SCL), Ittehad Chemicals and Engro Polymers Chemicals Limited (EPCL) are the main players in the industry. SCL and ICL dominate the northern parts of the country, whereas EPCL enjoys considerable share in the southern market.
The chlor-alkali industry is highly dependent on fuel & power, as it can account for more than 50 percent of its total production cost. The ongoing shortage of gas and power, the need to become self sufficient in energy, and higher RLNG tariffs are impacting the capacity utilisation of ICL and SCIL and squeezing their margins.
Operational and financial overview Capacity utilisation improved for Ittehad Chemicals Limited in the last fiscal year due to the better availability of Regasified Liquified Natural Gas (RLNG). However, Sui Northern Gas Pipelines Limited charged RLNG tariff instead of System Gas tariff, which depressed the gross profit margin. Gross profit margin was further squeezed by depressed prices of calcium chloride in the international market as well and has continued to decline in the latest financial results.
Over the previous fiscal year, ICL invested in increasing the capacity of hydrochloric acid by 50,000 tonnes as a result its production increased by nearly 20 percent. In terms of volume, hydrochloric acid is ICL's top commodity with production of nearly 175,000 metric tonnes.
ICL decreased the capacity of caustic soda liquid by 20 percent, probably because of lower margins. Nevertheless, its production increased along with the production of caustic soda flakes. Capacity remained underutilised for all products, because ICL pursues a strategy of demand based production.
The company issued 12 million rights shares at a premium of Rs 15 per share in June 2017. The funds were raised to finance the building of the IEM Plant 3, which is expected to be a lot more power efficient than the current IEM Plant 1 that is being used.
1QFY18 performance Although in the latest quarter results Ittehad Chemicals maintained a healthy trend of sales, its gross margin decreased. The directors' report attributes this to stiff competition, implying that the growth in revenue was volumetric driven by a decrease in price.
At first glance, it seems ICL's net profit margin has decreased significantly. However, in 1QFY17 the higher figure of profit after tax was due to deferred tax. A more accurate view of ICL's profitability is the pretax profit margin, which also declined. Given ICL's narrow margin of profitability, the erosion of its pre-tax margin is a cause of concern.
Except for an increase in other operating expenses, ICL's expense structure remained similar to the one it had in the same period last year, indicating that the decline in profits was due to a lower gross profit margin. EPS of last period has been restated due the issuance of rights share.
Future outlook ICL is considering the import of a caustic soda flakes plant with a capacity of 16,500 metric tonnes per annum, to increase its production since its margins are higher than caustic soda liquid. It is also considering to diversify further and establish a Linear Alkyl Benzene Sulphonic Acid LABSA) Plant.
IEM Plant 3 is in the process of being commissioned, which would contribute towards decreasing costs and hence increasing ICL's profitability. The plant is likely to be commissioned during the fourth quarter of the current financial year.
Since the textiles industry is a big consumer of caustic soda, ICL's fate is entwined with it. The first quarter of the current fiscal year has seen an improvement in textile exports with an up tick in value-added textiles. If the textile sector continues on this trend and regains its past glory, ICL's investments will allow it to be in a good position to benefit from it.
The company's performance however, remains strongly dependent upon the availability of power; consistent supply of gas to the units will help in maintaining margins and improving capacity utilisation. Furthermore, the continued depressed prices of calcium chloride continue to affect ICL's sales and margins.
Despite continued investments to better utilise capacity and mange power constraints, ICL's margins have shrunk. It also has seemed to lost investor confidence in recent months. A revival of the textile sector, and other industries that generate demand for caustic soda, is necessary for ICL to improve its performance.
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Ittehad Chemicals Limited: latest financials
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(Rs mn) 1QFY18 1QFY17 Chg
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Net turnover 1,265 1,031 23%
Cost of sales (1,077) (853) 26%
Gross Profit 189 178 6%
Selling and dist. expenses (67) (60) 12%
General and administrative expenses (41) (41) 1%
Other operating expenses (11) (2) 349%
Other operating income 5 3 -66%
Operating profit 75 78 -4%
Finance cost (41) (41) 0%
Profit before tax 34 37 -8%
Taxation (10) 25 -141%
Profit / (loss) after tax 23 62 -62%
EPS (Rs) 0.30 0.81 -63%
Gross Profit margin 15% 17%
Pre-tax profit margin 3% 4%
Net Profit margin 2% 6%
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Source: Company accounts
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Financial Snapshot
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Rs (mn) 2013 2014 2015 2016 2017
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Profit and Loss
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Sales 4278 4104 4046 4557 4990
Gross Profit 865 813 423 791 820
Operating profit 453 405 31 372 384
Profit/(loss) before tax 333 281 -74 224 220
Profit after tax 295 200 84 167 233
EBITDA 637 592 225 685 718
EPS (Rs.) 5.89 4.01 1.54 2.64 3.37
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Investor information
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Gross profit margin 20.23 19.81 10.45 17.35 16.43
Net profit margin 6.89 4.88 2.09 3.67 4.68
Return on equity 23.29 13.74 5.42 9.4 10.59
PE ratio restated 7.38 8.06 30.38 9.89 9.28
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Source: Company accounts
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ICL: Pattern of shareholding (ordinary shares) Shares % of total
(as at June 30, 2017) held shares
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Directors, CEO and their spouse and minor children 21,094,087 27.39%
Associated companies, undertakings and related parties 0 0.00%
Investment Corporation of Pakistan 0 0.00%
Insurance companies 4,667,599 6.06%
Other financial institutions 1,145,579 1.488%
General public (local) 40,507,627 52.61%
General public (foreign) 3,000 0.00%
Others 9,582,108 12.44%
Total 77,000,000 100%
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