Ittehad Chemicals Limited

Ittehad Chemicals Limited (PSX: ICL) was established in 1962; at the time of establishment it was known as United Chemicals. It underwent nationalisation in 1971, and was later denationalised in 1995 after Chemi Group of Industries it.

Ittehad Chemicals Limited is in the business of manufacturing, importing, exporting, packing and repacking Caustic Soda, Sodium Hypo Chlorite and other allied chemicals.

Shareholding pattern

The directors, CEO, their spouses and minor children own close to 26 percent shares of Ittehad Chemicals. Out of this, Mr. Muhammad Siddique, the Chairman of the company, holds 13 percent. Joint stock companies own around 13 percent, while 3 percent is held in modarabas and mutual funds.

Historical operational performance

Ittehad Chemicals has consistently experienced a positive growth in its topline since FY06, with the exception of a few years. Profit margins have also been improving for the most part except in FY15 when it fell considerably.

For Pakistan, FY15 was a particularly positive year in terms of macroeconomic indicators. The drop in international crude prices allowed the balance of payments position to improve; there was an increase in foreign exchange reserves, and rate of inflation declined. Within the chemical industry however, there is a lot of competition. Ittehad Chemicals is the founding company for the Chlor-alkali industry. According to the company’s annual account, this sector is quite fuel power intensive. During FY15, and in the preceding years, the country experienced energy shortage, which caused the company’s cost of manufacturing to increase considerably, consuming 89 percent of its revenue leaving little room for other costs. Thus margins nosedived.

Pakistan’s industrial sector exceeded the target growth rate of 6.4 percent in FY16. The CPEC implementation and other infrastructure developments provided prospects for a further boost in the economy. The company grew its sales year on year by almost 13 percent due to its plant IEM Plant-2 (Phase 1) beginning operations during the year. The new plant also helped to reduce cost of manufacturing since it is a cost efficient plant as claimed by the company’s annual report. Apart from a cost reduction, margins were also lifted due to other income and “partial reversal of the provision of GIDC made for the period prior to promulgation of GIDC Act, 2015”.

Ittehad Chemicals grew its topline by 9.5 percent in FY17; however, it was accompanied by a marginal increase in costs as a percentage of revenue. Costs inclined as a result of cost of raw materials consumed and other consumables. This, along with a fall in prices of Calcium Chloride internationally, resulted in gross margins to reduce slightly. With a fall in expenses and a rise in income coming from sale of scrap primarily, operating and net margins improved.

Despite the uncertainty in the economy due to FY18 being an election year, the company fared well in terms of its financial performance. Its topline grew by 15 percent- the highest rate of growth seen since FY13. This was due to higher prices of Caustic Soda in domestic as well as international market. Cost of manufacturing also remained more or less similar, as a percentage of sales, despite the higher revenue. Profit margins also improved with a lower finance cost and the doubled other income due to sale of scrap. The lower finance cost was a result of decline in mark-up/interest on long term diminishing musharaka. With higher sales, distribution costs increased with a higher figure for freight.

Ittehad Chemicals maintained its growth momentum during FY19, with the topline growing at a rate of little over 15 percent. Commencement of operation at the new power efficient IEM Plant-3 allowed cost of manufacturing to reduce as a percentage of revenue. This allowed gross and operating margins to improve. However, net margin rather fell, due to an elevation in finance costs (high mark-up rate) and a negative tax figure. During FY19 the company also issued bonus shares of Rs 77 million.

Half yearly results and future outlook

Between 1HY20 and 1HFY19, Ittehad grew its topline by 40 percent, as a result of its new LASBA plant. However, the increase in revenue was more than offset by an increase in cost of manufacturing due to higher RLNG/LESCO tariff rates causing gross margins to decline year on year. The improvement in revenue was primarily due to better prices in the second quarter of FY20. The fall in gross margins translated into lower operating margins as well, and an unprecedented escalation in finance costs pushed the company to incur a loss of Rs32 million for the period.

The company acknowledges that with the ongoing economic times, it is difficult to do business and be profitable but with increasing capacity and installation of new plants, the company hopes to increase its production and reduce costs, given the new plants are efficient. This would help to provide healthy contribution to the bottomline. Once stabilisation sets in, the company would be ready to utilise installed capacity to maximum.