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. Today ICI Pakistan's five businesses, polyester, soda ash, paints, chemicals and life sciences manufacture and sell a range of industrial and consumer products.
These include polyester staple fibres, POY chips, light and dense soda ash, sodium bicarbonate, paints for the decorative, automotive, 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 trading various specialised chemicals for use in industries in Pakistan.
The company spent Rs 1,012 million in 2007 on major capital projects and on sustenance to ensure efficiency and integrity of assets. The 50ktpa soda ash expansion project costing Rs 1.0 billion was completed as per plan and commercial production commenced in March 2007. Work on 65ktpa soda ash expansion project is progressing as per plan and the project is expected to complete in the second quarter of 2009.
RECENT RESULTS (H1'08)
On the whole, ICI's operating result in the second quarter and first half at Rs 964.6 million and Rs 1,704.7 million achieved an overall 35% and 36% growth in the second quarter and half year ended 30 June 2008 respectively, as against the same period last year (SPLY), amidst a difficult business environment in H1'08, due to law and order issues, inflationary pressures and energy shortages. Turnover-wise all businesses achieved growth over the SPLY. Leading contribution to the turnover came from polyester segment, followed by paints, soda ash, chemicals and life sciences.
Operationally all businesses improved over the same period last year, except paints business which was affected primarily by escalating raw material prices and rupee depreciation against the major currencies, thereby putting pressure on unit margins, despite a double-digit volumetric growth in the decorative and refinish segments. With the exception of polyester, one can see a shift in contribution by various business segments towards the operating results, in H1'08 (the outer circle in the graph) vis-a-vis the SPLY (inner circle).
Despite a 34% increase in bet sales, the gross profit remained flat in H1'08, due to commensurate increase in cost of sales. So did the gross and net profit margins in H1'08. However, on QoQ basis, there's a decline in Gross Profit in Q2'08 due to 39% surge in Cost of Sales surpassing the 38% growth in net sales.
Selling and administration expenses for the quarter and first six months increased on a comparable basis primarily due to double-digit inflation and one off provisioning for obsolete stock & bad debt in the Paints Business. In addition, promotional expenses to support business growth also registered an increase.
Financial charges of Rs 182 million increased by 151% comparatively. This includes exchange losses of Rs 103.9 million resulting from devaluation of the Pak rupee and temporary suspension of forward booking against the all types of imports by the SBP.
Other operating income almost doubled in H1'08 mainly on back of higher interest income earned over the same period last year, resulting from improved cash position.
PBT for the quarter at Rs 876.7 million and first half at Rs 1,520.2 million was higher by 37% and 35% respectively on a comparable basis. PAT for the quarter and first half at Rs 568.2 million and Rs 984.3 million was 35% and 33% higher than the corresponding periods last year. Earnings per share for the quarter at Rs 4.09 and first half at Rs 7.09 were up by 35% and 33% respectively compared to same period last year comparable basis.
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Recent Results Q2 '08 Q2 '07 % Chg H1 '08 H1 '07 % Chg
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Turnover 8,528 6,131 39% 15,936 11,827 35%
Sales tax, commission & discounts 1,055 708 49% 1,877 1,336 41%
Net sales and commission income 7,473 5,423 38% 14,059 10,491 34%
Cost of sales 5,952 4,270 39% 11,289 8,394 34%
Gross profit 1,521 1,153 -2% 2,770 2,097 0%
Selling & distribution expenses 304 280 9% 592 511 16%
Administrative & General expenses 252 159 59% 473 332 42%
965 714 35% 1,705 1,255 36%
Financial charges 82 32 157% 182 73 151%
WPPF 46 33 38% 80 60 35%
WWF 18 13 41% 31 23 38%
Other operating charges 8 7 14% 18 14 26%
Other operating income 66 9 621% 127 40 219%
PBT 877 638 37% 1,520 1,126 35%
Taxation 309 218 41% 536 385 39%
PAT 568 420 35% 984 741 33%
EPS - Basic and diluted 4.09 3.03 35% 7.09 5.34 33%
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FINANCIAL PERFORMANCE (FY02-FY07)
The company achieved a significant growth in profitability over 2006 and delivered strong financial results. Company's operating result at Rs 2,971.4 million for the year ended 31 December 2007 was 20% higher than 2006. Break-up of turnover and operating profits show polyester and soda ash were the main contributors.
Selling and administration expenses increased compared to FY06 to support business development and growth in the paints, life sciences and chemicals businesses, while in soda ash, the increase was due to outward freight expenses on account of higher sales and fuel cost.
As far as the gross profit margin of ICI Pakistan is concerned, a commendable trend was witnessed since 2003. This can be mainly attributed to a rise in commission income, which had to play a significant role in the impressive gross profit of the company. However, in FY07, owing to high administrative expenses and other operating charges, the both the gross and net margins did not tell an equally awe-inspiring story. A higher tax charge can also be held responsible for the declining net margin.
However, the tax charge of 2006 was primarily on account of a partial write off of deferred tax asset and does not involve any cash outflow. Accordingly, profit after tax for the year 2006 was 35% lower compared with the corresponding period of the previous year. One can see the same trend being continued in FY'07 where the profit and gross margins are almost equal to that of FY06.
Interestingly, taxation for 2005 showed a credit of Rs 626.5 million due to utilisation of the unrecognised portion of the deferred tax asset. Financial charges for the company have been increasing for the past four years owing to higher exchange losses on imports and significant increase in interest rates.
This can be another major reason for the declining net margin in spite of the rising trend in ICI's turnover. In 2004, other operating income from the sale of the PPTA shares resulted in a step rise in profits that was reflected in the improved gross and net margins for the same year.
The return on assets and equity have also witnessed a declining trend over the last few years because of greater growth rate in assets and equity (equity grew because of an increase in the unappropriated profits) compared to the net profit which grew at a slower rate. The decline in turnover after 2003, translated into lower bottom line profits over the period under review. The situation recovered slightly in FY07 due to increased profits.
The liquidity position of ICI Pakistan improved considerably after 2004. Before that, the company suffered from a less-than-sufficient liquidity situation with the current ratio less than 1. However, in 2004, due to the sale of the PPTA shares, together with operating cash flow enabled the company to achieve a cash surplus position. Medium loans of Rs 1.2 billion from the United Bank Limited, Rs 800 million from Habib Bank Limited and US Dollars 35.0 million from Mortar Investments International Limited were also repaid in 2004.
Ever since, the current ratio of the company has been quite good, with an increase witnessed in 2006, primarily due to an increase in the company's cash balances and due to more receivables. The increase in receivables can be attributed by increased marketing efforts in the paints sector, which attracted a number of prospective clients. The rising CA in FY07 on the other hand is attributed to higher inventory and receivables as its cash balance has declined compared to FY06.
The trend in the company's asset management ratios till FY07 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 overall 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, hence reflecting 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.
Owing to a remarkable growth rate in the turnover in 2003, primarily because regional PSF demand grew by 6%, the sales to equity ratio showed a rise from 02 to 03. However, from 2003 onwards, a declining trend was witnessed because of a slowing rate of growth of the company's turnover, largely because the latter years were tough for the polyester industry of Pakistan on account of rising oil prices and China's continued additions to PSF capacities resulting in a supply overhang in the region.
Consequently, the demand for PSF in Pakistan grew at a very low rate of 3%, and with a larger percentage increase in the company's equity because of grater unappropriated profits, the overall trend in the sales to equity ratio was declining but recovered in FY07 on account of relatively higher turnover.
ICI's D/A and D/E ratios clearly show that it is reducing its reliance on debt financing and has lower ratios compared to the industry. Further, long term debt to equity ratio shows that now ICI is relying more on its short term financing as this ratio is now almost negligible.
The TIE ratio shows a rising trend in FY07, owing to higher EBIT and considerably lower financial charges, than in FY06. Financial charges were 54% lower in FY07 than last year due to buyout of the Fayzan Manufacturing Modaraba's plant in September 2006. Financial charges were higher in FY06 mainly due to the higher utilization of running finance facilities.
The book value has consistently shown a rising trend since 2002. This is because the company has been witnessing a rise in unappropriated profits that have resulted in a steady rise in the company' equity. The earnings per share, however, as driven by net income have declined over the past few years mainly because the profits of the company, because of reasons mentioned above in the analysis. It rose again in FY'07 due to higher profits.
A noteworthy trend is witnessed with regard to the year end market price of the company, which has steadily increased since 2002 (except in 2006). This can be attributed to the expansion plans of the company, as well as greater marketing efforts by the organization, which led to greater investor confidence and a consequent rise in the market value of the company.
The (P/E) ratio shows that how much investors, are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Consequently, the P/E ratio also followed a rising trend driven by the increases in EPS and market price of its share.
On comparison with the 100-index, the scrip has outperformed the index in the last 3 months of FY07. Moreover, the overall cash position of the company improved which is evident by the positive trend of DPS. It has increased from Rs 2.5 per share in FY03 to Rs 6 per share in FY07, showing a good return to shareholders.
FUTURE OUTLOOKIn the later half of 2008, operating conditions will pose a challenge. The macro imbalances in the economy, rising energy deficit, high inflation and escalation in raw material prices amid phasing out of subsidies may lead to slowdown in the economic growth.
Non-availability of gas and extended load shedding in the last winter, is a cause for concern if reoccurs in the next winter. The government needs to give priority to supply of gas to industrial concerns and take adequate measures to conserve this scarce resource and its nonessential use.
The purchasing power of the downstream customers is already stretched due to continued increase in raw material prices. Consequently, passing further raw material cost increases through higher selling prices may become difficult, particularly in paints business.
The domestic polyester staple fibre industry is under pressure due to cost-push, poor health of domestic textile industry and business failures. Moreover, the reduction in the PSF duty from 6.5% to 4.5% in recent budget will be detrimental and ICI demands zero-rating of the PTA tariff (7.5%). The company will continue to focus on improving the revenue stream through higher utilization of assets and control over costs. Also, and more importantly, consistent and stable government policies are imperative for the future prospects of the PSF and textile industry.
Demand from the silicate segment is expected to remain subdued on account of raw material issues faced by the soap industry. Soda ash business is also evaluating export opportunities to partially offset the impact of the weak demand. Paints business is expected to improve its performance with the launch of innovative/new products and customized solutions.
Overall, ICI Pakistan has shown a noteworthy performance for the past couple of years. ICI continues to aggressively grow its paints business in a fast growing coatings market.
Growth is also expected in the chemicals and life sciences businesses. Recently completed acquisition of ICI Plc by Akzo Nobel brings exciting opportunities. The two companies, combined global presence, technologies, products, brands and expertise will provide better competitive edge and open opportunities which should benefit ICI and its stakeholders in the future. Hence we can expect a bright future for the company.
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ICI FINANCIALS
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INCOME STATEMENT 2002 2003 2004 2005 2006 2007
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Turnover 15,073,813 22,156,265 21,303,498 21,054,298 21,947,688 25,973,009
Gross Profit 2,327,095 2,664,367 2,755,709 3,351,698 4,083,210 4,806,120
Operating Profit 1,077,114 1,087,681 1,346,788 1,842,542 2,480,998 2,622,102
Profit Before Tax 723,094 806,552 2,898,950 1,612,401 2,117,797 2,768,523
Net Profit 1,854,732 766,244 2,846,368 2,253,257 1,455,628 1,784,800
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BALANCE SHEET 2002 2003 2004 2005 2006 2007
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Total Equity 4,591,014 5,114,863 8,053,980 9,493,072 10,265,010 11,398,450
Current Liabilities 6,932,541 8,262,583 5,194,379 5,891,930 5,436,275 6,276,103
Non-current Liabilities 1,478,895 74,568 82,601 90,604 104,079 119,571
Current Assets 4,618,700 5,305,892 7,179,045 6,500,138 7,023,855 9,058,107
Non-current Assets 9,168,174 8,825,935 6,738,979 9,469,783 9,905,729 9,748,184
Total Assets 13,786,874 14,131,827 13,918,024 15,969,921 16,929,584 18,806,291
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LIQUIDITY 2002 2003 2004 2005 2006 2007
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Current Ratio 0.67 0.64 1.38 1.1 1.29 1.44
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 2007
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Inventory Turnover 57.09 43.85 60.43 54.73 50.08 40.43
Days Sales Outstanding 16.06 10.46 13.78 11.06 11.99 14.54
Operating Cycle 73.15 54.3 74.21 65.79 62.07 54.97
Total Asset Turnover 1.09 1.57 1.53 1.32 1.3 1.38
Sales/Equity 3.28 4.33 2.65 2.22 2.14 2.28
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 2007
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Debt to Asset Ratio 0.61 0.59 0.38 0.37 0.33 0.34
Debt to Equity Ratio 1.83 1.63 0.66 0.63 0.54 0.56
Long Term Debt to Equity 0.32 0.01 0.01 0.01 0.01 0.01
Times Interest Earned 2.72 3.11 12.38 6.72 8.44 28.42
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PROFITABILITY 2002 2003 2004 2005 2006 2007
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Gross Profit Margin 15.44 12.03 12.94 15.92 18.6 18.50
Profit Margin 12.3 3.46 13.36 10.7 6.63 6.87
Return on Assets 13.45 5.42 20.45 14.11 8.6 9.49
Return on Equity 40.4 14.98 35.34 23.74 14.18 15.66
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MARKET VALUE 2002 2003 2004 2005 2006 2007
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EPS 13.36 5.52 20.51 16.23 10.49 12.86
Price/Earnings 4.04 15.4 4.37 8.85 11.01 15.29
Book Value 38.73 44.25 62.25 71.95 82.05 89.41
Year End Market Price 53.95 85 89.65 140.5 115.5 196.65
Dividend per share 2.25 2.5 4 5 5.5 6.0
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