Ittehad Chemicals Limited (PSX: ICL) was incorporated in Pakistan in September 1991 to purchase the assets of Ittehad Chemicals and Ittehad Pesticides under a scheme of arrangement. The company was privatized in 1995. The company manufactures and sells caustic soda and other chemicals e.g. liquid chlorine, hydrochloric acid, calcium chloride etc.

Pattern of Shareholding

As of June 30, 2022, ICL has 100 million shares outstanding which are held by 1371 shareholders. Local general public with a stake of 67.35 percent in ICL forms the largest category of shareholders. This is followed by Directors, CEO, their spouse and minor children holding 21.3 percent shares. Joint stock companies hold 10.99 percent of ICL’s shares. The remaining shares are held by other categories of shareholders such as Modarba and Mutual Funds; Pension funds etc., each having a shareholding of under 1 percent.

Historical Performance (2018-22)

The topline and bottomline of ICL present a contrasting journey in all the years under consideration. While the topline has been growing by leaps and bounds, the bottomline has been shrinking in all the years with an exception to 2021 where it grew by 9.8 times over the last year.

The bottomline of ICL took the hardest hit in 2020 where it plunged by 85 percent year-on-year despite a sizeable 33 percent year-on-year growth in sales. The growth in sales was the result of instigation of ICL’s Linear Alkyl benzene Sulphonic Acid (LABSA) plant operations in the beginning of the year which added to its sales volume. However, high cost of production due to increased electricity and gas prices couldn’t let the company enjoy a higher gross profit which plunged by 14 percent year-on-year, culminating into a GP margin of 13 percent in 2020 as against 21 percent in 2021. Finance cost was another stumbling block which grew by 88 percent year-on-year in 2020 owing to high discount rates in the first three quarters of the year. Finance cost would have soaked up the entire operating profit of the company resulting in a negative bottomline had the fair value gain on investment property not lent the helping hand by growing by over 12 times in 2020. The bottomline showed a net profit of Rs60.8 million in 2020 as against Rs405 million in 2019 resulting in an NP margin of 0.7 percent in 2020 as against 6 percent in the previous year.

2021 was the most fortunate year for ICL in terms of bottomline growth and margins. While the sales growth of 26 percent was lesser than what it posted in the previous year, the company posted a net profit of Rs656.7 million, which is not only the highest in absolute terms but also in terms of growth. The GP margin stood at 17 percent in 2021 despite 20 percent year-on-year growth in sales. This was on account of better pricing and sales mix. The major growth propeller was LABSA sales. Financial cost, which has been suppressing ICL’s bottomline, was contained in 2021 owing to low discount rate. Then fair value gain on investment property also grew significantly, providing growth momentum to the bottomline which grew by 980 percent year-on-year with NP margin clocking in at 6 percent in 2021.

In 2022, the company posted the highest ever topline growth of 44 percent year-on-year but as is the case in all the years (except 2021), the bottomline plunged by 37 percent year-on-year in 2022. During the year, the company enhanced the capacity of its LABSA plant to 70,000 metric tons per annum. This greatly improved the sales volume of the company which is evident in its topline growth. During the year, the company also improved its fuel efficiency by upgrading its power plant engines. This kept the cost of sales in control and enabled the gross profit to post a year-on-year growth of 10 percent despite high inflation and cost of raw materials. However, GP margin dropped to 13 percent in 2022 from 17 percent in the previous year. In 2022, the company’s export sales improved by 52 percent over the last year, especially in the UAE region. This meant higher freight charges which pushed up the distribution cost by 40 percent year-on-year. This shrank the operating profit by 9 percent year-on-year which culminated into an OP margin of 6 percent. Then finance cost again soared owing to high discount rate coupled with increased long-term financing and trade payables. The fair value gain on investment also contracted during the year. The bottomline weakened by 37 percent year-on-year with an NP margin of 2.6 percent in 2022.

Recent Performance (1HFY23)

With a topline growth of 77 percent year-on-year, ICL performed exceptionally well in 1HFY23. The growth mainly came on the back of over 100 percent growth in export sales which amidst depreciated Pak Rupee brought about humungous exchange gain for the company. The gross profit grew by 165 percent in 1HFY23 translating into a GP margin of 18 percent as against 12 percent during the same period last year. Selling and distribution expense grew by 131 percent in 1HFY23 owing to huge freight charges on export sales. Operating expenses also grew by a whopping 222 percent on the back of high WWF and WPPF on account of higher profits. However, this was largely bypassed by other income which multiplied on account of higher gains on financial assets. Operating profit grew by 228 percent year-on-year in 1HFY23 with an OP margin of 11 percent as against 6 percent during the same period last year. Finance cost increased by 137 percent year-on-year in 1HFY23 on the back of high discount rate coupled with increased borrowings during the year to meet working capital requirements. Despite high finance cost and distribution cost, the bottomline was able to deliver over 300 percent growth in 1HFY23 with an NP margin of 6.3 percent as against 2.7 percent in 1HFY22.

Future Outlook

With expanding export market of ICL, the sales will show no respite in the coming times. The up-gradation of power plant engines which are currently halted due to LC issues are expected to be completed by the end of FY23 which will improve the fuel efficiency of the company and improve its gross margins. Higher distribution expense on account of freight charges will be inevitable, however, greater gains on financial and non-financial assets will keep the operating profit healthy enough to absorb high financial cost and translate into a sizeable bottomline.