Sitara Chemical Industries Limited (PSX: SITC) was incorporated in Pakistan as a public limited company in 1981. The company is engaged in operating a Chlor Alkali plant, Oleo Chemical plant, and a yarn spinning unit.
Pattern of Shareholding
As of June 30, 2024, SITC has a total of 21.429 million shares outstanding which were held by 1716 diverse shareholders. Directors, CEO, their spouses, and minor children have the majority stake of around 65.2 percent in the company followed by Banks, DFIs, and NBFIs accounting for 10.27 percent shares of SITC. The local general public holds 9.66 percent shares of the company while associated companies, undertakings, and related parties hold 3.56 percent shares. Around 3.5 percent of SITC’s shares are held by mutual funds and 3.04 percent by joint stock companies. Insurance companies account for 1.47 percent of shares of SITC. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-24)
Barring a marginal dip in 2020, SITC’s topline has by and large followed an inclining trend since 2019. Conversely, its bottom line couldn’t follow suit and grew only in 2021 and 2023. SITC’s margins have been fluctuating since 2019 to peak in 2021. In 2022, SITC’s margins shrank followed by a rebound in 2023. In 2024, SITC’s margins dipped again (see the graph of profitability ratios). The detailed performance overview of the period under consideration is given below.
In 2019, SITC’s topline grew by 3.53 percent year-on-year. During the year, the overall economic environment remained stressed with a downtick in GDP and LSM growth. Owing to demand destruction, the company’s production and sales volume dropped across various product categories. The uptick in net sales can be attributed to an upward revision in the prices of Caustic Soda, the main revenue driver of SITC. Cost of sales grew by 3.18 percent year-on-year on account of a hike in inflation, Pak Rupee depreciation as well as a spike in energy tariff during the year. Gross profit inched up by 4.82 percent year-on-year in 2019 with a slight change in GP margin from 21.47 percent in 2018 to 21.73 percent in 2019. During the year, SITC overhauled its electrolyzer and replacement of old machinery with new Swiss machinery in the textile division which resulted in cost efficiency in terms of electricity savings and also drove up the production capacity of SITC by 20 MTPD. On account of increased prices of petroleum, freight charges greatly escalated during the year, pushing up the distribution expense by 27.57 percent year-on-year in 2019. Despite a drop in the HR count from 2327 in 2018 to 2172 in 2019, payroll expenses continued to elevate on account of inflation. This drove up the administrative expense by 11.89 percent year-on-year in 2019. SITC incurred a net other expense of Rs.23.81 million in 2019, up 401 percent year-on-year on account of the loss incurred on the disposal of fixed assets in 2019. All these factors squeezed the operating profit by 2.56 percent year-on-year in 2019 with OP margin marching down to 13.44 percent from 14.28 percent in 2018. Finance costs spiked by 46 percent year-on-year not only because of the high discount rate but also because of increased borrowings to finance the capital expenditure during the year. Net profit slid by 18.48 percent year-on-year in 2019 to clock in at Rs.885.46 million with an NP margin of 6.97 percent versus an NP margin of 8.86 percent recorded in 2018. EPS also tapered from Rs.50.69 in 2018 to Rs.41.32 in 2019.
The economic woes further spiraled in 2020 with the outbreak of COVID-19. This resulted in the lockdown in the 4QFY20, which created a decline of 0.38 percent in GDP and 10.12 percent in LSM growth. The shutdown of industries further constricted the demand for SITC’s products, resulting in a 7.13 percent year-on-year shrinkage in the topline in 2020. The cost of sales dipped by 4.28 percent year-on-year in 2020. Despite the BMR projects undertaken last year, which were expected to fully materialize in 2020, a hike in electricity, RLNG, coal, and cotton bale prices reduced the gross profit by 17.41 percent year-on-year in 2020 with GP margin slipping to 19.33 percent in 2020. Another major reason for the high cost of sales was a switch from a combination of natural gas and RLNG to only RLNG in 2020. Lower sales resulted in low freight charges. This coupled with a considerably lower advertisement budget allocated for the year pushed the distribution expense down by 7.38 percent year-on-year in 2020. A number of employees dropped to 2123 in 2020 which slightly reduced the payroll expense. This coupled with electricity savings on account of lockdown translated into a 5.14 percent dive in administrative expense in 2020. SITC registered net other income of Rs.97.10 million in 2020 which was primarily the result of lower provisioning done for WWF and WPPF in 2020. Moreover, the unwinding of deferred consideration receivable and high dividend income on investments also contributed to recording net other income in 2020 versus net other expenses recorded in the previous year. Operating profit plummeted by 17.7 percent year-on-year in 2020 with OP margin sliding down to 11.91 percent. Finance costs magnified by 55 percent year-on-year in 2020 due to a high discount rate for the most part of the year coupled with increased short-term borrowings. Net profit is measured down by 66.26 percent year-on-year in 2020, which clocks in at Rs.298.76 million with an NP margin of 2.53 percent. EPS also bottomed out at Rs.13.94 in 2020.
In 2021, SICL posted 25.37 percent year-on-year growth in its net sales. Both chemicals and textile segments performed well during the year as routine business activity resumed after the lockdown period. GDP and LSM registered higher than anticipated growth of 3.94 percent and 9.29 percent respectively in 2021. The revival of economic activity instilled growth momentum in the demand for SITC’s products in 2021 resulting in higher production. Cost of sales also magnified by 24.58 percent year-on-year in 2021. This could’ve been even higher had the energy prices not stabilized during the year. Gross profit recoiled by 28.68 percent year-on-year in 2021 with GP margin climbing up to 19.84 percent. Significantly lesser advertisement expenses coupled with lower freight charges resulted in a 9.31 percent contraction in distribution expenses in 2021. Administrative expenses moved up by a nominal 3.18 percent in 2021 due to curtailed payroll expenses and electricity charges. Payroll expenses slid despite an increase in the number of employees to 2280 in 2021. SITC posted net other income of Rs.332.28 million in 2021, up 242 percent year-on-year primarily due to tremendous gains on the sale of fixed assets in 2021. Operating profit picked up by 61.91 percent year-on-year in 2021 with OP margin touching the optimum level of 15.38 percent. Finance cost also gave some breather in 2021 as it contracted by 39.26 percent year-on-year due to monetary easing. This was despite increased borrowings during the year to meet working capital requirements as well as finance the ongoing capital expenditure. Net profit ascended by 351 percent year-on-year in 2021 to clock in at Rs.1347.69 million with an NP margin of 9.12 percent and EPS of Rs.62.89.
Among all the years under consideration, 2022 witnessed the highest topline growth of 46.27 percent year-on-year. The economic rebound that began in 2021 continued in 2022, however, it created financial imbalances in the economy due to higher imports, diminishing foreign exchange reserves, and mounting current account and fiscal deficit. The volumetric sales as well as prices of chemicals posted growth in 2022, however, the sale of yarn and fabric nosedived during the year. Cost of sales mounted by 58.23 percent year-on-year in 2022 on account of the commodity super cycle in the international market in response to economic rebound and robust demand. The Russia-Ukraine war added to the ado. This coupled with high Indigenous inflation, a sharp rise in electricity, petroleum, and RLNG prices cut down gross profit by 2 percent year-on-year in 2022 with GP margin drastically falling to 13.28 percent. High POL prices culminated in a 37.32 percent year-on-year hike in distribution expense. The administrative expense also increased by 18.20 percent on account of high payroll expenses as the company hired additional human resources taking the tally to 2380 in 2022. Net other income narrowed down by 42 percent year-on-year in 2022 on account of lesser gain on the sale of fixed assets. Operating profit measured down by 21 percent year-on-year in 2022 with OP margin shrinking to 8.3 percent. A 48.48 percent spike in finance costs was the result of monetary tightening during the year. Net profit contracted by 51.35 percent year-on-year in 2022 to clock in at Rs.655.64 million with an NP margin of 3 percent and EPS of Rs.30.60.
SITC’s net sales grew by 27.13 percent year-on-year in 2023. The company curtailed its production activities during the year on account of import restrictions as well as a downtick in demand. The improvement in the topline was the result of an upward revision in the prices of SITC’s products to pass on the effect of the cost spike to the consumers. The cost of sales grew by 22.72 percent year-on-year in 2023 due to a hike in energy prices as well as cotton prices after torrential floods. Gross profit grew by 55.92 percent year-on-year in 2023 with GP margin rebounding to 16.3 percent. A hike in ocean freight charges due to exorbitant prices of diesel resulted in a 63.3 percent growth in distribution expenses in 2023. The administrative expense also grew by 28.40 percent year-on-year in 2023 due to inflation as well as an increase in the number of employees from 2380 in 2022 to 2629 in 2023. Net other income jumped up by 22 percent year-on-year in 2023 due to higher amortization of deferred grants, higher rental income, dividend income, and markup on bank deposits. Operating profit posted growth of 71.95 percent in 2023 with OP margin jumping up to 11.23 percent. Finance costs are magnified by 79.63 percent in 2023 due to an unprecedented discount rate coupled with increased borrowings. SITC registered 51.51 percent year-on-year growth in net profit which clocked in at Rs.993.35 million with EPS of Rs.46.35 and NP margin of 3.61 percent.
In 2024, SITC’s net sales grew by 13.16 percent. The sales volume of caustic soda slid during the year due to the contraction of the local textile sector during the year. Conversely, volumetric sales as well as prices of yarn improved during the year. High energy cost resulted in a dip in GP margin which was recorded at 15.81 percent in 2024. In absolute terms, gross profit ticked up by 9.82 percent in 2024. Distribution expense ticked down by 11.26 percent in 2024 due to lower freight and octroi charges on account of lower sales volume of caustic soda. Administrative expense escalated by 15.41 percent in 2024 due to higher payroll expense which was the result of inflationary pressure as well as workforce expansion to 2728 employees. Net other income strengthened by 22 percent in 2024 due to lower profit-related provisioning done during the year coupled with an increase in dividend, markup, and rental income, gain on sale of investment property as well as gain on sale of fixed assets recorded during the year. The company also recorded higher amortization of deferred grants in 2024. Operating profit grew by 13 percent in 2024 with OP margin staying intact at 11.2 percent. Finance costs surged by 45.73 percent in 2024 on account of higher discount rates and increased borrowings. The gearing ratio climbed up from 36.38 percent in 2023 to 42.47 percent in 2024. Net profit slumped by 41 percent in 2024 to clock in at Rs.585.507 million with EPS of Rs.27.32 and NP margin of 1.88 percent.
Recent Performance [1QFY25]
SITC’s net sales stood intact at last year’s level depicting a negligible 0.08 percent dip in 1QFY25. The cost of sales inched up by only 0.10 percent during the period due to incremental depreciation charges emanating from the revaluation of fixed assets done during the period. Gross profit nosedived by 1 percent in 1QFY25 with GP margin clocking in at 15.41 percent versus GP margin of 15.56 percent recorded during the same period last year. While the sales volume of finished yarn remained stable during the year, the lower sales volume of caustic soda squeezed distribution expense by 5.39 percent in 1QFY25. Administrative expenses escalated by 10.29 percent in 1QFY25 due to inflationary pressure. The company has also been expanding its workforce until last year which also could be the case during 1QFY25. Lower profit-related provisioning might have pushed down other expenses by 32.5 percent in 1QFY25. Conversely, other income strengthened by 29.9 percent during the period probably due to higher dividend income, rental income,e and amortization of deferred grants. SITC recorded a 1 percent slide in its operating profit in 1QFY25 with OP margin clocking in at 10.68 percent versus OP margin of 10.78 percent recorded during the same period last year. Finance costs grew by 17.31 percent during the period despite monetary easing. This was due to an increase in borrowings. Net profit tapered off by 23 percent in 1QFY25 to clock in at Rs.155.33 million with EPS of Rs.7.25 versus EPS of Rs.9.41 recorded during 1QFY24. NP margin measured down from 2.65 percent in 1QFY24 to 2 percent in 1QFY25.
Future Outlook
The expected revival in economic activity on account of improvement in macroeconomic indicators will result in improved demand for caustic soda, resulting in improved topline and margins for SITC. Downward revision of the discount rate will keep the finance cost in check. The company is also actively working on a 50 MW coal-fired power plant which will rein in its energy cost and make its operations more efficient.