Sitara Chemicals Industries Limited (PSX: SITC) was incorporated in 1981. It began producing caustic soda in 1985, initially at the rate of 30 metric tons a day, which has since then increased to over 600 MT a day.
Various by-product facilities have been added and expanded upon, which include sodium hypochlorite, bleaching powder, hydrochloric acid, and liquid chlorine among others. Caustic soda remains the main source of revenue however, contributing to more than 65 percent of sales in 2017.
The company also entered the textile spinning business in 1995 and now deals in fabric and yarn, which account for nearly 20 percent of its revenue. Furthermore, it has a specialty chemicals and export division, which was established in 2001, and an agri-chemicals division that was set in 2003.
Industry overview Pakistan has a lot of potential for production of basic inorganic chemicals; however the industry faces high prices of feedstock. Basic raw material constitutes a big chunk of cost of production, about 30 to 60 percent, in the chemicals industry. Since Pakistan's chemical industry either uses natural gas or crude oil as feedstock, fluctuations in oil prices affect growth projections of firms.
Caustic soda is a key product of Pakistan's chlor alkali industry. The demand for caustic soda is highly dependent on the growth of the manufacturing sector as it is an essential raw material in variety of industries, ranging from textiles, soaps and detergents, paper and board, to vegetable oil refining, thermal power units, and food processing. The biggest consumer of caustic soda in Pakistan is the textile sector.
The major players of the caustic soda and chlor alkali based products are SITC, Ittehad Chemicals Limited, Engro Polymers Chemicals Limited, and Nimir Industrial Chemicals Limited. Since Engro Polymer's entry in this industry, the market has become more competitive as it has the freight advantage and better supply reliability of being located in the south.
Financial and operational overview While SITC's top-line has grown steadily, its profitability has had a more of a roller coaster ride. In 2012, Sitara chemicals started export of caustic soda liquid to Indian markets through Wagah with the local chlore alkaki market displaying increase in demand. Continuation of this trend, along with better gas and electricity conditions and renovations in the plant enabled the company to enjoy the highest gross profit and net profit margins to date in FY13.
FY14, FY15, FY16 saw increasing sales but margins declined due to energy shortages accompanied with a price hike. Business growth slowed and exports to India came under pressure due to the geopolitical situation.
SITC inducted a 40 mega-watt coal fired power plant in FY17 which resulted in energy savings and uninterrupted supply of electricity the year around. This contributed to bringing the cost of production down and its improving gross profit margin since nearly 40 percent of its cost is attributable to fuel & power and interrupted supply of power deeply impacts the company's production capacity. SITC is now self-sufficient in its energy needs, which reduces the impact of potential power shortages in the future.
SITC recorded tax credit admissible under the Income Tax Ordinance, 2001 on investment in plant and machinery of coal fired power plant, and extension and expansions of other chemical plants. This enabled its profit after tax to jump to high double digits in FY17 despite the marginal growth in sales.
9MFY18 Performance Sales saw significant double digit increase year-on-year, supported by an overall improved economic environment and stable international caustic soda prices. Since products of the textile sector such as yarn are the main demand drivers of caustic soda, positive changes in the sector helped drive SITC's top-line - average yarn prices and increase in volumetric sales year-on-year helped increase sales of the company.
However, keeping tax aside, Sitara chemicals profit before tax declined marginally. This is in part due to gross margins being under pressure because of higher electricity prices owing to increased coal prices in international market.
Going forward, Sitara Chemicals has undertaken BMR of one of its old membrane cell at a cost of about Rs 500 million. This will enable the company to increase caustic production and reduced electricity cost per ton. Excess production that will be available is planned to be exported to neighbouring countries. SITC also intends to diversify and induct new product lines.
Future outlook Nearly 50 percent of Pakistan's caustic soda production is consumed by the textiles sector. The government is aggressively working towards export promotion with textiles being the key industry. As the textile sector grows, SITC's top-line will grow giving its bottom-line a boost.
Other investments that bode well for SITC is the commission of its Carbon Dioxide (CO2 Food Grade) and Calcium Chloride Prill Plants as well capital expenditure towards spindles for its textile division. The start of the commercial production of these plants is expected to increase SITC's market share in coming years. Along with upgrading it laboratory equipment, SITC is enhancing its production capacity of its textile division and looking to improve the quality of its yarn.
A word of caution though is the rising international prices of coal and RLNG along with adverse exchange rate parity. In the past, these challenges have been the cause of a dip in margins and may continue to pose hurdle for SITC's profitability in the future.
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Pattern of shareholding (as at June 30, 2017)
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Shares held %
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NIT and ICP 685,722 3%
Directors, Chief Executive Officers, and their spouse and minor childer 14,015,467 65%
Banks Development Financial Institutions, Non Banking Financial Institu 1,860,953 9%
Insurance Companies 1,444,786 7%
Mutual Funds 464,600 2%
Modarabas 16,050 0%
Foreign Companies 7,300 0%
General Public
a. Local 2,290,557 11%
b. Foreign 96,839 0%
Associated Companies, undertakings and related parties. (Parent Company - 0%
Joint Stock Companies, others, etc 457,547 2%
Others 89,585 0%
Shareholding of 5% or more
Muhammad Adrees, Chief Executive 13,637,402 64%
JS Bank Limited 1,669,850 8%
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Source: company accounts
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Sitara Chemical Industries Limited
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Rs. mn 9MFY18 9MFY17 YoY
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Sales $8,987 $7,263 24%
Cost of sales ($7,066) ($5,456) 30%
Gross profit $1,921 $1,807 6%
Distribution cost ($181) ($136) 33%
Administrative expenses ($432) ($393) 10%
Other expenses ($70) ($74) -5%
Finance costs ($340) ($261) 30%
Other income $82 $53 55%
Share of profit/(loss) of associates ($0) ($4) -90%
Profit before tax $980 $993 -1%
Provision for tax ($88) ($203) -57%
Profit after tax $891 $790 13%
EPS 41.58 36.84 13%
GP margin 21% 25% -14%
NP margin 10% 11% -9%
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