Incorporated in 1981, Sitara Chemical Industries Limited (PSX: SITC) began operations in 1985. Its core business involves producing caustic soda, initially at the rate of 30 tons per day, which has since been enhanced to over 600 tons. Over time, its caustic soda production facilities have been supplemented by addition of various by-products, which include sodium hypochlorite, bleaching power, hydrochloric acid and liquid chlorine over others.
SITC also entered in the textile spinning business in 1995, which accounts for nearly 20 percent of business in the form of yarn and fabric. Under brand name "Rajah's" Sitara Chemicals offer men's garments and fabrics. Other than that, SITC also has a specialty chemicals division and agri-chemicals division. About 5 percent of its revenue is generated from exports. Its main business is caustic soda, which accounted for nearly 80 percent of total sales in FY18.
Industry overview
Caustics soda belongs to the chlor-alkali industry. Its demand is dependent on the manufacturing sector as it is a vital raw material for a diverse range of industries from textile and soaps to vegetable oil refining, food processing and thermal power units. The biggest consumer of caustic soda is the textile sector.
Despite the high prices of feedstock, Pakistan is self-sufficient in basic inorganic chemicals. Feedstock consists of coal, gas or crude oil which is why fluctuations in oil prices impact growth projections of firms in this industry.
Main players of caustic soda and chlor alkali products are Engro Polymer, Sitara Chemicals, Nimir Industrial Chemicals, and Ittehad Chemicals. EPCL's entry in the industry has made the market more competitive since it has freight advantage and better supply reliability as it is located in the south. Nimir's announcement of an investment of Rs 2 billion for expansion of its caustic soda plant, power generation and soap finishing plant will further enhance competition in the sector.
Financial and operational overview
Profitability has shown volatility in recent years though SITC's top-line has grown steadily. Export of caustic coda through the Wagah border to India started in 2012 while the domestic market showed an increase in demand as well. This trend, along with better gas and electricity condition enabled SITC to enjoy the spike in gross and net profit margins in FY13.
FY14-FY16 witnessed a rising top-line but energy shortages and rate hikes put pressure on margins. The geopolitical situation of the region decreased exports to India as well, which contributed to business growth slowdown. To combat the situation, SITC inducted a 40 mega-watt coal fired plant in FY17 ensuring continuous energy supply and savings. Therefore, gross profit margin improved as feedstock is one of the main cost components.
While sales grew marginally in FY17, profit after tax jumped to high double digits because of tax credit recorded on investment in plant and machinery of power plant and extension and expansions of other chemical plants.
FY18 Performance
Continuing past trends, SITC's sales continued to rise in FY18. Top-line was led by caustic soda whose sales increased in the local market as well as in exports, with production rising by 11 percent. While production increased across most categories, higher prices of yarn on average as well as its volumetric growth also supported total revenue.
Gross margins came under pressure probably due to rising international prices of coal and RLNG along with currency devaluation. Last year SITC's bottom line profited from tax credits given the investments made by the company. Since tax provision was recorded this year taking into account recognition of taxable difference as against last year, tax reported rose manifold and profit after tax registered a 7 percent decrease.
Since the trend in FY18 was of stable international prices, the company undertook BMR of one of its old membrane cell at a cost of about Rs 500 million. This will allow an increase in production of caustic soda at reduced electricity cost per ton, thus pushing up gross margins as well as allowing excess production to be exported.
SITC has commissioned a brick making plant which uses fly ash (produced from its coal fired power plant as waste) as raw material to produce bricks. These bricks are stronger and have thermal insulation as compared to red clay bricks. The company has also sold land worth Rs 2 billion, of which 20 percent amount has been received with the rest expected over 6 years. The company has also invested in its textile division to improve quality of yarn and efficiency of its production.
Future outlook
Nearly 50 percent of the country's caustic soda production is consumed by the textile sector. Furthermore, the company has a textile division that manufacturers yarn. Given the currency devaluation and the government's emphasis on an increase in exports, textile sector is expected to grow and so will demand for SITC's core offerings.
Its challenges will remain rising international prices of coal and RLNG especially as the currency devalues. Given its low proportion of exports as part of total revenue, it has a limited hedging mechanism towards adverse exchange rate parity. Furthermore, competition from Nimir may decrease demand in domestic market.
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Pattern of shareholding (as at June 30, 2018)
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%
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NIT and ICP 0.24%
Directors, Chief Executive Officers, and their spouse and minor childern 63.64%
Banks Development Financial Institutions, Non Banking Financial Institutions 8.94%
Insurance Companies 4.70%
Mutual Funds 6.00%
Modarabas 0.08%
Foreign Companies 0.00%
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General Public
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a. Local 10.17%
b. Foreign 0.78%
Associated Companies, undertakings and related parties. (Parent Company) 0.77%
Joint Stock Companies, others, etc 2.30%
Others 0.63%
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Source: company accounts
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Sitara Chemical Industries Limited
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Rs. mn FY18 FY17 YoY
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Sales 12,264 10,074 22%
Cost of sales (9,632) (7,762) 24%
Gross profit 2,633 2,312 14%
Distribution cost (269) (206) 31%
Administrative expenses (608) (580) 5%
Other expenses (115) (68) 69%
Finance costs (439) (371) 18%
Other income 110 99 11%
Share of profit/(loss) of associates (57) (6,916) -99%
Profit before tax 1,312 1,180 11%
Provision for tax (226) (14) 1514%
Profit after tax 1,086 1,166 -7%
EPS 50.69 54.43 -7%
GP margin 21% 23% -6%
NP margin 9% 12% -23%
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