ICI takes a dip on margins

These are challenging days for ICI Pakistan. In the same year as the demerger of the paints segment from the company, it also saw margins dipping on a year-on-year basis, owing to lower margins in its leading sectors polyester and soda ash.
In the results of the Company published on the KSE yesterday, the companys revenues receded by three percent in 3QCY12 and six percent in 9MCY12 on a year-on-year basis, which was reflected in a decline in the companys gross margins on a year-on-year analogy as well.
The decrease in the top line comes on the heels of lower sales volume in the PSF and Soda Ash segments. Subdued cotton prices both globally and domestically led to a bearish trend in PSF prices, while lower demand from the downstream sector led to the decrease in volumes. In fact, the PSF segment recorded an operating loss of Rs137 million during 1HCY12.
As for Soda Ash, the erratic availability of gas, and the consequent use of furnace oil as an alternate put cost pressures on the Company, while production had to be scaled back to minimize use of the expensive furnace oil, according to the Companys latest available financial report.
The imposition of a provisional anti-dumping duty on imports of Soda Ash from Kenya by the National Tariff Commission is a welcome step for the Company though.
These two businesses make up a significant portion of the Companys revenues, especially PSF. The effect of the margins on these two being hit was evident in the decrease in ICIs overall operating margins by about 2 percentage points.
During the year, the Company also incurred a one-off expense of Rs124 million related to the demerger of the paints business, plausibly explaining the increase in its administrative expenses as a percentage of sales from 2.6 percent in 9MCY11 to 3.6 percent in 9MCY12.
All in all, ICIs net margins slid this year relative to the previous one during both the third quarter and the cumulative nine months by 1.4 percentage points for both the periods.
Going forward, further price decreases are expected for PSF in the remainder of the year, while the availability of gas in the upcoming winter months continues to pose a pressing concern, bearing in mind the need to use more expensive furnace oil as an alternative.
A prompt commencement of the coal fired boiler project - scheduled to come on board in 2013 - can help the Company considerably with cost curtailment going forward.

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ICI P&L

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(Rs mn)                 3QCY12  Y/Y chg   9MCY12   Y/Y chg

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Sales                    8,688      -3%   25,417       -6%

Cost of sales            7,633      -1%   22,417       -5%

Gross profit             1,055     -18%    3,001       -9%

Gross margin             12.1%     -18%      12%       -4%

Selling & distribution     258       1%      807        9%

Administrative expenses    276       7%      924       33%

Operating Profit           521     -32%    1,270      -32%

Operating margin          6.0%     -30%       5%      -28%

PAT                        302     -32%      764      -36%

Net margin                3.5%     -29%       3%      -32%

EPS (Rs)                  3.27              8.27

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