ICI: Gas outages take toll

ICI Pakistans latest results for the first quarter this year were mired in negatives, with significant slump seen in the Companys profitability margins.
A significant reduction in volumetric sales of the PSF business was witnessed this quarter on a year-on-year basis, down about 26 percent in 1QCY12 relative to 1QCY11. Both globally and locally, PSF demand has been subdued owing to recessionary pressures and a healthy cotton output, with net sales for the segment down 35 percent in 1QCY12 on a year-on-year basis.
Demand from the downstream sector has been lackluster because of first, lower cotton prices which tilted blend economics in favor of cotton rather than PSF, secondly, textile mills have also borne the brunt of global recessionary pressures, particularly in the eurozone, leading to lower exports and, therefore, lower demand for fiber, and thirdly, local mills have also had to suffer and close down because of the frequent gas outages in the country, further straining PSF demand.
Resultantly, prices of fibre have been strained, and with firm feedstock prices, margins have remained quite subdued. In effect, gas outages have dealt a further blow to PSF margins because of the use of furnace oil as an alternate, which is much dearer than gas-with the segment recording a net loss this quarter relative to an operating profit of Rs.647 million in 1QCY11.
Overall, the declining performance of the PSF segment is also reflective of the businesss cyclical nature, which had undergone three exceptional years since 2009, and is likely to return to pre-2009 levels this year.
Gas outages also affected the performance of the Soda Ash division since the use of furnace oil as an alternate-affected margin. Consequently, the operating profit for the segment went down from Rs.19 million in 1QCY11 to Rs.7 million in 1QCY12, despite a marginal year-on-year improvement of about a percentage in net sales. Gas outages for the Soda Ash segment during 1QCY12 increased to 58 days as opposed to 55 days in 1QCY11.
The paints segment, meanwhile, saw a decrease on volumetric sales during the quarter, owing to the discontinuation of the promotional oken scheme for non-premium paints, lower demand from tractor and motorcycle industries, and FBRs requirement for customers to quote their CNIC numbers on invoices, which was not taken well by dealers in the decorative and refinish downstream industries.
Life Sciences posted operating profits twice as high on a year-on-year basis, driven primarily by a one-off sale of sunflower seeds to the government.
Overall, the Companys gross margins decreased by 2 percentage points, while operating margins decreased even more by around 6 percentage points. The steeper fall in operating results could be explained by greater selling and distribution expenses due to higher promotional expenditure incurred during the quarter in the paints segment, and greater admin expenses on account of one-off demerger costs of the paints segment during the quarter.
Akzo Nobel, ICI Pakistans holding Company plans to demerge ICIs paint business into a separate legal entity, after which there will be two entities listed on local bourses (ICI Pakistan and Akzo Nobel Pakistan). Later after that, Akzo will divest its shareholding in ICI Pakistan.
The demerger will be completed after receipt of the Sindh High Courts certified copy of the order sanctioning the scheme. As part of the demerger, ICI Pakistan will see a reduction in its share capital by 46.4 million shares amounting to Rs.464 million, and will also have to settle the paints business inter-unit account balance of Rs.3.7 billion (as at 31 March 2012). Though this will leave the Company in an overdraft position, adequate arrangements for the same have been made with banks.
Going forward, the Company is likely to continue facing challenges of an uncertain gas supply, particularly affecting the PSF and Soda Ash businesses. Further, the PSF segment is expected to remain in a cyclical low with expectations of reduced margins in the PSF chain. Polyester and soda ash dumped at uncompetitive prices by regional countries continue to be a persistent threat, which the Company beseeches the government to seriously look into.