ICI: profitability up, but margins down

With the paints segment demerged and domestic cotton prices gradually moving up north, ICI Pakistan is preparing for relatively improved results in CY13.
However, even though ICI’s profitability seems to have improved in 1QCY13 relative to the same period last year, a closer look at profitability margins shows that the company has yet to see some improvement on the efficiency front.
A dip in the gross margins suggests that ICI Pakistan has been taking a hit as far as the cost of sales go. In most likelihood, this pressure is emanating from high energy costs and reduced availability of natural gas – particularly important for the soda ash segment – which increases reliance on the more expensive furnace oil.
Most of the increase in revenues witnessed in leading segments – PSF and soda ash – likely comes at the heels of improved volumes rather than prices. In case of PSF, rise in domestic cotton prices during the quarter under review could explain the improvement in sales volume.
Reduction in administrative expenses helped beef up the operating margin a bit. The particular expense plausibly dropped because of the paints segment’s associated administrative costs been done away with this year.
But a steep drop in other operating income dampened the effect, resulting in a slight decline in ICI’s net margin.
Going forward, ICI’s new coal-fired boilers are expected to come online this year, with expectations of some improvement in margins. Further, the recent rise of domestic and international cotton prices and expectations of a continuation in this trend make it likely that the PSF industry is set for better days than seen last year.

====================================================

ICI P&L

====================================================

Rs (mn)                   1QCY13   1QCY12    Y/Y chg

====================================================

Sales                      9,315    8,208        13%

Cost of sales              8,468    7,396        14%

Gross profit                 848      811         4%

Gross margin                 9.1%     9.9%

Selling & distribution       271      260         5%

Administrative expenses      201      280       -28%

Operating Profit             375      272        38%

Operating margin             4.0%     3.3%

Other operating income        24       94       -74%

PAT                          173      158        10%

Net margin                  1.86%    1.93%

EPS (Rs)                    1.88     1.71

----------------------------------------------------

Source: KSE announcement

====================================================