Concerns and hope ahead for ICI

Before ICI Pakistan announced its results for 1QCY11, most were expecting an improvement in the companys revenues and bottomline.
After all, the surge in cotton prices, which helped increase demand for PSF and the resultant rise in PSF prices were expected to help prop up the companys top line. And, indeed, the top line surged by 32 percent in 1QCY11 versus the same period last year, attributable to the mentioned reason in all probability.
Gross margins, however, fell relative to 1QCY10, despite the rise in revenues probably due to limited gas supply during the winter months of the first quarter. The use of the more expensive furnace oil as an alternate, therefore, becomes tough on the companys cost of sales.
Yet, despite the fall in gross margins, the operating margin depicted commendable growth, owing to operational efficiencies as seen in distribution and administrative expenses.
Going forward, ebbing cotton prices in both local and international markets and expectations of good cotton harvest later in the year may put pressure on PSF prices.
The soda ash segment is likely to bear the brunt of gas shortages, not expected to be mitigated in CY11 relative to CY10. Further, tightening macroeconomic policies in regional markets such as China and India might result in some decline in export demand as well.
The company mentions on its website its intent to "...developing a long-term solution to mitigate the adverse affects of worsening gas outages in the coming years," which can help the segment considerably. But exact details of the likely solutions and the timeframe of implementation were not available.
With post-flood reconstruction taking place in Pakistan, domestic demand of construction materials, such as glass, is likely to increase. The glass, silicate and paper industries are major industrial consumers of soda ash and therefore, some recovery in domestic demand of soda ash might be witnessed in CY11.
Also linked with the construction industry is ICIs paint segment, which is likely to witness an improvement in domestic demand because of reconstruction activities in flood-affected areas.
The paint segments penetration into the topcoat paint category with major auto manufacturers and in marine and protective coatings bodes well for the company because of portfolio diversification.
Development of new products and extensive marketing effort in the life sciences segment; in particular pharmaceuticals, animal health and vegetable seeds, is also expected to continue the growth momentum in these categories in 2011.

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ICI P&L

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(Rs mn)                  1QCY11  1QCY10     chg

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Sales                    10,667   8,088     32%

Cost of sales             9,130   6,878     33%

Gross profit              1,537   1,209     27%

Gross margin              14.4%   14.9%     -4%

Selling & distribution      373     399     -7%

Administrative expenses     270     256      5%

Operating Profit            894     555     61%

Operating margin           8.4%    6.9%     22%

PAT                         624     397     57%

Net margin                 5.8%    4.9%     19%

EPS (Rs)                   4.50    2.86     57%

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Source: KSE notice