Chemicals: ICI PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002 - 3Q 2010
ICI Pakistan Limited is a 75.81%-owned subsidiary of ICI Plc, UK. It was set up as a public limited company in Pakistan in 1952. ICI's presence in this part of the world, however, predates the formation of the public limited company and indeed, Pakistan itself.
The Khewra Soda Ash Company, a predecessor of ICI Pakistan Limited, set up a soda ash manufacturing facility in Khewra in 1944 with a capacity of 18,000 tonnes per annum. This facility was sited next to the salt range as rock salt and limestone; two key raw materials for manufacturing soda ash were available here in abundance.
Today ICI Pakistan's five businesses, polyester, soda ash, paints, chemicals and life sciences manufacture and sell a range of industrial and consumer products. These include polyester staple fibres, POY chips, light and dense soda ash, sodium bicarbonate, paints for the decorative, automotive, refinish segments, for industrial use and projects, specialty chemicals, polyurethanes, and adhesives and the company also arranges manufacture on a toll basis of pharmaceutical and animal health products. It also markets seeds and in addition is engaged in trading in various specialised chemicals for use in industries in Pakistan.
FINANCIAL PERFORMANCE (3Q10)
PSF sales volume for the quarter and nine months was higher by 22 percent and 6 percent respectively over the same period last year. Higher sales volume resulted in operating profit of Rs 566.3 million, 82 percent higher compared with Q3 2009. Operating result for the nine months at Rs 1,420.6 million was 69 percent higher over the same period last year. Feed stock prices started an upward trend during the quarter and peaked at the end of quarter driven by increasing demand from the downstream market and rising global cotton prices. PSF prices followed this trend. Domestic and international cotton prices touched all time high and blend economics favoured usage of PSF as at one time price of PSF was lower than that of cotton by Rs 130.
In soda ash business, the nine months sales volume was 17 percent higher compared with the same period last year due to higher exports. Operating result at Rs 404.3 million and Rs 822.7 million for the quarter and nine months was 28 percent and 2 percent higher respectively compared with same periods last year mainly due to improved margins and volume growth, despite a slump in demand in the local front.
In the paints business, the operating result, for the quarter and the nine months was lower by 90 percent and 29 percent at Rs 9.2 million and Rs 198.3 million respectively compared with the same periods last year. This was due to lower demand because of excessive rains, flooding and security incidents. However, the future looks promising due to entry into marine and industrial coating business along with the expected demand from the OEMs.
The other segments like life sciences, ICI posted an overall sales income of Rs 8.5 billion and Rs 25.6 billion for the quarter and nine months ended September 30, 2010 respectively which were 22 percent and 23 percent higher compared with same periods last year. Operating result and profit after tax for the nine months ended September 30 2010 were 23 percent and 17 percent higher respectively compared with corresponding period last year. Margins were under pressure due to inflationary pressures, gas supply disruptions etc. However, it is expected that the business would pick up in the last quarter and improve the full year results.
FINANCIAL PERFORMANCE (FY09)
During FY09 company faced concurrent headwinds notably, recession in the developed world, significant decline in large scale domestic manufacturing worsened by energy shortages as well as increase in electricity and gas tariffs. In addition, continual inflation and high interest rates constrained the demand particularly in the construction and automobile sectors. When looking sector wise, the most profitable remained the polyester, on the other hand, chemicals and paints operating results were negative. This showed the decline in the total aggregate demand and hence resulting in lower turnover comparative to FY08.
Despite this, company demonstrated growth in earnings over 2008. Focus on customers, cash, costs and strength of a diverse portfolio helped to protect margins and limit the decline in volumes in a contracting economy.
Profit after tax of Rs 2.04 billion for FY09 was up by 10 percent compared with
FY08. Earnings per share at Rs 14.73 in FY09 was up by 10 percent over FY08.
In FY09, the company did face profitability issues. The ratios slightly declined over the period, attributing to the economic slowdown and market conditions resulting because of it. We see a slender decline in Gross Profit Ratio from 17.63% in FY08 to 17.52% in FY09. The main explanation is because of the cost of goods sold increased marginally with less proportionate increase in sales revenue. Again the economic condition and high power tariffs resulted in such slight decline.
Similar result was observed when both ROA and ROE showed decline from 11.08% in FY08 to 9.54% in FY09, similarly ROE decreased from 16.31% to 15.17%.
It can again be traced back to the net income which just increased by 9% in FY09 comparatively to the assets employed which increased by 16%. Hence the outcome of the ROA and ROE remained low for FY09.
In FY09 the current ratio tends to be static compared to FY08. The ratio remained at 1.92x.
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Cash and Bank Balances FY'09 FY'08
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Short term deposits Rs 3,350,000 Rs 120,000
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The trend in the company's asset management ratios till FY'08 is very encouraging and note worthy. There has been a decline in the inventory turnover ratio, the days sales outstanding (except in FY07 where it rose due to higher trade debts) and the over all operating cycle, demonstrating that the company has been efficient in selling off its inventories and receiving cash against its receivables. A greater marketing effort by the company is a major reason for its commendable asset management as the company can easily sell off its products to the clients.
Easy credit terms can be responsible for a rise in the days sales outstanding after 2005, which has now been controlled by the company, with the DSO finally reducing in FY08, for the first time since 2005. Hence this reflects a good performance of the company on the asset management platform.
Owing to a significant rise in the total assets for the past few years, the total assets turnover ratio has seen a decline till FY06 in spite of an increasing turnover. In 2003, work was initiated on the Refined Sodium Bicarbonate Plant which was completed in 2004, hence explaining the rise in total assets for the company during these two years.
The company spent Rs 396.6 million as sustenance capital in 2005 to maintain its existing assets and, in 2006, investment was made in three major projects at a cost of Rs 3.3 billion. These projects include the Asset Modernisation and Improvement Project (AMIP) in polyester, soda ash 50ktpa expansion and acquisition of the manufacturing facility of Fayzan Manufacturing Modaraba (FMM). Consequently, ICI Pakistan's assets have generally been high.
However, FY07 TATO ratio shows that the company has managed these fixed assets more efficiently due to which total assets turnover ratio has shown a rise. The rise in TATO in FY08 is more due to the low growth in assets, coupled with the rise in net sales, showing that the company has managed its growth plans well, also the current losses in cash balances led to low asset growth, thus this performance could not be depicted as entirely satisfactory and further efforts are needed to manage the asset turnover in the future.
In addition, the nine months ended accounts showed a considerable performance in the asset management ratios. The only area that a saw decline was the sales/equity ratio which was 0.61 compared to 2.32 in 2008.
For the period FY09, the asset management ratios too declined. The operating cycle increased from 50days in FY08 to 60 days in FY09. This is explained by an increase in the inventory turnover from 39 days to 49 days in FY09. As again the current market condition led to low demand and hence resulting in lower asset management.
A slight deterioration is observed in FY09 as the company's liabilities increased for the period. Debt to Equity reduced to 0.52 and Debt to Asset decreased to 0.33. As no further debt was issued for the period and Term Finance mounting to Rs 550 million was considered nil for the FY09, these deteriorations show that the other liabilities such Trade Payables and in Non-Current Liabilities, the tax liability was a huge increase which led to the weakening of the ratios.
Leverage condition remained stable in 3Q09, with its gearing ratios constant. TIE ratio decreased from 25.32 days to 26.23 days. The reason for this marginal decrease was a decline in the EBIT that had resulted in the lower revenues this year.
The company was able to increase its earnings for the period as EPS for FY09 was Rs 14.73 compared to Rs 13.42 in FY08. This is mainly attributed to the increase in the net income for the year, which augmented by 10% in FY09.
The P/E multiple showed a great confidence in the company as the Market Price of the Stock increased Rs 169.34 at year end comparatively to Rs 68.71 in FY08. Thereby, increasing the P/E multiple to 11.40 in FY09. The increment in stock price shows the level of confidence in the investors even though the market conditions and economic conditions tend to hamper the growth and profitability of various sectors.
The company paid out dividends to its shareholders, which was 40% of its earnings bringing it about to nearly Rs 7 per share.
FUTURE OUTLOOK
Prospects of a global recovery in 2010 remain mixed. On the domestic front, there are signs of macroeconomic stability, but this hard gained recovery is threatened by the pressures building up on fiscal account, further increase in energy shortages and the unease on continued security incidents. Other than this, the market conditions remain competitive and tough to operate and post challenges for various industries. One major area that remains inevitable is the energy crisis and fares related to it, this would impede efficiency and drive up costs for the firm
Globally, the revival of economies are taking at slower pace or remained stagnant however the debt crisis still remains issue which led to downturn of the various economies on the European front. Business environment is therefore expected to remain tough in 2010.
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ICI FINANCIALS
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INCOME STATEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Turnover 15,073,813 22,156,265 21,303,498 21,054,298 21,947,688 25,973,009 31,921,873 32,399,181
Gross Profit 2,327,095 2,664,367 2,755,709 3,351,698 4,083,210 4,806,120 5,647,341 5,675,892
Operating Profit 1,077,114 1,087,681 1,346,788 1,842,542 2,480,998 2,622,102 2,910,600 3,027,654
Profit Before Tax 723,094 806,552 2,898,950 1,612,401 2,117,797 2,768,523 3,129,908 3,072,506
Net Profit 1,854,732 766,244 2,846,368 2,253,257 1,455,628 1,784,800 2,068,872 2,044,738
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BALANCE SHEET 2002 2003 2004 2005 2006 2007 2008 2009
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Total Equity 4,591,014 5,114,863 8,053,980 9,493,072 10,265,010 11,398,450 12,683,880 13,482,796
Current Liabilities 6,932,541 8,262,583 5,194,379 5,891,930 5,436,275 6,276,103 4,281,110 5,799,898
Non-current Liabilities 1,478,895 74,568 82,601 90,604 104,079 119,571 739,900 1,208,117
Current Assets 4,618,700 5,305,892 7,179,045 6,500,138 7,023,855 9,058,107 8,232,427 11,125,168
Non-current Assets 9,168,174 8,825,935 6,738,979 9,469,783 9,905,729 9,748,184 10,435,258 10,297,489
Total Assets 13,786,874 14,131,827 13,918,024 15,969,921 16,929,584 18,806,291 18,667,685 21,422,657
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LIQUIDITY 2002 2003 2004 2005 2006 2007 2008 2009
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Current Ratio 0.67 0.64 1.38 1.1 1.29 1.44 1.92 1.92
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Inventory Turnover 57.09 43.85 60.43 54.73 50.08 40.43 39.36 49.02
Days Sales Outstanding 16.06 10.46 13.78 11.06 11.99 14.54 11.32 10.22
Operating Cycle 73.15 54.3 74.21 65.79 62.07 54.97 50.68 59.23
Total Asset Turnover 1.09 1.57 1.53 1.32 1.3 1.38 1.71 1.51
Sales/Equity 3.28 4.33 2.65 2.22 2.14 2.28 2.52 2.40
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 2007 2008 2009
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Debt to Asset Ratio 0.61 0.59 0.38 0.37 0.33 0.34 0.27 0.33
Debt to Equity Ratio 1.83 1.63 0.66 0.63 0.54 0.56 0.40 0.52
Long Term Debt to Equity 0.32 0.01 0.01 0.01 0.01 0.01 0.06 0.09
Times Interest Earned 2.72 3.11 12.38 6.72 8.44 28.42 25.23 26.23
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PROFITABILITY 2002 2003 2004 2005 2006 2007 2008 2009
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Gross Profit Margin 15.44 12.03 12.94 15.92 18.6 18.50 17.69 17.52
Profit Margin 12.3 3.46 13.36 10.7 6.63 6.87 6.48 6.31
Return on Assets 13.45 5.42 20.45 14.11 8.6 9.49 11.08 9.54
Return on Equity 40.4 14.98 35.34 23.74 14.18 15.66 16.31 15.17
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MARKET VALUE 2002 2003 2004 2005 2006 2007 2008 2009
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EPS 13.36 5.52 20.51 16.23 10.49 12.86 14.91 14.73
Price/Earnings 4.04 15.4 4.37 8.85 11.01 15.29 4.61 11.50
Book Value 38.73 44.25 62.25 71.95 82.05 89.41 98.32 89.89
Year End Market Price 53.95 85 89.65 140.5 115.5 196.65 68.71 169.34
Dividend per share 2.25 2.5 4 5 5.5 5.50 6.00 7.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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