Following its growth pattern in recent history, ICI Pakistan painted a sales growth of 20 percent in 1HCY11 over 1HCY10 on account of higher selling prices. However, this increase was whitewashed by more-than-expected hike in cost of sales and other expenses. Thanks to the substitution effect, the polyester wing of ICI remained the star contributor as the demand for PSF jacked up in 1HCY11 in the backdrop of increasing cotton prices. Yet, falling international and domestic cotton prices are likely to haul down the prices of PSF in the coming periods, signs of which are evident in the eight percent fall in the quarterly sales for 2QCY11. Bridled gas supply coupled with an upward revision in gas prices clipped soda ash production, a pricey venture as Rs500 million extra had to be paid out from the companys till which also reflected through the 26 percent rise in the cost of sales for the current half. The company, however, is in the process of reducing its reliance on gas supply by installing a coal-fired boiler which is expected to become operational in the next 16 months. Company sources also revealed that since industrial usage takes up a quarter of domestic gas requirement which is already on its annual high during winters; gas curtailment may become a contentious issue for the management in coming months. Selling expense as a percentage of sales dropped by 100bps to four percent and increased by 200bps to five percent in 1HCY11 and 2QCY11 respectively over corresponding periods. Mounting costs pressurized the company margins and profits dipped 16 percent in 1HCY11 and 44 percent from 1QCY11. Therefore, net margins came down by 200bps to five percent in the recent half. In spite of the disappointing turn taken by the company performance, the directors in an attempt to keep shareholders pleased, declared an interim dividend of Rs3.5 per share translating into a dividend payout of 50 percent still falling short of a 65.6 percent payout in the previous half. In the recent past the company stock price closely followed the declining trend in Karachi stock market but still managed to outperform the benchmark index. Yesterday, however, since the 1HCY11 result fell shy of analysts expectations, ICIs share price dropped five percent as against a marginal decline of 0.4 percent in the broader market. The paints segment contributes 17 percent to the sales revenue and contributes four percent to the companys profits. The segment has seen its margins erode in recent months. Moreover, the parent company also experienced some cannibalisation of paints in the local market. DE-MERGING BUSINESS The company also announced a de-merger of its paints business, where Akzo Nobel will have exclusive ownership of 75.8 percent of the paints undertaking and each shareholder in ICI shall be allotted 33.46 shares on every 100 fully paid-up ordinary shares of Akzo Nobel Pakistan. With the de-merging of ICIs paints business coupled with, falling cotton prices globally and worrying inefficiencies in producing soda ash, shareholders will need something more convincing to keep their interest intact.
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ICI PAKISTAN LTD
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Rs (mn) 1HCY11 1HCY10 Chg
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Sales 20,438 17,067 20%
Cost of sales 17,485 13,920 26%
Gross Profit 2,953 3,146 -6%
Gross margin 14% 18% Down
400 bps
Administrative expenses 646 535 21%
Selling & distribution 898 840 7%
Financial charges 47 92 -49%
Other operating income 253 253 0%
PAT 973 1,165 -16%
Net margin 5% 7% Down
200 bps
EPS (Rs) 7.01 8.39 -16%
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Source: KSE notice
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