Chemicals ICI PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002 - Financial Year 2007
ICI Pakistan Limited is a subsidiary of ICI Plc, UK, which owned 75.81% shares of the company. It was established in Pakistan in 1952 as a public limited company. 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.
Now, ICI Pakistan's five businesses, polyester, soda ash, paints, chemicals and life sciences manufacture and sell a wide 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, specially chemicals, polyurethanes, and adhesives. The company also manufactures on a toll basis of pharmaceutical and animal health products. It also markets seeds and in addition, is engaged in trading various specialised chemicals for the industrial use.
The company spent Rs 1,012 million in 2007 on major capital projects and on sustenance to ensure efficiency and integrity of assets. The 50ktpa soda ash expansion project costing Rs 1.0 billion was completed as per plan and started the commercial production in March 2007. Work on 65ktpa soda ash expansion project is progressing as per plan.
On 2nd January 2008, the acquisition of ICI Plc by Akzo Nobel was officially completed and the two companies became one. The combination of Akzo Nobel and ICI Plc creates a leading industrial company in coatings and chemicals. Akzo Nobel has the distinction of being a Fortune 500 company and listed on the Euronext Amsterdam stock exchange. Complementing its long history dating back to 1777 is the endless application of Akzo Nobel's products across many downstream industries. Akzo Nobel is the chemical industry leader on the Dow Jones Sustainability Indexes.
There was acceptance of Akzo Nobel's cash offer by the Board of ICI Plc, Akzo Nobel's formal offer for acquisition of ICI Plc UK, the parent company of ICI Omicron B.V., was approved by the shareholders of both the companies and subsequently by the regulatory authorities in December 2007. The take-over process was completed on 2 January 2008 and with this acquisition, Akzo Nobel has become the ultimate holding company of ICI Pakistan Limited. ICI Pakistan Limited continues to be a direct subsidiary of ICI Omicron B.V. All Businesses of ICI Pakistan shall be part of Akzo Nobel's continuing portfolio, which comprises coatings and chemicals.
Financial performance (FY02-FY07):
The company witnessed a significant growth in its profits in 2007 over 2006 and delivered strong financial results. The company's operating result at Rs 2,971.4 million for the year ended 31 December 2007 was 20% higher than 2006. Selling and administrative expenses increased compared to last year to support business development and growth in paints, life sciences and chemicals businesses, whereas in soda ash, the increase was due to outward freight expenses on account of higher sales and fuel cost.
Financial charges for the year at Rs 146.4 million were 54% lower than last year mainly due to buyout of the Fayzan Manufacturing Modaraba's plant in September 2006. With higher operating result and lower financial charges, profit before tax at Rs 2,768.5 million and profit after tax at Rs 1,784.8 million were higher than last year by 31% and 23% respectively.
Break-up of turnover and operating profits show polyester and soda ash were the main contributors. Although polyester showed the highest chunk in the revenues, in terms of profitability it secured a lower position. This is due to the rising crude oil prices while the polyester prices are not following the trend accordingly. PTA prices also remained soft. The PSF prices increased in the regional market, but the off-take was not so splendid because of the lackluster performance of the textile sector. This fact combined with the dumping of the product from China added to the problems.
The soda ash business delivered another outstanding year and achieved record production level of 260,596 tonnes due to increased plant capacity with 50ktpa expansion project. During 2007, the demand of soda ash remained subdued, as the silicate segment was affected throughout the year due to raw material shortages faced by the soap industry. In addition, prevailing political uncertainty and law and order situation in the country especially in the second half of the year affected consumption by the bazaar segment.
Despite weak demand, the business managed to deliver 3% growth in sales volume by successfully exporting the available product to the regional markets. Coke prices in Q4 2007 increased by 56% over the same period last year due to strong demand and increase in the export tax in China. To mitigate the impact of this cost-push, the Business had to increase selling prices in order to partially recover the escalating input costs. Growth in net sales income and control over costs enabled the Business in achieving operating result of Rs 862.6 million.
The paints business delivered a mixed performance in 2007. Demand in the decorative and refinish segments remained strong leading to double-digit growth in sales volume in both the segments. In the industrial segment demand remained subdued due to weak performance of domestic auto manufacturing industry.
The life sciences business delivered another successful year with double-digit growth in all sectors. The pharmaceutical, seeds and animal health sectors grew at 10%, 26% and 47% respectively due to robust demand in the existing product range and diversification of portfolio.
As far as the gross profit margin of ICI Pakistan is concerned, a commendable trend was witnessed since 2003. This can be majorly attributed to a rise in commission income, which had to play a significant role in the impressive gross profit of the company. However in FY07, owing to high administrative expenses and other operating charges, both the gross and net margins did not tell an equally awe-inspiring story. A higher tax charge can also be held responsible for the declining net margin.
However, the tax charge of 2006 was primarily on account of a partial write off of deferred tax asset and does not involve any cash outflow. Accordingly, profit after tax for the year 2006 was 35% lower compared with the corresponding period of the previous year. One can see the same trend being continued in FY07 where the profit and gross margins are almost equal to that of FY06.
Interestingly, taxation for 2005 showed a credit of Rs 626.5 million due to utilisation of the un-recognised portion of the deferred tax asset. Financial charges for the company have been increasing for the past four years owing to higher exchange losses on imports and significant increase in interest rates. This is another major reason for declining the net margin in spite of the rising trend in ICI's turnover. In 2004, other operating income from the sale of the PPTA shares resulted in a step rise in profits that was reflected in the improved gross and net margins for the same year.
The return on assets and equity also witnessed a declining trend over the last few years because of greater growth rate in assets and equity (equity grew because of an increase in the unappropriated profits) compared to the net profit which grew at a slower rate. The decline in turnover after 2003, translated into lower bottom line profits over the period under review. The situation recovered slightly in FY07 due to increased profits.
The liquidity position of the company improved considerably after 2004. Before that, the company suffered from a less-than-sufficient liquidity situation with the current ratio less than 1. However, in 2004, due to the sale of the PPTA shares, together with operating cash flow enabled the company to achieve a cash surplus position. Medium loans of Rs 1.2 billion from the United Bank Limited, Rs 800 million from Habib Bank Limited and US dollars 35.0 million from Mortar Investments International Limited were also repaid in 2004.
Ever since, the current ratio of the company has been quite good, with an increase witnessed in 2006, primarily due to an increase in the company's cash balances and due to more receivables. The increase in receivables can be attributed to increased marketing efforts in the paints sector which attracted a number of prospective clients. The rising CA in FY07 on the other hand is attributed to higher inventory and receivables as its cash balance has declined compared to that in FY06.
The trend in the asset management ratios till FY07, was 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, hence reflecting 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 FY'06 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, FY 07 TATO ratio shows that the company has managed these fixed assets more efficiently due to which total assets turnover ratio has shown a rise.
Owing to a remarkable growth rate in the turnover in 2003, primarily because regional PSF demand grew by 6%, the sales to equity ratio showed a rise from 02 to 03.
However, 2003 onwards a declining trend was witnessed because of a slowing rate of growth of the company's turnover, largely because the latter years were tough for the polyester industry of Pakistan on account of rising oil prices and China's continued additions to PSF capacities resulting in a supply overhang in the region. Consequently, the demand for PSF in Pakistan grew at a very low rate of 3%, and with a larger percentage increase in the company's equity because of grater unappropriated profits, the overall trend in the sales to equity ratio was declining but recovered in FY'07 on the account of relatively higher turnover.
ICI's D/A and D/E ratios clearly show that it is reducing its reliance on debt financing and has lower ratios compared to the industry, Further, the long term debt to equity ratio shows that now ICI is relying more on its short term financing as this ratio is now almost negligible.
However, the TIE ratio shows a rising trend in FY07, owing to higher EBIT and considerably lower financial charges, than in FY06. Financial charges were 54% lower in FY07 than last year due to buyout of the Fayzan Manufacturing Modaraba's plant in September 2006. Financial charges were higher in FY06 mainly due to the higher utilisation of running finance facilities.
The book value of the company has consistently shown a rising trend since 2002. This is because the company has been witnessing a rise in unappropriated profits that have resulted in a steady rise in the company's equity. The earnings per share, however, as driven by net income have declined over the past few years mainly due to the profits of the company, because of reasons mentioned above.
It rose again in FY07 due to higher profits. A noteworthy trend is witnessed with regard to the year-end market price of the company, which has steadily increased since 2002 (except in 2006). This can be attributed to the expansion plans of the company, as well as greater marketing efforts by the organisation, which led to greater investor confidence and a consequent rise in the market value of the company.
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Consequently, the P/E ratio also followed a rising trend driven by the increases in EPS and market price of its share. On comparison with the 100-index, the scrip has outperformed the index in the last 3 months of FY'07.
Moreover, the overall cash position of the company improved which is evident by the positive trend of DPS. It has increased from Rs 2.5/share in FY03 to Rs 6/share in FY07, showing the good return to shareholders as the primary objective of the ICI.
Future outlook:
In 2008, trading conditions are expected to be difficult. The domestic PSF industry is under pressure due to cost push, poor health of domestic textile industry and business failures. The company will continue to focus on improving the revenue stream through higher utilisation of assets and control over costs. Also and more importantly, the consistent and stable government policies are imperative for the future prospects of the PSF and textile industry.
Demand from the silicate segment is expected to remain subdued on account of raw material issues faced by the soap industry. Soda Ash Business is also evaluating export opportunities to partially offset the impact of weak demand. Paints Business is expected to maintain its performance with the launch of innovative/new products and customised solutions.
Overall, ICI Pakistan had shown a noteworthy performance for the past couple of years. Even though the profitability of the company has been declining, in the facets of asset management, liquidity, and market worth, the company indeed deserves a commendable remark. ICI continues to aggressively grow its paints business in a fast growing coatings market. The growth in the chemicals and life sciences businesses is also expected.
Recently completed acquisition of ICI Plc by Akzo Nobel brings with it exciting opportunities. The two companies, combined global presence, technologies, products, brands and expertise will provide better competitive edge and open opportunities which should benefit ICI and its stakeholders in the future. Hence one expects a bright future for the company.
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ICI Financials
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INCOME STATEMENT 2002 2003 2004 2005 2006 2007
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Turnover 15,073,813 22,156,265 21,303,498 21,054,298 21,947,688 25,973,009
Gross Profit 2,327,095 2,664,367 2,755,709 3,351,698 4,083,210 4,806,120
Operating Profit 1,077,114 1,087,681 1,346,788 1,842,542 2,480,998 2,622,102
Profit Before Tax 723,094 806,552 2,898,950 1,612,401 2,117,797 2,768,523
Net Profit 1,854,732 766,244 2,846,368 2,253,257 1,455,628 1,784,800
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BALANCE SHEET 2002 2003 2004 2005 2006 2007
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Total Equity 4,591,014 5,114,863 8,053,980 9,493,072 10,265,010 11,398,450
Current Liabilities 6,932,541 8,262,583 5,194,379 5,891,930 5,436,275 6,276,103
Non-current Liabilities 1,478,895 74,568 82,601 90,604 104,079 119,571
Current Assets 4,618,700 5,305,892 7,179,045 6,500,138 7,023,855 9,058,107
Non-current Assets 9,168,174 8,825,935 6,738,979 9,469,783 9,905,729 9,748,184
Total Assets 13,786,874 14,131,827 13,918,024 15,969,921 16,929,584 18,806,291
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LIQUIDITY 2002 2003 2004 2005 2006 2007
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Current Ratio 0.67 0.64 1.38 1.1 1.29 1.44
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ASSET MANAGEMENT 2002 2003 2004 2005 2006 2007
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Inventory Turnover 57.09 43.85 60.43 54.73 50.08 40.43
Days Sales Outstanding 16.06 10.46 13.78 11.06 11.99 14.54
Operating Cycle 73.15 54.3 74.21 65.79 62.07 54.97
Total Asset Turnover 1.09 1.57 1.53 1.32 1.3 1.38
Sales/Equity 3.28 4.33 2.65 2.22 2.14 2.28
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DEBT MANAGEMENT 2002 2003 2004 2005 2006 2007
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Debt to Asset Ratio 0.61 0.59 0.38 0.37 0.33 0.34
Debt to Equity Ratio 1.83 1.63 0.66 0.63 0.54 0.56
Long Term Debt to Equity 0.32 0.01 0.01 0.01 0.01 0.01
Times Interest Earned 2.72 3.11 12.38 6.72 8.44 28.42
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PROFITABILITY 2002 2003 2004 2005 2006 2007
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Gross Profit Margin 15.44 12.03 12.94 15.92 18.6 18.50
Profit Margin 12.3 3.46 13.36 10.7 6.63 6.87
Return on Assets 13.45 5.42 20.45 14.11 8.6 9.49
Return on Equity 40.4 14.98 35.34 23.74 14.18 15.66
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MARKET VALUE 2002 2003 2004 2005 2006 2007
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EPS 13.36 5.52 20.51 16.23 10.49 12.86
Price/Earnings 4.04 15.4 4.37 8.85 11.01 15.29
Book Value 38.73 44.25 62.25 71.95 82.05 89.41
Year End Market Price 53.95 85 89.65 140.5 115.5 196.65
Dividend per share 2.25 2.5 4 5 5.5 6.0
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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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