Ittehad Chemicals Limited (PSX: ICL) was incorporated in Pakistan in September 1991 to purchase the assets of Ittehad Chemicals and Ittehad Pesticides under a scheme of arrangement. The company was privatized in 1995. The company manufactures and sells caustic soda and other chemicals e.g. liquid chlorine, hydrochloric acid, calcium chloride etc.
Pattern of Shareholding
As of June 30, 2023, ICL has 100 million shares outstanding which are held by 1189 shareholders. Local general public with a stake of 67.61 percent in ICL, forms the largest category of shareholders, followed by Directors, CEO, their spouse and minor children holding 21.4 percent shares. Joint stock companies hold 10.67 percent of ICL’s shares. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-23)
The topline and bottomline of ICL present a contrasting journey in all the years under consideration. While the topline has been growing staggeringly in all the years under consideration, bottomline slid in three years i.e. 2019,2020 and 2022. ICL’s margins have also been oscillating over the period. During 2019, gross and operating margins considerably picked up while net margin plunged. This was followed by the erosion of all the margins in 2020. In 2021, ICL witnessed sound recovery in its margins which was significantly reversed in 2022. In 2023, the margins strengthened yet again. The detailed performance review of the period under consideration is given below.
In 2019, ICL’s topline grew by 15.7 percent year-on-year on the back of high demand as well as upward revision of prices. During the year, ICL diversified its product line by commissioning LABSA (Linear alkyl benzene sulphonic acid) plant with a capacity of 24000 M tons. The company also took cost control measures and shifted its production to its state-of-the-art power plant IEM Plant-3 which commenced its operation at the onset of 2019. This bore fruit and resulted in 43 percent year-on-year rise in ICL’s gross profit in 2019. GP margin also rose from 16.8 percent in 2018 to 20.8 percent in 2019. Distribution expense ticked up by 13.85 percent in 2019 on account of higher freight charges. ICL hired additional resources for its new plant during the year which took the total HR count up to 682 in 2019 versus 673 in 2018. This resulted in higher payroll expense which drove up administrative expense by 15 percent in 2019. Loss on decommissioned fixed assets and increased profit related provisioning translated into 29.84 percent higher other expense in 2019. Conversely, other income slumped by 51.8 percent in 2019 on the back of lower scrap sales. ICL was able to register 49.9 percent rise in its operating profit in 2019 with OP margin picking up from 8.8 percent in 2018 to 11.4 percent in 2019. Finance cost mounted by 65.7 percent in 2019 due to higher discount rate and increased borrowings for BMR as well as working capital requirements. ICL’s gearing ratio rose from 40 percent in 2018 to 45 percent in 2019. Higher finance cost resulted in 2.5 percent year-on-year drop in net profit which clocked in at Rs.405.05 million in 2019 with EPS of Rs.4.78 versus EPS of Rs.4.91 in 2018. NP margin also nosedived from 7.2 percent in 2018 to 6.1 percent in 2019.
The bottomline of ICL took the hardest hit in 2020 where it plunged by 85 percent year-on-year despite sizeable 33.29 percent year-on-year growth in net sales. The growth in sales was the result of instigation of ICL’s LABSA plant operations which added to its sales volume. However, high cost of sales due to increased electricity and gas prices couldn’t let the company enjoy a higher gross profit. ICL’s gross profit plunged by 14.3 percent year-on-year, culminating into a thinner GP margin of 13.3 percent in 2020. Distribution expense hiked by 21.6 percent year-on-year in 2020 on account of increased freight charges. Administrative expense inched up by a marginal 4.5 percent on account of inflation while number of employees went down to 649 in 2020. Significantly lower profit related provisioning pushed down other expense by 21 percent in 2020 which was absorbed by 29 percent higher other income recorded by ICL in 2020. Improved other income was the result of higher scrap sales made during the year. ICL’s operating profit tumbled by 34.4 percent in 2020 with OP margin slipping to 5.6 percent. Finance cost was another stumbling block which grew by 87.81 percent year-on-year in 2020 owing to high discount rates in the first three quarters of the year. Finance cost would have soaked up the entire operating profit of the company and resulted in a negative bottomline had the fair value gain on investment property not lent the helping hand by growing by over 12 times in 2020. ICL posted net profit of Rs60.8 million in 2020 , down 85 percent year-on-year, resulting in EPS of Rs.0.72 and NP margin of 0.7 percent
2021 was the most fortunate year for ICL in terms of bottomline growth. During the year, the company acquired the entire equity of its group company Ittehad Salt Processing (Private) Limited. ICL posted net sales growth of 26 percent in 2021. LABSA sales greatly contributed in the topline growth amid sluggish demand from other segments as economies began to regain their lost momentum after COVID-19. Moreover, upward revision in prices as well as cost control measures implemented by the company resulted in 59.57 percent higher gross profit recorded by ICL in 2021. GP margin also climbed up to 17 percent in 2021. 15 percent higher distribution expense incurred in 2021 was the consequence of higher freight and marketing service charges. During the year, ICL streamlined its workforce to 621 employees, resulting in lower payroll expense. This drove down its administrative expense by 3.7 percent in 2021. Higher profit related provisioning, loss on sale of fixed assets as well as foreign exchange loss resulted in 77.56 percent higher other expense in 2021. Other income grew by a marginal 9.35 percent in 2021 due to gain on discounting of GIDC payable, recovery of doubtful debts and gain on sale and disposal of assets. ICL posted 120.35 percent year-on-year escalation in its operating profit in 2021 with OP margin mounting to 9.8 percent. Finance cost, which has been suppressing ICL’s bottomline, was contained in 2021 owing to low discount rate and curtailed long-term borrowings. ICL’s gearing ratio tumbled from 41 percent in 2020 to 35 percent in 2021. Then fair value gain on investment property also grew significantly, providing impetus to the bottomline which grew by 980 percent year-on-year to clock in at Rs.656.77 million with EPS of Rs.6.57 and NP margin of 5.9 percent in 2021.
In 2022, the company posted robust topline growth of 40.97 percent year-on-year. During the year, the company enhanced the capacity of its LABSA plant to 70,000 metric tons per annum. This greatly improved the sales volume of the company which is evident in its topline growth. During the year, the company also improved its fuel efficiency by upgrading its power plant engines. This kept the cost of sales in check and enabled the gross profit to post a year-on-year growth of 9.5 percent despite high inflation and cost of raw materials. However, due to low consumption in the market, the company couldn’t pass on the impact of cost hike to its consumers. Consequently, GP margin dropped to 13.2 percent in 2022. In 2022, the company’s export sales improved by 52 percent over the last year, especially in the UAE region. This meant higher freight charges which pushed up the distribution cost by 39.79 percent year-on-year. Administrative expense also escalated by 22.22 percent in 2022 on account of inflationary pressure although ICL undertook workforce rationalization to bring it down to 617 employees in 2022. Other expense declined by 24.80 percent in 2022 due to no loss incurred on sale of fixed assets, lower exchange loss and lower profit related provisioning. Other income also dropped by 34.93 percent in 2022 as the company didn’t book any gain on sale of fixed assets, discounting of GIDC payable as well as recovery of doubtful debts during the year. This shrank the operating profit by 9.17 percent year-on-year in 2022 which culminated into OP margin of 6.3 percent. Finance cost soared by 46.4 percent in 2022 owing to high discount rate coupled with increased long-term financing. Gearing ratio, once again, climbed up to 40 percent in 2022. Fair value gain on investment also contracted during the year. The bottomline weakened by 36.88 percent year-on-year to clock in at Rs. 414.54 million with EPS of Rs.4.15 and NP margin of 2.6 percent in 2022.
2023 stands out other years as ICL recorded the highest topline growth of 54.76 percent during the year. Better margins on export sales and superior energy management resulted in 141.86 percent higher gross profit recorded by ICL in 2023 with GP margin rising up to 20.6 percent. Robust export sales resulted in 101.92 percent surge in distribution expense on account of higher freight charges. Higher prices of POL products also played a role in driving up the freight charges in 2023. Administrative expense built up by 22.35 percent in 2023 on account of higher payroll charges as ICL grew its workforce to 682 employees in 2023. Other expense mounted by 142.83 percent in 2023 due to heightened provisioning for WWF and WPPF. However, sharp rise in other expense was counterbalanced by 263.86 percent higher other income which was primarily the effect of higher foreign exchange gain. Operating profit magnified by 211.11 percent in 2023 with OP margin reaching its highest level of 12.7 percent. Finance cost swelled by 70.4 percent in 2023 due to unprecedented level of discount rate although ICL was able to bring its gearing ratio down to 26 percent in 2023. Imposition of 10 percent super tax was also the cause of concern for the company in 2022. However, 52 percent higher fair value gain on investment property gave considerable support to the bottomline which posted 340.54 percent year-on-year improvement in 2023 to clock in at Rs.1826.196 million with EPS of Rs.18.26 and NP margin of 7.5 percent – the highest among all the years under consideration.
Recent Performance (1HFY24)
ICL’s net sales posted marginal 1.29 percent year-on-year rise in the 1HFY24. While the company did quite well and posted 18 percent year-on-year growth in its net sales in the 1QFY24, 13.5 percent drop in net sales in the 2QFY24 deteriorated the overall topline performance during the 1HFY24. While detailed financial statements have not been posted by the company to comment on the underlying reason behind sluggish sales performance during the 2nd quarter, lackluster demand from local and export market could be blamed. Cost of sales slid by 0.77 percent during 1HFY24 enabling ICL to register 10.48 percent higher gross profit with GP margin climbing up from 18.3 percent in 1HFY23 to 20 percent in 1HFY24. Weak sales volume during the period is also evident from 20 percent lower distribution expense incurred by the company during 1HFY24, however, inflationary pressure kept the administrative expense elelvated during the period. Other expense grew by 27.8 percent in 1HFY24 while other income dropped by 39.38 percent. ICL recorded 26.54 percent stronger operating profit in 1HFY24 with OP margin clocking in at 13.7 percent, up from 11 percent during the same period last year. Finance cost picked up by 22 percent during the period under consideration. This coupled with higher effective tax rate due to the imposition of super tax resulted in 8 percent year-on-year plunge in net profit which clocked in at Rs.694.30 million in 1HFY24 with EPS of Rs.6.94 versus EPS of Rs.7.55 during the same period last year. NP margin also shrank from 6.3 percent in 1HFY23 to 5.7 percent in 1HFY24.
Future Outlook
ICL is making concerted efforts to strengthen its footprint in the global market amid weak demand in the home market. The company is also investing in multiple projects such as establishment of biomass power plant, installation of a flaker plant, addition of an electrolyzer as well as expansion of calcium chloride plant. All these projects once commissioned will provide immense operational efficiency to ICL and reduce its cost. This will make the company’s products more competitive in the local and global markets and will greatly improve its margins and profitability.
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