Ibrahim Fibres Limited

About the company:

The leading player in synthetic textiles, Ibrahim Fibres Limited (PSX:IBFL) is one of the largest producers of polyester in the country. With nearly Rs17 billion in market capitalisation, the company takes its place in the KSE100 index.

The company's core business is the production of polyester staple fibre (PSF). Its three polyester plants in Faisalabad have the capacity to produce almost 400,000 tons of PSF. In addition, the firm operates in the spun yarn segment, dividing its operations into three textile plants. One of these plants is the company's own, while the other two are acquisitions - previously A.A Textile and Zainab Textile. Collectively, these three plants give Ibrahim Fibres over 136,000 spindles to its name. Ibrahim Fibres also has two power plants whose power generation capacity is 73.3 MW.

Finally, the consortium of Ibrahim Leasing Limited and Ibrahim Group assumed control of Allied Bank in August 2004 by injecting Rs14.2 billion into the capital of Allied Bank, acquiring 325 million additional shares of the company. Allied Bank often makes a healthy contribution to the company's financials, beefing up the bottom line by contributing the share of profit of associate.

Prior Performance

Ibrahim Fibres' top line had been on an uptrend and reached a crescendo in FY14, but the journey of the company's profits has been haphazard over the period. The most recent fiscal year has been one of the worst in the company's history, with a 22 percent drop in sales year-on-year bringing the top line figure back to its 2011 levels. The gross and net profits for the year are at historic lows, with gross margins having now reached the 2 percent mark.

Things quite clearly went wrong for Ibrahim Fibres in FY14 - ironically, the year that sales peaked. As per the Director's report, the year under review had witnessed a depression in the demand and prices of PSF. This happened after the National Tariff Commission withdrew anti-dumping duty on the import of PSF from China. The decision was taken at the onset of FY14 and PSF was dumped heavily by Chinese companies in the local market at exceptionally low prices. Thus, the profitability of the company was adversely affected and this continues to hamper its performance.

In addition, Ibrahim Fibres does not have an export market, with exports amounting to a negligible 0.02 percent of sales as of FY15. With heavy PSF dumping and nowhere to go, the company took a beating in its only market. As per Annual Report, the lower crude oil prices in FY15 adversely affected the whole petrochemical chain, including PSF Industry. Prices of PTA and MEG - raw materials in the manufacture of PSF - started weakening. PSF prices followed the same trend and resulted in steady inventory losses, adversely affecting profitability and yielding the dismal results seen that year. Moreover, dumping by Chinese companies touched record levels during the FY15, as per the Annual Report, and this resulted in further pressure on pricing and capacity utilisation of local PSF manufacturers.

The graph shows quite clearly that PSF volumes were still higher than the levels seen from FY11 to FY13. This reflects on how steep the company has had to lower its prices in order to remain competitive. Furthermore, the plant capacity expansion circa FY13 seems to have been a mistake because the production levels are nowhere near that amount and there is enormous underutilization.

Recent Performance For the half year ended FY16, Ibrahim Fibres saw the same slowdown and malaise that has characterised its performance for the past two years - the top line fell by 18 percent year-on-year while the bottom line plummeted by a massive 66 percent. A once meek gross profit now stood as a gross loss, representing a decline of 148 percent year-on-year.

As per the Director's Report, the company's polyester production over the period was more or less at par with last year. However, the oversupply of crude oil decreased its prices by more than 35 percent. Due to the declining prices of petrochemical chain, the prices of PTA, MEG and PSF also remained under pressure. Moreover, the Chinese dumping did not ease up either.

Apart from the polyester business, the firm's textile business is also under fire. Due to the commodity price crunch and the lower prices of cotton, its proportion in blended fabrics is now higher while PSF demand has been subdued.

After taking into account the enormous Rs1.3 billion contributed by the associate company Allied Bank Limited, Ibrahim Fibres turned a profit after all. Finance cost was also curtailed by 38 percent year-on-year. Nevertheless, the fall in gross profit was monumental.

Outlook The National Tariff Commission of Pakistan (NTC) initially imposed provisional anti-dumping duty against PSF imports from China in October 2015, and then announced its final determination in February 2016. Although the NTC lowered the anti-dumping duty rates for some major Chinese companies, the imposition is nevertheless a huge positive step to get the local PSF industry out of the hole it's in.

Ibrahim Fibres is also adding coal to its existing energy base of heavy fuel oil and natural gas. The company signed an agreement with an Austrian company for installation of a coal-fired power generation plant of 20.4 MW in FY15. After having achieved financial close, the civil works for this project started during the last quarter of 2015. Finally, the yarn business of the company might be looking up in light of the ongoing cotton shortage in the country.