Immediately after the announcement of Akzo Nobels decision to de-merge ICIs paint business into a separate legal entity and later divest its holding in whatever will be left in ICI Pakistan; shares in ICI Pakistan jumped quite sharply. For the uninitiated, here is why:
Since the acquisition of UK-based ICI, the Dutch Akzo Nobel has been on a global divestment spree to focus their strategy on their specialties: chemicals, coatings and decorative paints.
The company had immediately sold ICIs adhesives and electronics materials business to Henkel in early 2008. In 2009, it divested its 75.8 percent stake in the PTA activities of ICI Pakistan to Korean company KP Chemical Corporation. The holding in Pakistan PTA came as a part of the acquisition of ICI Pakistan. Last year, it sold its starch business - acquired as a part of the purchase of ICI in 2008 - to Corn Products International, a US corn refiner.
The rationale for concentrating on the paints segment in Pakistan is to focus on Akzos strategic interest in paints and coatings, even though ICI Pakistans other segments - PSF, soda ash, life sciences and chemicals - are "robust and promising businesses".
Since 2001, the paints segment has contributed an average of 18.5 percent to the groups turnover, and about 25 percent to operating profits. However, since 2008, the segments contribution to the operating results has been dwindling, despite a reasonable contribution to turnover.
This was because Kansai Paints Japan terminated its OEM operations in late 2007, ceasing supplies to auto manufacturers, and related one-off provisioning in 2008.
In 2009, decline in construction activities and in automobile production affected sales for the paints segment, while expenses incurred for the launch of Akzo Nobels flagship vehicle refinish brand Sikkens also affected operating performance of the segment that year.
2010, on the other hand, was a difficult year for the paints segment, with operating profit declining by about 50 percent, despite a 4 percent increase in sales volumes. The reason was a one-off debtors provisioning undertaken due to deteriorating economic conditions, liquidity conditions and high interest rates.
Overall, since the acquisition by Akzo, ICI Pakistan had been able to bring in new products in the paints segment, such as Sikkens, OEM top coats for auto manufacturers, marine and protective coatings and packaging coatings.
However, the paints business is largely dependent on construction activities and the performance of the automobile sector, which are further dependent on economic conditions in the country.
High interest rates, restricted liquidity, high inflation, lower disposable income, decreasing FDI inflows and falling PSDP spending on the part of government; are all hurdles to the paints industry.
The overall performance of the firm which also offers life sciences products, was commendable in the past few years despite dwindling operating profits from the paints business.
This is because ICI Pakistans key segment is PSF, which has performed impressively of late. This performance came despite concerns faced in the soda ash business, another key segment of ICI Pakistan, due to gas shortages in the country. Such a diverse portfolio means that ICI Pakistans profitability and prospects are unlikely to be affected by the divestment of the paints segment.
For Akzo, the proportion of ICI Pakistan comes to about 2.5 percent in its total revenues and, therefore, that of the paints segment is about 0.5 percent of their revenues.
Though the percentage of turnover from ICI Pakistans paints segment in Akzos total revenues is low, concerns from external factors remain. Besides that, challenges also remain in the form of competition from the unorganised sector, counterfeiting and lack of intellectual property rights in the country.
So perhaps the investors decision to prop up ICIs stock price after the announcement on Friday - that the sick unit will be plucked out of the firm - does make sense.
But heres a catch: only last month Waqar Malik, CEO ICI Pakistan, told BR Research that paint market in Pakistan is expected to grow from 110 million to 600 million over the next few years. Jacking up ICIs share prices to bubble-friendly levels may not be a wise decision.