CLARIANT PAKISTAN LIMITED – Analysis of Financial Statements Financial Year 2006 – Financial Year 2009

Clariant Pakistan Limited (CPL) is a subsidiary of Clariant International Limited, a Swiss chemical giant. The company is engaged in the manufacturing and selling of chemicals, dyestuffs, emulsions and masterbatches. Parent company, Clariant International Limited Muttenz, Switzerland holds 75 percent of the subsidiary’s stock.

NIT and ICP have 12 percent stake while some 805 individuals claim 8 percent shareholding in Clariant Pakistan. The company is a limited liability company incorporated in Pakistan and listed at Karachi Stock Exchange since 1997. CPL was among the top 25 companies of the Year 2009 announced by KSE.

Clariant is the global leader in the field of specialty chemicals with presence in five continents and 90 countries with more than 100 group companies, employing about 25,000 people and headquartered in Muttenz near Basle, Switzerland. Businesses of the company are organized in five divisions namely: Textile, leather and paper chemicals (TLP) masterbatches, pigments and additives, functional chemicals and oil and mining services. However, CPL is only involved in the first four. It is important to mention that the fiscal year of the company is same as the calendar year ie CPL’s financial year end is on 31 December of each year.

FINANCIAL PERFORMANCE

Since FY’05 the company shows an increasing trend in its net sales and the trend continues till the end of FY09. Typically, in most countries the chemical industry sells roughly half its turnover to other manufacturing operations Manufacturing operations concern the operation of a facility, as opposed to maintenance, supply and distribution, health, and safety, emergency response, human resources, security, information technology and other infrastructural support organizations.

These commercial areas include other branches of the chemical industry itself as well as important parts of industries such as consumer products, engineering, defense, cars, packaging and construction. This interdependence with so many other industrial branches makes the structure of the industry inherently complex and underlines its general importance to economic development generally.

Despite a decrease in real GDP growth in FY08 and FY09, CPL showed increased sales from 5757.46 million in FY07 to 7697.03 million in FY09 reflecting a combined growth of 34% in two years. Though the growth in FY09 was only 9% as compared to 23% in FY08. This increase in net sales can be attributed to the overall growth in chemical industry resulting from increased demand mainly for fertilizer inputs, Chlor-Alkali, pesticides, plastic inputs for use in packing, auto, electronics, house hold items, cables, pipes and fittings etc, in addition to the high use of chemicals in the processing of textile, leather, and carpets. High demand of chemicals in various sub sectors of the economy reflects the high potential in the local manufacturing, value addition and formulation.

Most impressively, the company was able to reduce the percentage of sales devoted to cost of goods sold from 76.81% to 74.78% in FY 07-08 leading to an increase in profits from 464.8m to 518.5m. This increase can be accounted to depreciation of local currency versus US Dollar and higher international commodity prices which ultimately increased the cost of imported raw material. Chemical Industry mainly uses imported raw material and its imports account for 12-15% of total imports of Pakistan. CPL successfully maintained its profitability and on average Net Profit margin was 8%. Gross Profit Margin showed an increase of 2% in FY08 and was a result of decreased proportion of cost of sales.

However, there was a slight decrease in Gross Profit margin in the net year, which can be accounted to increased cost of sales in FY09. Year over year, Clariant Pakistan has been able to grow their Net Profits from 518.5m to 585.8m (indicating 13% growth) primarily through revenue growth.

Return on Total Assets has remained stable over time indicating that the company’s revenue and total assets are growing in the same proportion. Total Assets of the company grew from 3597.2m in FY06 to 4973.58m in FY09 indicating an overall increase of 38%. Return on Equity decreased from 49% to 44% in FY07 and this decrease can be accounted to increased cost of sales in that particular year. The ratio further decreased to 38% in FY08, however this time, the decrease was due to issuance of shares. The paid up capital of the company increased from 218.36m to 272.94m indicating an increase of 25% which resulted in a further decrease in ROE in FY08. However the ratio showed slight increase in FY09 due to increase in Net Profit whereas no change was observed in paid up capital in that year.

While the costs associated with cost of goods, SGA and income tax all increased as a percentage of sales, the growth in sales revenue contributed enough to still see an overall improvement in profits and stable profitability ratios.

Talking about the liquidity position of the company, one can observe that in the current ratio has remained fairly above 1 and on average the company has maintained a decent ratio of 1.66. It can also be observed that the quick ratio initially decreased 1.13 to 0.92 in FY07 then increased reaching 1.09 in FY09.

On the current liabilities side, there was an increase in short term borrowings resulting in decrease in both Current and Quick Ratios in FY07. Current Liabilities rose by 42% reaching 2235.1 million as opposed to 1574.5 million in FY06. However in the following years, CPL maintained its current liabilities and an increase in current assets was observed resulting in an improvement of liquidity ratios. Overall, the liquidity position of the company is fairy stable and is close to the industry averages.

Coming to the asset management side of the company, one can observe that the fixed asset turnover ratio has decreased from FY06-08, but showed slight increase in FY09.

Both Capital Employed Turnover and Total Asset Turnover ratios remained stable throughout the period where capital employed turnover maintained an average of 3.7 times which is slightly better than the industry average of 3.5. Total Asset turnover maintained an average of 1.5 times indicating efficient utilization of total assets to generate sales.

Analyzing the debt management of the company, it shows a decreasing debt/equity ratio indicating a good trend as the company is paying off its debt and using equity to generate funds. In FY 06 CPL has a near 50:50 ratio of debt and equity which is now reduced to 15:85 indicating that the company has substantially reduced its risk. Also it can now attract investors, as it is relatively a debt free company. This company’s management employs a level of debt in the capital structure that appears to be in line with industry norms.

Times Interested Earned Ratio has gone down from 3.35 times in FY 06 to 2.93 in FY09 times indicating company’s decreasing ability to pay interest. TIE was lowest in FY08 (2.05 times) which was due to decreasing profits as a result of increased cost. Also increasing interest rates contributed to the worsening of this ratio.

Market value of the share was highest in FY06 in line with the bullish sentiments in the KSE. Average price was lowest in FY09 and this decrease can be associated to rising inflation and recession as now people are more risk averse and have limited available funds to invest.

Earning per share has remained stable over time whereas P/E ratio has decreased reflecting increased earnings and decline in price.

FUTURE OUTLOOK

Absence of clear policy framework on the development of chemical sector, by the government, has resulted into growth, which has been haphazard and on short-term need basis. The chemical sector has no benchmarks at this moment in terms of its total productive capacity, sales turnover, and contribution to GDP and taxes, manpower employed value addition benchmarks in comparison to global trends and other indicators of the sector. In such a scenario it is difficult to assess where the company stands now in the industry, however, by analyzing the financial statements of CLA, one can say that the company has reflected growth in sales and has maintained profitability despite economic recession and political instability in the country. This clearly indicates that the company can do really well in up coming years when the economic conditions are expected to be more favorable as compared to the period of 2007-2009 when the entire world was affected by recession.

The company maintained profitability over the last four years with an average Net profit Margin of 8%. Similarly, it enjoyed a stable return on assets and slight fluctuation in return on equity.

Liquidity position of the company has also remained stable with current ratio and quick ratio maintaining an average of 1.66 and 1.02 respectively reflecting good liquidity position.

CPL has maintained fairly stable assets management ratios indicating the efficient utilization of resources to generate sales. Where fixed asset turnover showed slight fluctuation due to various reasons, capital employed turnover and Total Asset turnover ratios maintained an average of 3.7 &1.5 times respectively which is slightly better than the industry average.

The company is gradually minimizing its risk by paying off its debt and raising more equity. Now the company has substantially reduced its debt and now maintains a debt/equity ratio of 17% which is again in line with the industry norms.

Generally it is reflected that FY08 was a tough year for the company. However, none of the ratios deteriorated drastically indicating the financial strength of the company. By analyzing the company performance in FY06-09, one can say that CPL is expected to do really well in near future.

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