Despite the tough-operating environment of our economy during FY10 ICI succeeded in achieving relatively strong performance indicators. The onset of adverse conditions was pacified by the strong control over costs and great emphasis on margin maintenance that the higher management stringently imposed at all levels in the firm.
An overview of the sector-wise performance of the company is as follows:
The Polyester Staple Fibre category was fraught by problem some conditions as the prices of crude oil continued to rise in the broader context of speculative trading being triggered by concerns over supply in the regional market. Global increase in polyester demand due to lower crop yields or bad harvest conditions in Pakistan, India and the USA at a time of recession-hit demand recovery, led to great rises in the prices of the product and consequently translated into better operating results for this segment of the firm.
ICI had to operate the plant at full capacity in order to cater to the high demand of Polyester and the substantial increase in the sales and production volumes stand to reflect that. The future prospects of this sector stand contingent on two major factors: a) the degree of realisation of the expected global bumper crop of cotton; and b) the state of affairs regarding the anti dumping duty on Polyester Staple Fibre both of which can have detrimental effects on the performance of this sector and of ICI overall.
On the back of consumption recovery in the emerging markets of China, India and Brazil the global soda ash market grew by around 4-5%; however, the conditions of the domestic market were quite to the contrary. Regular gas curtailment and interruptions this year, caused major disruptions in industrial activity, translating into a lower downstream off take for ICI’s products in this segment. It was observed that an unexpected increase in the unbranded detergent sector was a source of mitigation for such a letdown of soda ash demand. The company benefited from the opportunity to expand into foreign markets and the growth in net sales was primarily contributed by an increase in exports.
Optimization of resource use became a crucial concern for the company as additional costs of over half a million rupees had to be incurred on the procurement of alternative fuel to compensate for the gas outages. Low-cost dumping of soda ash by foreign producers was an acute concern this year.
Extended monsoon and flood season this year adversely affected the demand for paints in the portfolio of ICI’s products. The difficulties of this segment were compounded by the construction sector slump accompanied by the fall in average disposable income that has eventually resulted in the lengthening of the household maintenance cycle to five years for a previously experienced three years. The progress in industrial paints segment was comparatively more encouraging as ICI achieved the OEM topcoats’ status with several major automobile manufacturers. As far as the life sciences segment is concerned, the sub-sectors falling under this category depicted great variation; where on one hand the sunflower seeds segment was badly hit due to the shifting preferences of farmers towards cotton, the pharmaceuticals, animal health and other vegetable seeds category took off with promising results.
Lastly, comes the case of one of the biggest segments of ICI’s product portfolio- chemicals. Given the flood struck demand it was surprising to find that the operating results of this section actually improved by a three percent rate over the previous year. Load shedding and gas availability pose future question marks on the operational feasibility of these segments given that the industrial clientele would be adversely affected by the unavailability of power supply.
Tracing the impact of the segment-specific conditions defined in the previous section is crucial to dissect the resilience of the firm’s financial and operating strategies to unexpected movements in the economy. The graph below depicts a snapshot of the firm’s bottom line performance over the past year; almost all the profitability indicators took a dip with the GP margin falling by a 4.7% rate to 19% in 2010 whereas the operating margin only marginally moved by -0.75%.
The high costs from the introduction of alternative fuel management options and other operational efficiency enhancing techniques served to enhance the operating cost percentage to 89.43%; however, the firm needs to be applauded for its stringent cost control in the areas of administration and selling costs.
As far as the efficiency of ICI’s operations is concerned, we find that the turnover rates increased across the board. However, as it was cited earlier, the company was operating at production levels peculiarly close to full capacity, therefore this change needs to be interpreted with care. The cut down on overhead expenditures spell a disastrous future for the productivity of the firm’s operations to the extent that they chop of maintenance spending especially in the high capacity utilization conditions of the past year. In short the implications of a 25% increase in fixed asset usage alone and an overall close to 20% rise in total asset turnover may not be fairly positive.
Moreover, a fall in inventory turnover days despite the reports that certain major segments of ICI experienced a sales volume contraction in the past year helped reduce the overall length of the cash cycle; the firm also seemed to have implemented a stringent and conservative credit policy for customers as a record 20% reduction in credit days was recorded. The liquidity implications furthermore, were very positive as the working capital of the firm increased from a figure of – Rs 82.19 million in 2009 to Rs 320.64 million in 2010. Pertinent liquidity indicators have been presented in the graph.
Lastly, as far as the investor concern ratios are concerned, the firm’s rising EPS and DPS failed to entice investors for ICI’s securities in the equity markets. This was reflected in the 28% decline in the P/E ratio of the firm that stood at a low 8.24 as compared to 11.44 last year. Also that the because of a healthy cash position the company declared the entire sum of its Post tax income as dividends, however a declining dividend cover ratio questions the prudence of such actions greatly. The dividend yield swelled to 12.13% against the 4.75% previously recorded in 2009 however even this couldn’t raise the depressed market value per share for ICI. Moreover, the firm’s gearing ratio declined while total debt percentage to capital stayed constant at 10%.
A snapshot of the financial ratios for the period ended FY10 are as follows:
Debt to equity % 51.97746 45.19649
Total debt to capital ratio 0.1 0.1
Interest cover Times 18.07112 22.65417
Liquidity Ratio 2009 2010
Current ratio Ratio 1.92:1 2.17:1
Acid test ratio Ratio 1.27:1 1.39:1
Cash ratio Ratio 0.77:1 0.85:1
Equity Ratio 2009 2010
P/E ratio Rs 11.44 8.24
EPS Rs 14.73 17.5
DPS Rs 8 17.5
Dividend cover Times 1.84 1
Dividend yield Percent 4.75% 12.13%
Dividend payout % 54.31% 100.01%
Market value per share Rs 168.49 144.24
Break up value per share Rs 97.14 104.81
Cost Ratio 2009 2010
Operating cost % % 89.35% 89.43%
Administrative cost % 4.14 3.7
Selling cost % 5.17 4.77
Efficiency Ratios 2009 2010
Asset turnover Times 1.33 1.59
FA turnover Times 3.09 3.87
Inventory turnover Times 6.08 6.71
Inventory turnover days Days 58 51.19
Debtor turnover days 11.08 8.9
Creditor turnover Days 41 40.08
Operating Cycle Days 28 20
Growth Ratios 2009 2010
Net sales growth % 2.27 23.57
Operating results % -0.81 22.62
EBITDA % 1.04 19.45
Profit after tax % 9.77 18.78
Operating working capital % -82.19 320.64
Profitability Ratios 2009 2010
Gross margin % 19.96 19.03
Operating Margin % 10.65 10.57
NP Margin % 7.19 6.91
ROE % 15.17 16.7
ROA % 9.54 11.02