ICI Pakistan Limited is a 75.81% owned subsidiary of ICI Plc, UK. It was set-up as a public limited company in Pakistan in 1952. ICI's presence in this part of the world, however, predates the formation of the public limited company, and indeed, Pakistan itself.

The Khewra Soda Ash Company, a predecessor of ICI Pakistan Limited, set-up a soda ash manufacturing facility in Khewra in 1944 with a capacity of 18,000 tonnes per annum. This facility was sited next to the salt range as rock salt and limestone, the two key raw materials for manufacturing of soda ash available here in abundance.

Currently, the ICI Pakistan has five businesses ie polyester, soda ash, paints, chemicals and life sciences manufacture and sell a range of industrial and consumer products. These include polyester staple fibres, POY chips, light and dense soda ash, sodium bicarbonate, paints for the decorative, automotive, refinish segments for the industrial and projects use, specialty chemicals, polyurethanes, and adhesives.

The company also arranges manufacture on a toll basis of pharmaceutical and animal health products. It also markets seeds and in addition is engaged in the trading of various specialised chemicals used in the industries in Pakistan.

The company spent Rs 1,012 million in 2007 on major capital projects and on sustenance to ensure efficiency and integrity of assets. The 50ktpa soda ash expansion project costing Rs 1.0 billion was completed as per plan and commercial production commenced in March 2007. Work on 65ktpa soda ash expansion project is in progress and likely to be completed in the second quarter of 2009.

RECENT RESULTS (Q1'08)Despite a difficult business environment in Q1'08, due to law and order issues, inflationary pressures and energy shortages, ICI performed well achieving the 37% growth in operating results compared to the same period last year.

All businesses except soda ash and paints achieved significantly higher results over the same period last year, which were affected by extended and unplanned gas load-shedding and pressure on unit margins due to escalating raw material prices respectively, despite double-digit growth in volumes in the decorative and refinish segments.

ICI's operating result at Rs 740.1 million in Q1'08 was 37% higher than the same period last year. Selling and administration expenses increased by 25% and 27% respectively, on a comparable basis due to inflation and higher outward freight cost in soda ash business on exports. In addition, promotional expenses have increased to support business growth.

Financial charges of Rs 100.3 million increased by 147% comparatively. This includes exchange losses of Rs 54.0 million resulting from devaluation of the Pak rupee. Other operating income almost doubled mainly on account of higher interest income earned over the same period last year. Profit before tax and profit after tax for the quarter at Rs 643.5 million and Rs 416.2 million were higher by 32% and 30% respectively than the corresponding period last year. Earnings per share at Rs 3.0 also increased by 30% over the same period last year.

FINANCIAL PERFORMANCE (FY02-FY07)The company achieved a significant growth in profitability over 2006 and delivered strong financial results. Its operating result at Rs 2,971.4 million for the year ended 31 December 2007 was 20% higher than 2006. The break-up of turnover and operating profits show that polyester and the soda ash were the main contributors.

Selling and administration expenses increased compared to FY06 to support business development and growth in paints, life sciences and chemicals businesses whereas in soda ash, the increase was due to outward freight expenses on account of higher sales and fuel cost.

As far as the gross profit margin of ICI Pakistan is concerned, a commendable trend was witnessed since 2003. This can mainly be attributed to a rise in commission income, which had to play a significant role in the impressive gross profit of the company.

However, in FY07, owing to high administrative expenses and other operating charges, the both gross and net margins did not tell an equally awe-inspiring story. A higher tax charge can also be held responsible for the declining net margin.

However, the tax charge of 2006 was primarily on account of a partial write off of deferred tax asset and does not involve any cash outflow. Accordingly, profit after tax for the year 2006 was 35% lower compared with the corresponding period of the previous year. One can see the same trend being continued in FY07 where the profit and gross margins are almost equal to that of FY06.

Interestingly, taxation for 2005 showed a credit of Rs 626.5 million due to utilization of the un-recognised portion of the deferred tax asset. Financial charges have been increasing for the past four years due to higher exchange losses on imports and significant increase in interest rates.

This can be another major reason in declining the net margin in spite of the rising trend in ICI's turnover. In 2004, other operating income from the sale of the PPTA shares resulted in a steep rise in profits that was reflected in the improved gross and net margins for the same year.

The return on assets and equity have also witnessed a declining trend over the last few years because of greater growth rate in assets and equity (equity grew because of an increase in the unappropriated profits) compared to the net profit which grew at a slower rate. The decline in turnover after 2003, translated into lower bottom line profits over the period under review. The situation recovered slightly in FY07 due to increased profits.

The liquidity position of ICI Pakistan improved considerably after 2004. Before that, the company suffered from a less-than-sufficient liquidity situation with the current ratio less than 1. However in 2004, due to the sale of the PPTA shares, together with the operating cash flow enabled the company to achieve a cash surplus position.

Medium loans of Rs 1.2 billion from the United Bank Limited, Rs 800 million from Habib Bank Limited and US dollars 35.0 million from Mortar Investments International Limited were also repaid in 2004. Ever since, the current ratio of the company has been quite good, with an increase witnessed in 2006, primarily due to an increase in the company's cash balances and due to more receivables.

The increase in receivables can be attributed to the increased marketing efforts in the paints sector, which attracted a number of prospective clients. The rising CA in FY07 on the other hand is attributed to higher inventory and receivables as its cash balance has declined compared to that in FY06.

The trend in the company's asset management ratios till FY07 is very encouraging and noteworthy. There has been a decline in the inventory turnover ratio, the days sales outstanding (except in FY07 where it rose due to higher trade debts) and the overall operating cycle, demonstrating that the company has been efficient in selling off its inventories and receiving cash against its receivables.

A greater marketing effort by the company is a major reason for its commendable asset management as the company can easily sell off its products to the clients. Easy credit terms can be responsible for a rise in the days sales outstanding after 2005, hence reflecting a good performance of the company on the asset management platform.

Owing to a significant rise in the total assets for the past few years, the total assets turnover ratio witnessed a decline till FY06 in spite of an increasing turnover. In 2003, work was initiated on the Refined Sodium Bicarbonate Plant, which was completed in 2004, hence explaining the rise in total assets for the company during these two years.

The company spent Rs 396.6 million as sustenance capital in 2005 to maintain its existing assets and, in 2006, investment was made in three major projects at a cost of Rs 3.3 billion. These projects include the Asset Modernisation and Improvement Project (AMIP) in polyester, soda ash 50 ktpa expansion and acquisition of the manufacturing facility of Fayzan Manufacturing Modaraba (FMM).

Consequently, ICI Pakistan's assets have generally been high. However, FY07 TATO ratio shows that the company has managed these fixed assets more efficiently due to which total assets turnover ratio has shown a rise. Owing to a remarkable growth rate in its turnover in 2003, primarily because regional PSF demand grew by 6%, the sales to equity ratio showed a rise from 02 to 03.

However from 2003 onwards a declining trend was witnessed due to slow rate of growth of the company's turnover, largely because the latter years were tough for the polyester industry of Pakistan on account of rising oil prices and China's continued additions to PSF capacities resulting in a supply overhang in the region.

Consequently, the demand for PSF in Pakistan grew at a very low rate of 3%, and with a larger percentage increase in the company's equity because of greater unappropriated profits, the overall trend in the sales to equity ratio was declining but recovered in FY07 on account of relatively higher turnover.

ICI's D/A and D/E ratios clearly show that it is reducing its reliance on debt financing and has lower ratios compared to the industry. Furthermore, the long-term debt to equity ratio shows us that now the ICI is relying more on its short-term financing, as this ratio is now almost negligible.

However, the TIE ratio shows a rising trend in FY07, owing to higher EBIT and considerably lower financial charges, than in FY06. Financial charges were 54% lower in FY07 than last year due to buyout of the Fayzan Manufacturing Modaraba's plant in September 2006. Financial charges were higher in FY06 mainly due to higher utilization of running finance facilities.

The book value of ICI Pakistan Limited consistently showed a rising trend since 2002. This is because the company has been witnessing a rise in unappropriated profits that have resulted in a steady rise in its equity.

The earnings per share, however, as driven by net income have declined over the past few years mainly because the profits of the company, because of reasons mentioned above in the analysis. It rose again in FY07 due to higher profits. A noteworthy trend is witnessed with regard to the year-end market price of the company, which has steadily increased since 2002 (except in 2006).

This can be attributed to the expansion plans of the company, as well as great marketing efforts by the organisation, which led to greater investor confidence and a consequent rise in the market value of the company.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Consequently, the P/E ratio also followed a rising trend driven by the increases in EPS and market price of its share. On comparison with the 100-index, the scrip has outperformed the index in the last 3 months of FY07.

Moreover, the overall cash position of the company improved which is evident by the positive trend of DPS. It has increased from Rs 2.5/share in FY03 to Rs 6/share in FY07, showing the good return to shareholders as the primary objective of ICI.

FUTURE OUTLOOK: In 2008, trading conditions are expected to be difficult. The macro imbalances in the economy, rising energy deficit, high inflation and escalation in raw material prices may lead to slowdown the economic growth. Non-availability of gas and extended load-shedding in the last winter is a cause for concern if it re-occurs in the next winter.

The government needs to give priority to supply of gas to industrial concerns and take adequate measures to conserve this scarce resource and its non-essential use. The purchasing power of the downstream customers is already stretched by the continued increase in raw material prices. Consequently, passing further raw material cost increases through higher selling prices may become difficult.

The domestic PSF industry is under pressure due to cost push, poor health of domestic textile industry and business failures. The company will continue to focus on improving the revenue stream through higher utilization of assets and control over costs. Also and more importantly, consistent and stable government policies are imperative for the future prospects of the PSF and textile industry.

Demand from the silicate segment is expected to remain subdued on account of raw material issues faced by the soap industry. Soda Ash Business is also evaluating export opportunities to partially offset the impact of weak demand. Paints business is expected to improve its performance with the launch of innovative/new products and customized solutions.

Overall, ICI Pakistan has shown a noteworthy performance for the past couple of years. ICI continues to aggressively grow its paints business in a fast growing coatings market. Growth is also expected in the chemicals and life sciences businesses.

Recently completed acquisition of ICI Plc by Akzo Nobel brings with it exciting opportunities. The two companies, combined global presence, technologies, products, brands and expertise will provide better competitive edge and open opportunities which should benefit ICI and its stakeholders in the future. Hence one expects a bright future for the company