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ICI: Stiff task ahead - Views on News from Equitymaster
 
 
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  • Mar 11, 2002

    ICI: Stiff task ahead

    Slowdown in the economy and increased competition, both from domestic majors as well as multinational majors, have forced companies to restructure themselves in order to become competitive on a global scale. Though it remains to be seen whether they emerge competitive or not, an attempt is being made across the spectrum. ICI India is one amongst them. The decade long restructuring exercise finally gained pace in the current fiscal. The company aims at restructuring its business in line with its parent company.

    (Rs m) 3QFY01 3QFY02 Change
    Net sales 1,966 1,724 -12.3%
    Other Income 11 22 101.9%
    Expenditure 1,792 1,514 -15.5%
    Operating Profit (EBDIT) 174 211 21.0%
    Operating Profit Margin (%) 8.9% 12.2%  
    Interest 7 8 26.2%
    Depreciation 59 56 -4.9%
    Profit before Tax 119 168 40.9%
    Extraordinary items (9) (16) 76.7%
    Tax 34 49 45.2%
    Profit after Tax/(Loss) 76 103 34.8%
    Net profit margin (%) 3.9% 6.0%  
    No. of Shares (m) 40.9 40.9  
    Diluted Earnings per share* 7.5 10.1  
    P/E Ratio (x)   6.8  

    The restructuring exercise has already started to show positive results. The company reported a 35% rise in net profits for the third quarter ended December 31, 2001. Though sales fell sharply by 12%, it is primarily on account of exit from identified non-core businesses. The company sold its polyurethanes and industrial paints businesses in April 2001 and May 2001 respectively (earlier in FY01, ICI exited from explosives business). The polyurethane division contributed to 13% of turnover of the company in FY01.

    However, it is one of the market leaders in the Indian paint segment and has been gradually increasing its presence in the decorative segment across the country. Also, its industrial specialties sales has grown 20% over previous year on the back of strong growth in agricultural surfactants, spin finishes, polymer additives and adhesives. But turnover declined by 5% for industrial paints division on account of slowdown in the economy. The rubber chemicals business of the company, notably, has been affected on account of subdued tyre demand. The rubber chemicals business contributed to 13% of FY01 sales.

    Besides, ICI has decided to sell its pharmaceutical business to Nicholas Piramal India for a consideration of Rs 700 m (including working capital). Consequently, Nicholas would take over the manufacturing facility at Chennai and ICI's employee strength would reduce by around 360. This will go a long way in reducing its debt (Rs 357 in FY01) and working capital requirements.

    On one hand, the company is exiting from unprofitable business. On the other, it has been consolidating its presence in its core businesses. ICI acquired Hindustan Lever's catalyst and adhesives businesses for Rs 210 m and Rs 90 m in Dec 2001.

    Going forward, the company's strategies on the paints front are encouraging. This is one segment, which is expected to grow at a CAGR of 12% over the next five years. While it is consolidating its presence in the chemicals business front, it still has a long way to go. The company has a very low operating margin when compared with its peers and it has to perk up its act to be competitive. With peak customs duty being lowered in the recent budget, imports could pose serious threat to domestic players. While we expect the operating margins to improve gradually, net profit is expected to grow at a slower rate.

    The stock currently trades at Rs 69, implying a P/E multiple of 6.8x annualised nine months earnings. Though market capitalisation to sales of ICI is just 0.3 times, the diversified nature of the company has been affecting its valuations.

     

     

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