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ICI India: Can it grow? - Views on News from Equitymaster
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  • May 24, 2002

    ICI India: Can it grow?

    After languishing for almost a decade, ICI India's restructuring initiative of exiting from identified non-core businesses has paid rich dividends for the fiscal year ended 2002. While turnover has declined noticeably due to sale of some of its divisions, profits have risen 16% on the back of profit on sale of the same. But the key positive from its performance is the management's willingness to speed-up the restructuring process and the consequent improvement in margins.

    (Rs m) FY01 FY02 Change
    Sales 8,356 6,431 -23.0%
    Other Income 51 99 94.1%
    Expenditure 7,736 5,788 -25.2%
    Operating Profit (EBDIT) 620 643 3.8%
    Operating Profit Margin (%) 7.4% 10.0%  
    Interest 35 17 -50.7%
    Depreciation 231 230 -0.6%
    Profit before Tax 405 496 22.3%
    Extraordinary item 464 576 24.2%
    Tax 178 267 50.0%
    Profit after Tax/(Loss) 691 805 16.4%
    Net profit margin (%) 8.3% 12.5%  
    No. of Shares (m) 40.9 40.9  
    Diluted Earnings per share 16.9 19.7  
    P/E (x)   4.3  

    First a brief look at the restructuring exercise in the current fiscal. The pharmaceutical business was transferred to Nicholas Piramal India in March 2002 for a gross consideration of Rs 700 m. This division contributed to 8% of sales in FY01. Besides, the motors and industrial paint division, which was transferred into a 50:50 joint venture with Berger Paints at the beginning of the year, was transferred to Berger completely towards the end.

    The company acquired a majority stake in Quest international India, a joint venture with Quest International BV and Hindustan Lever, for a consideration of Rs 1,520 m, which is in line with ICI's parent company operations. In order to strengthen its presence in the adhesives business, the company acquired adhesives business of HLL for Rs 79 m. Furthermore, the nickel catalyst division of HLL was also acquired in FY02 for Rs 197 m. After all these adjustments, sales during FY02 was lower by 23%.

    The spurt in other income is understandable keeping surplus cash with the company in mind. The rise in operating margins is on account of benefits derived from exiting cash consuming businesses. Margins have been steadily declining over the last four years of operations. Though operating profits grew at a slower rate, the sharp fall in interest expenses and a 24% increase in extraordinary items has enabled ICI to post a 16% growth in net profits. Extraordinary items include profit from sale of polyurathanes, pharmaceuticals and industrial paints divisions to the tune of Rs 429 m, Rs 4 m and Rs 28 m respectively. But excluding benefits from restructuring exercise, profit growth was stagnant.

    Following the restructuring exercise, we expect the contribution from the decorative paint division to touch almost 60% of revenues, which offers huge growth potential in the long run. However, the segment is highly competitive with leaders like Asian Paints and Goodlass Nerolac dominating the scene. Though ICI's brands are well-recognised, the company is believed to be deriving a key portion of revenues from Eastern and Northern markets. Asian Paints has managed to extend its lead in the market through aggressive product launches and pricing strategy. Given this backdrop and keeping the current demand scenario in mind, growth in demand and in price realisations are unlikely in FY03.

    ICI currently trades at Rs 85 implying a P/E multiple of 4.3x FY02 earnings. After considering profits from operations (excluding extraordinary items), P/E multiple stands at 15x. The stock has been rising since August 2001. While the company's initiatives are encouraging, the challenge now is to grow its remaining businesses. ICI would continue to remain a diversified major with presence in fragrance, starch, chemicals and textile auxiliaries. The new ventures like Quest International would continue to consume cash in the near term. Consequently, growth in operating margins may be feeble despite benefits from the restructuring exercise.



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