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ICI India: Accruing benefits

Aug 29, 2002

This is one of the never ending restructuring story that the stock markets have been hearing for more than five years. But after languishing for a significant amount of time, ICI India finally stepped on the restructuring pedal in FY02. Starting 1QFY03, it has started to reap the benefits of the same.

(Rs m)1QFY021QFY03Change
Net sales 1,779 1,782 0.2%
Other Income 20 1 -95.5%
Expenditure 1,677 1,575 -6.1%
Operating Profit (EBDIT) 102 208 103.8%
Operating Profit Margin (%)5.7%11.7%
Interest (12) 13 -
Depreciation 56 60 7.9%
Profit before Tax 78 135 74.1%
Extraordinary items (12) (8) -
Tax 19 46 141.1%
Profit after Tax/(Loss) 47 81 72.6%
Net profit margin (%)2.6%4.6%
No. of Shares (m) 40.9 40.9
Diluted Earnings per share* 4.6 8.0
P/E Ratio (x) 11.3
(* annualised)

The first quarter performance of the company is a clear vindication of the benefits accruing from the sale of some of its divisions. While revenue growth at 0.2% may not be impressive, it is on account of sale of its pharmaceutical division to Nicholas Piramal last year. This division contributed to 8% of revenues in FY02. On a like-to-like basis, revenues have actually increased by 16% in 1QFY03. ICI's industrial chemical units and paint division were believed to have been the key growth driver in the same period.

Revenue mix
(Rs m) 1QFY03 (% of sales) FY02 (% of sales)
Segment Revenue .
Paints 8,840 49.6% 32,491 44.8%
Industrial Specialities 3,484 19.5% 13,158 18.1%
Industrial Chemicals 5,616 31.5% 21,950 30.3%
Pharmaceuticals - - 5,464 7.5%
Total of the above 17,940 100.7% 73,063 100.7%
Less: Inter-segment revenue 117 0.7% 527 0.7%
Net Sales 17,823 100.0% 72,536 100.0%

On the paint division front, the company has a strong presence in the Eastern region where Berger is the other large player. As far as the distribution network is concerned, it is the second largest in the sector. ICI has been increasing the number of dealer tinting machines over the last two years. Robustness in housing demand and a strong reach would continue to drive paint volumes in the coming quarters.

Operating margins have almost doubled during the quarter as the paint division has turned profitable in 1QFY03. At the PBIT level, ICI's paint division reported a net loss of Rs 94 m in FY02. But in 1QFY03, the division posted a PBIT of Rs 12 m. This combined with increased capacity utilisation has enabled the company to double its operating profits on a like-to-like basis in 1QFY03.

The stock currently trades at Rs 90 implying a P/E multiple of 11.5x 1QFY03 annualised earnings. The stock has risen more than 100% in the last one year. Though valuations are on the lower side on a peer valuation basis (Asian Paints trades at a P/E multiple of 16x), the diversified business nature will continue to weigh on profits. It had ventured into starch and fragrance manufacturing last year, in line with its parent company, ICI Plc. It acquired a majority stake in Quest international India, a joint venture between Quest International BV and Hindustan Lever, for a consideration of Rs 1,520 m. It remains to be seen how the new divisions perform in the coming years. Also, with crude prices already touching US$ 30 per barrel (key raw material for paint division), margin growth might be limited.

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