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ICI India: In a transition phase - Views on News from Equitymaster
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  • Nov 22, 2001

    ICI India: In a transition phase

    If the recent announcements are any indication, ICI India, the diversified Indian subsidiary of Imperial Chemicals Incorporation of UK, seems to have stepped up its decade old restructuring exercise. And that has started to show some positive results in recent quarters.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Sales 2,174 2,007 -7.7% 4,265 3,786 -11.2%
    Other Income 11 14 29.9% 27 34 27.4%
    Expenditure 2,049 1,817 -11.3% 3,995 3,494 -12.6%
    Operating Profit (EBDIT) 126 190 51.6% 270 292 8.2%
    Operating Profit Margin (%) 5.8% 9.5% á 6.3% 7.7% á
    Interest 12 14 16.4% 19 2 -90.6%
    Depreciation 55 61 11.4% 111 117 4.9%
    Profit before Tax 70 130 85.4% 166 208 24.9%
    Extraordinary item (4) 1 -114.3% 90 (11) -112.2%
    Tax - 30 - 51 49 -4.5%
    Profit after Tax/(Loss) 66 101 52.5% 205 148 -27.9%
    Net profit margin (%) 3.0% 5.0% á 4.8% 3.9% á
    No. of Shares (eoy) (m) 40.9 40.9 á 40.9 40.9 á
    Earnings per share (Rs)* 6.4 9.8 á 10.0 7.2 á
    (*annualised) á á á á á á

    The company reported a 7.7% fall in sales in 2QFY02. But full credit to the restructuring exercise, operating profit increased sharply by 51.6% to Rs 190 m. The 7.7% fall in sales is primarily on account of the its exit from non-core businesses. It sold its polyurethanes business (13% of FY01 sales) to Huntsman International India in March 2001. Further, the motor and industrial paints business was transferred to Berger Auto & Industrial Coatings Limited, a 50:50 joint venture with Berger Paints India in the current year. In FY01, it exited from the explosives business. If one were to adjust for these divisions, sales have actually increased by 11% and operating profits by 39% over the corresponding quarter of the previous year.

    The restructuring benefitů
    (% of sales) 2QFY01 2QFY02 1HFY01 1HFY02
    Raw material costs 56.8% 47.4% 61.8% 45.4%
    Staff costs 8.4% 7.0% 8.9% 7.1%
    Excise duty 12.5% 10.6% 12.0% 10.1%
    Other expenses 26.0% 21.7% 24.1% 21.6%

    However, ICI still has a long way to go. It has plans to exit from other businesses like nitrocellulose, rubber chemicals and pharmaceuticals that accounted for 25% of FY01 turnover. But the management had said that it won't sell these businesses in haste but will exit at the right price. While exit from these non-core divisions bodes well in the long run, it has diversified once again into fragrance and starch manufacturing (in line with its parent company's worldwide business operations). It acquired a majority stake in Quest International India, a joint venture between ICI India, Qwest International BV and Hindustan Lever, for a consideration of Rs 1.5 bn in June 2001. Paints division, which contributed to 44% of sales in FY01, is also facing intense competition and ICI has been growing at a comparatively lower rate than the industry.

    The scrip currently trades at Rs 70 implying a P/E multiple of 9.8x annualised 1HFY02 earnings. Though the company is expected to fare well at the operating level, not much is expected in terms of sales growth given the nature of businesses like textile auxillaries and chemicals.



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