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ICI – Focus is the key

Dec 1, 2000

ICI India is a diversified company with interests in paints (decorative as well as industrial paints), textile auxiliaries, chemicals and pharmaceuticals. Towards realigning its diversified businesses, the company sold its explosives business and is currently divesting its industrial paint division. This division would be a 50:50 joint venture with Berger Paints, the third largest paint manufacturer in the country. Sales declined by 15% for the first half of the current year. The hive off of the explosives division, which contributed towards 13% of the turnover last year, affected the sales. We expect sales to decline for the coming quarters as well in view of the prospective hive off of its industrial paints, rubber chemicals and pharmaceutical divisions. However, the worrying factor is the sharp fall in operating margins from 11.2% in 1HFY00 to 8.8% in 1HFY01, despite the fact that operating margins for explosives division were very low.

(Rs m) 1HFY00 1HFY01 Change
Sales 4,758 4,062 -14.6%
Other Income 216 27 -87.5%
Expenditure 4,157 3,800 -8.6%
Operating Profit 601 262 -56.4%
OPM (%) 12.6% 6.5%  
Interest 109 12 -89.0%
Depreciation 124 112 -9.7%
Profit before Tax 584 165 -71.7%
Other Adjustments      
Tax 135 51 -62.2%
Profit after Tax/(Loss) 449 114 -74.6%
Net profit margin (%) 9.4% 2.8%  
Earnings per share 22.0 5.6  

However, margins have shown notable improvement for paints (40% of FY00 turnover) and textiles auxiliaries (13% of FY00 turnover) divisions. We do not expect this trend to continue as competition has intensified. In the textile auxiliaries business, the company is a very small player, which means that the company does not adequate pricing power. Therefore, we expect the company to post around 15% drop in turnover for the full year (FY01). Margins are also expected to decline from 6.6% in FY00 to 5% in FY01.

One of the critical issues that are looming over the prospects of the paint sector is the rise in rutile titanium dioxide prices (more than 80% of the requirement of the industry is imported) and drought situation in three states. Even for the rubber chemicals division, excess capacity and falling realisations have pressurized margins and is expected to continue. But, on the upside, there are some favorable aspects to look forward to. The company has good brands (Dulux) in the decorative segment and also has commendable market share in Eastern parts of India.

The company has proposed to venture into fragrance and starch businesses (in line with its parent company ICI Plc), which has further raised apprehension about the focus of the company. Besides, ICI India has been in the restructuring mode for more than a decade. Going by the company’s plans, it looks likely that the company will restructure continually. This, we think is definitely a big negative.

The stock is currently trading at Rs 97 at a P/E multiple of 16.6x the annualised 1HFY01 earnings.

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