Various by-product facilities have been added and expanded upon which include sodium hypochlorite, bleaching powder, hydrochloric acid, and liquid chlorine among others. Caustic soda remains the main source of revenue however, contributing to more than 65 percent of sales in 2017.
The company also entered the textile spinning business in 1995 and now deals in fabric and yarn, which account for nearly 20 percent of its revenue. Furthermore, it has a specialty chemicals and export division, which was established in 2001, and an agri-chemicals division that was set in 2003.
Industry overview
Pakistan has a lot of potential for production of basic inorganic chemicals; however the industry faces high prices of feedstock. Basic raw material constitutes a big chunk of cost of production, about 30 to 60 percent, in the chemicals industry. Since Pakistan's chemical industry either uses natural gas or crude oil as feedstock, fluctuations in oil prices affect growth projections of firms.
Caustic soda is a key product of Pakistan's chlor alkali industry. The demand for caustic soda is highly dependent on the growth of the manufacturing sector as it is an essential raw material in variety of industries, ranging from textiles, soaps and detergents, paper and board, to vegetable oil refining, thermal power units, and food processing.
The major players of the caustic soda and chlor alkali based products are SCIL, Ittehad Chemicals Limited, Engro Polymers Chemicals Limited, and Nimir Industrial Chemicals Limited. Since Engro Polymer's entry in this industry, the market has become more competitive as it has the freight advantage and better supply reliability of being located in the south.
Operational overview SCIL seems to have improved its handling of cost of production and equity since last year. Its gross profit margin, operating profit percentage, and profit before tax percentage have all improved since FY16, albeit marginally. On the production side, its inventory turnover has improved implying that it is using it cash flow and current assets more efficiently. The significant improvement in return on capital employed also implies that its reserves are being used wisely. Capacity utilization has improved as well with production nearly equaling sales.
Financial overview The growth of low single digit figures in the top line in FY17 was offset by better management of cost of sales resulting in 9 percent increase in gross profit since FY16. EPS saw a big jump of 52 percent from FY16.
SCIL inducted a 40 mega-watt coal fired power plant in FY17, which resulted in energy savings and uninterrupted supply of electricity the year around. This contributed to bringing the cost of production down and its improving gross profit margin since nearly 40 percent of its cost is attributable to fuel and power, and interrupted supply of power deeply impacts the company's production capacity. SCIL is now self-sufficient in its energy needs, which reduces the impact of potential power shortages in the future.
SCIL recorded tax credit admissible under the Income Tax Ordinance, 2001 on investment in plant and machinery of coal fired power plant, and extension and expansions of other chemical plants. This enabled its profit after tax to jump to high double digits despite the stagnant growth in sales.
Increase in other income was mostly because of gain on sale of available for sale investment, of Rs 36.6 million. Of that amount, Rs 31.1 million was due to SCIL reclassifying its investment in Sitara Peroxide Limited (SPL) to available for sale investments due to resignation of common director from SPL. SCIL's share of post-acquisition loss from SPL before reclassification was Rs 8.8 million. Rs 12.5 per share was proposed as dividends for FY17, a one-rupee increase over last year.
Outlook In FY17, the industrial sector of the country witnessed a growth of 5 percent as compared to 5.8 percent, whereas the textile sector's growth was stagnant. This contributed to SCIL's lackluster growth in sales though its gross margin improved.
Currently, the market is competitive and SCIL's growth in FY17 was limited. Its improvements in PAT and EPS were attributable more to tax reasons than operational performance or growth in market share. However, improvements in Pakistan's energy supply and its investments towards self-sufficiency for its energy needs will help control its cost of production in the future since electricity is a major cost component in manufacturing of caustic soda.
Other investments that bode well for SCIL is the commission of its Carbon Dioxide (CO2 Food Grade) and Calcium Chloride Prill Plants as well capital expenditure towards spindles for its textile division. The start of the commercial production of these plants is expected to increase SCIL's market share in coming years. Along with upgrading its laboratory equipment, SCIL is enhancing its production capacity of its textile division and looking to improve the quality of its yarn.
Nearly 50 percent of Pakistan's caustic soda production is consumed by the textiles sector. Though the textile sector has received major drawbacks of late, the August textile export figures showed a 9 percent year-on-year increase. If this trend hold, SCIL's top line will grow giving its bottom line a boost.
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Sitara Chemical - Pattern of shareholding
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Shares held %
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NIT and ICP 685,722 3.20%
Directors, Chief Executive Officers,
and their spouse and minor children
Mr. Muhammad Adrees 13,637,402 63.64%
Mr. Haseeb Ahmed 375,540 1.75%
Mr. Muhammad Khalil 525 0.00%
Mr. Abdul Awal 500 0.00%
Mr. Muneeb-ul-haq 500 0.00%
Mr. Waheed Akhter Sher 500 0.00%
Mr. Ahmad Nawaz 500 0.00%
Banks Development Financial Institutions, 1,860,953 8.68%
Non-Banking Financial Institutions
Insurance Companies 1,444,786 6.74%
Mutual Funds 464,600 2.17%
Modarabas 16,050 0.08%
Foreign Companies 7,300 0.03%
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General Public
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a. Local 2,290,557 10.70%
b. Foreign 96,839 0.45%
Associated Companies, undertakings 0 0.00%
and related parties. (Parent Company)
Joint Stock Companies, others, etc 457,547 2.14%
Others 89,585 0.42%
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Source: Company accounts
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Sitara Chemical Industries Limited
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2017 2016 2015 2014 2013 2012
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Gross profit % 22.95 21.69 18.02 24.29 30.93 27.73
Operating profit % 15.4 14 16.57 17.61 23 23
Profit before tax % 11.71 11.44 12.75 13.01 16.99 13.18
Inventory turnover (times) 6.76 8.44 8.94 7.05 5.85 6.03
Current ratio (times) 0.88:1 0.75:1 1.04:1 0.87:1 0.73:1 0.61:1
Return on capital employed % 9.72 7.29 10.89 10.74 13.81 9.56
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Source: Company accounts
Copyright Business Recorder, 2017