Earnings Report /

ICI Pakistan: 3QFY21 review – Record profitability

  • ICI has posted record profitability in 3QFY21 results

  • While all segments are exhibiting strong growth and profitability, the recent turnaround in PSF segment is most notable

  • Our TP of PKR900/sh implies a Neutral rating but we look to revisit our estimates

Intermarket Securities
27 April 2021

ICI Pakistan Ltd (ICI) has posted a net profit of PKR1.9bn (EPS PKR21.24) for 3QFY21, up 22% qoq and 4x yoy. Notably, 3Q net profits is the highest ever in a quarter posted by the company. The result takes the 9MFY21 NPAT to PKR4.3bn (PKR49.58/sh), up 86% yoy. ICI did not announce any dividend alongside the result. 

Broadly, we understand that the 3Q result is a repeat of the previous quarter – where all segments exhibited strong growth in profitability but most notable was the turnaround in PSF profits (potentially, new record profits for this segment).  

Key highlights

  • Net Sales have clocked in at PKR17.7bn, up 11% qoq and 19% yoy. We understand that the growth was broad-based but major contribution came from: (i) PSF segment (prices rose c.25% qoq amid surge in global demand for textiles), (ii) Pharmaceutical (new product launches; ICI claims to be among the fastest growing companies in the industry), (iii) Animal Health (normalisation of demand from Poultry segment) and (iv) Chemicals (higher demand for Polyurethanes amid rise in automobile production). 

  • Gross margins of 25% are the highest ever achieved by the company (24% in 2QFY21). Prior to FY21, GMs averaged 18%, where its most profitable segments (Soda ash and Life Sciences) boasted margins of more than 28-30%. PSF margins in 2QFY21 were 16% vs. average c.4% in the prior 15 quarters; in 3QFY21, we estimate PSF primary margins rose by 25% qoq to over PKR70/kg.

  • Selling and Admin expenses have risen in tandem with Revenue, where Operating margins are up nearly 1ppt to 15.2% (also the highest ever level).  

  • The share of profits from associates (Nutrico Pakistan) is up 67% qoq to PKR187mn indicating strong demand and also significant exchange gains given the company sells imported products. The profits have more than doubled yoy from PKR57mn SPLY (distorted by Fx losses and Covid-19). Finance costs are down 15% qoq and 61% yoy – partly due to deleveraging amid present profitability and partly exchange gains, in our view.

  • The effective tax rate has come in at 26% vs. 38% last year but nearly same as in the previous quarter.

This is an impressive result by ICI, which has outperformed our earnings estimates at the start of FY21 by a wide margin (and calls for sharp upgrades, in our view). As per management guidance, the sublime profitability of the PSF segment can be sustained in the near term, while all other segments will continue its present growth trajectory. Note that the revenue and profit contribution from the recently commissioned Nutrico Morinaga facility is still very low and this could be the next big source of earnings growth – while PSF profits normalise. We are looking to revisit our estimates in light of this result. Our June 2021 TP of PKR900/sh implies a Neutral stance.

Along with the result, ICI also announced plans to increase its stake in Nutrico Pakistan (trading business, an associate) from 40% to 51% and merge the operations with Nutrico Morinaga (manufacturing facility, a subsidiary) – culminating in a 51% stake in the merged entity. This is a wise move by the company as it will limit potential duplication or cannibalisation between the products of the two companies (presently both sell powdered milk formula but to different target markets). Immediately after post-merger, however, ICI’s profits will jump by merely PKR1.0/sh at best, in our view.