Finding Growth
ICI India is on a restructuring drive and its first quarter results indicate that it has already reaped the benefits. The sale of its stake in Nalco Chemicals has increased the net profit by 71 per cent, apart from increase in volumes in all its divisions' sales. The sales have grown by 14 per cent to Rs 204 crore and the operating profit went up 13 per cent to Rs 26 crore . At its current price of Rs 197, the market has dicounted it 14 times on its latest earnings. It is a long term buy and warrants a good look at the prospects.
Following the parent's footsteps
Worldwide, ICI Plc decided to exit the commodity chemical business by acquiring Unilever's speciality chemicals business in 1996-97 and selling off ICI Australia (Orica). The polyester and fertiliser business have also been hived off. It sold off its polyester films and titanium dioxide business to Du Pont in July 1997. Gradually it has been getting rid of its rubber chemicals and explosives businesses as well. ICI Plc's future focus areas are paints and speciality chemicals and materials like acrylics and polyurethanes (PU), which is a high value, low volume business.
ICI India, the 51 per cent Indian subsidiary of ICI Plc, is moving much on the same lines. It sold off its fertiliser unit to GP Goenka group, the polyester staple fibre (PSF) unit to Reliance and the low density polyethylene (LDPE) unit to Bindal Agro. After selling its 49 per cent stake in Zeneca Agrochemicals, it recently divested its 40 per cent stake in Nalco Chemicals to the latter's parent.
Gaining competence
ICI India will utilise the funds earned from these disinvestments for its ongoing expansion plans. It has earmarked Rs 1,000 crore for investments, of which Rs 300 crore is expected to be invested by year 2000. It has a PU blending factory, a technical unit for textile surfactants, a paint project in Tamil Nadu and an explosives unit in Andhra Pradesh in the pipeline. Apart from this, it is also looking at mergers and acquisitions as a growth strategy to reach the magic Rs 5,000 crore turnover mark by 2005. Currently, talks are on to acquire Pond's' speciality chemicals division and it has already acquired Asha Nitrochem, for its nitrocellulose requirements.
In the next ten years, the company will phase out a few more businesses which are not a part of worldwide operations. As long as they are profitable in the Indian market, it will continue to run these divisions. But, the money invested in these areas, will be minimal compared to its focus areas. A look at these core areas.
Core areas
Paints: ICI Plc. has recently acquired coatings interests of Williams in Europe which owns some well known brands. Its focus is on decorative paints and automotive refinishes. The same strategy has been followed by the Indian subsidiary. It has setup a new plant in Mumbai and another is being set up in Mohali, Chandigarh. Initially, it was focussing only on premium niche areas, but it is now hitting at the lower end of the market. This has driven volumes growth which was 14 per cent in the first quarter of 1998-99.
In addition, it has expanded the dealer network 1.6 times to 5,200 dealers between 1994 and 1997 and has its plants strategically located in all the four regions of the country. As of today, it commands 13 per cent market share in decorative paints close to Berger Paints' 14 per cent. The total contribution to sales is 40 per cent and this translates, as per analysts, into 50 per cent of profits.
For industrial paints (mainly auto refinishes), the company has a technical tie-up with Herberts of Germany which may be later converted into a joint venture. Also, it acquired Asha Nitrochem's nitrocellulose unit which is used in paints for resin quality for higher end finishes. As per the company, it has given ICI a cost competitive facility to service paints and printing inks and will serve as an export base.
Speciality chemicals: In speciality chemicals, the company is into surfactants catering to textiles, agrochemicals and personal care segments. The international acquisition of Unilever's speciality chemicals will help ICI India to access areas like foods, adhesives, speciality starches and oleochemicals. In 1997-98, textile auxilliaries contributed 9.6 per cent to the turnover and the volumes grew 20 per cent in the first quarter of 1998-99.
Other speciality materials like polyurethanes and acrylics which are currently being commissioned by ICI India from ICI Plc. are high growth areas. PU is one of the most widely used polymers worldwide and in Asia Pacific region the growth is expected to be much faster. In India it is mostly used in flexible foam which is growing at 20 per cent. It is also available in semi-rigid and rigid forms with applications in coatings, adhesives, sealants and elastomers catering to many products.
ICI India is focussing on footwear, appliances and automotives. It is backed by a strong systems house and Innovation centre set up recently for Rs 15 crore. In India, the company intends to create the market first and then install capacities.
In acrylics, the parent is the largest producer of methyl methacrylate (MMA), basic raw material for acrylics. ICI India has entered into a joint venture with Gujarat State Fertilisers and Chemicals for the manufacture of acrylics.
Other Areas
Rubber Chemicals: The industry is facing dumping and poor demand. In the first quarter, ICI's margins in this business has gone down inspite of a volume growth. This division contributes 13.8 per cent to the company's total turnover. In India, Nocil and Bayer are two other big players wherein Nocil is the market leader with 43 per cent share and Bayer holds 30 per cent. The former once sold out to Montell will get better technical expertise while the latter is the subsidiary of a key international player. Without technical support, ICI is operating in low margin business.
This does not gel with the philosophy of ICI Plc. of concentrating on high margin products notwithstanding that realisations improved 10 per cent in 1996-97. So, in due course of time, the company will probably hive off this business. But, the company maintains that it has comprehensive product range supported by a wide sales network and cost reduction which will protect profitability.
Explosives: Considering the investment made in setting up an emulsion plant in Rourkela and phasing out the nitroglycerine plant in Gomia, it looks as if ICI is serious about it. In 1997-98 it contributed 15.5 per cent to the turnover, down from 19 per cent previous year since all the detonator business has been transferred to Initiating Explosives India limited. A joint venture with Ensign Bickford in which ICI has 70 per cent stake.
The division has a dedicated customer line with Coal India limited accounting 70 per cent of sales. ICI has moved from packed to bulk explosives in tandem with the shift in mining system from underground to open-cast mines. This has helped improve margins, but this division will contribute as along as technology remains unchanged. Worldwide, this business has been sold to Orica and there exists enough domestic competition. So, ICI may not like to stick to this business in the long run.
Pharmaceuticals: This division contributed 9 per cent to the turnover in 1997-98 and showed a 21 per cent growth over the previous year. It largely comprises cardiovascular and anaesthetic formulations for which it has a licensing agreement with Zeneca Chemicals. It formulates the latter's bulks and markets them. Although both the anaesthetics, Fluothane (halothane) and Inderal (propa-nolol) operate in niche segments, Tenormin is atenolol based where Kopran's Aten is the market leader and there exist several other players. Though these segments are growing at 20-25 per cent, the presence is very limited with very little R&D support.
The company intends to launch new molecules under product licensing arrangements. In future, the company will look at alliances but does not have mergers and acquisitions in mind. So, the possibility of this also being eventually hived off into a joint venture or sold off exists. But, as long as it is milking profits, the business will be retained.
Outlook
With its philosophy clearly defined as a high margin and not a volumes player, ICI is a safe place to park one's funds. In the immediate future with further hiving off of non core businesses, more income will be generated to invest in manufacturing facilities here. One can wait for it to decline to its immediate support level at Rs 172 before entering since the scrip is on the decline.