Report On Financial Analysis Of Ici Pakistan Limited 2008[1]

Report on Financial Analysis Of

2008

Prepared By: Kinzah Athar SP08-MB-0013 Prepared For: Analysis of Financial Statement Shahnshah Alam Date: 13th November’09

Introduction ICI Pakistan Limited was set up as a public limited company in Pakistan in 1952. On January 2, 2008 ICI Plc, the parent company of ICI Pakistan was formally acquired by AkzoNobel; the acquisition was approved by the shareholders of both companies as well as regulatory authorities, and the takeover process was completed, making AkzoNobel the ultimate holding company. AkzoNobel, a Fortune 500 company based in Amsterdam, is the world’s largest global producer of paints and coatings as well as one of the major manufacturers and suppliers of specialty chemicals. The five businesses are, Polyester, Soda Ash, Paints, Chemicals and Life Sciences, A wide range of Pharmaceutical and Animal Health products manufactured on a toll basis. It also market Seeds, and in addition are engaged in trading in various specialized chemicals for use in industries across Pakistan. ICI today is of course, a part of AkzoNobel, and the coming together of these two great companies ensures one strongly led, technologically sophisticated company with healthy and sustainable long-term growth prospects. In 1995 ICI Pakistan Limited set up a USD 490 million PTA manufacturing facility at Port Qasim, near Karachi, which was commissioned in 1998. In 2000, the business was de-merged to form Pakistan PTA Limited, which was at the time a subsidiary of ICI Plc UK. The turnover at ICI Pakistan Limited in 2008 was Rs 31.92 billion and the profit before tax crossed Rs 3.13 billion. It is one of the largest quoted companies on the Karachi, Lahore and Islamabad Stock Exchanges with a paid up share capital of Rs 1.39 billion. The company employs around 1300 permanent staff members.

Financial Position of the company on the basis of Analysis of financial statements 1. Liquidity Analysis The cash ratio of ICI Company in 2008 is 0.46 which is less as compared to 2007 which was 0.57 then. It shows that liquidity of company is slightly decreased which is not a good sign. The Current ratio is 1.9, increased as compared to 2007 1.4 which shows that company has enough cash to meet its urgency/obligations. Thus, the current ratio throws light on the company’s ability to pay its current liabilities out of its current assets The quick ratio is also showing increasing trend from 0.9 to 1.1 which explains that company is able to use its near cash or quick assets to immediately extinguish or retire its current liabilities. The value of working capital has increased from year 2007 to value of year 2008 which shows that firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The liquidity ratios of the firm have increased, illustrating that the firm may experience stability in financing its short-term obligations given that the net income for the period has also increased.

2. Leverage Analysis The debt ratio of ICI company reduces in 2008 to 26.8% from 2007 33.9% which shows that company is less leveraged by debt and is now on low risk side. The ability of firm has now decreased to pay its interest on 1 rupee in 2008 as compared to 2007 which is shown by TIE which has been decreased from 7 to 6 times. The increasing trend of equity ratio from 60% to 73% shows that company is more financed by equity in 2008 and is on low risk side. The TIE ratio has showed a decline over the past year, showing a decrease in the operating profit of the company. The company's debt is decreasing continuously with respect to its equity. Hence, large assets are provided for equity financing.

3. Activity / Efficiency Analysis The operating cycle takes 74 days against the previous year 2007 which were 76 days. Consequently the turnover ratios are higher than the previous year. This shows that the company has an efficient working capital cycle. The cash is not tied up for long and is collected in a reasonable period. Hence firm will not face liquidity problems as significant as its competitor. The receivable days has been decreased in 2008 to 17 days from 18 in 2007 which is also good for the company. The decreasing trend of inventory turnover days shows that company inventory has high turnover which has now been decreased to 57 days in 2008 from 58 days in 2007. The asset turnover has been increased from 122 to 149% in 2008, shows that company is using assets efficiently and generating its sales & revenue by proper allocation of Assets but also shows that profit margins are decreased as asset turnover has now been increased.

4. Profitability Analysis The gross profit has been decreased in 2008 to 19 % from 20% of 2007 which is also evident from asset turnover. The operating margin has also been decreased in 2008 11.2% from 12% of 2007. This may be due to current economic recession and as well as pricing strategy to increase the asset turnover which resulting in decreasing of profits. The net margin has been slightly decreased from 7.7% to 7.4% which shows that proper measures should be conducted by the company to avoid more decreasing trend in future. The total return on assets has drastically increased from 9 to 11% from 2007 to 1008 which is a good sign for the company. The return on equity has now increased from 9% to 15% from 2007 to 2008. The dependence of company on equity has now been increased. Despite the increase in sales, the gross profit margin shows has declined due to rise in the current recession of economy.

5. Marketability Analysis The EPS has increased from 12 to 14; shows share holders confidence on the company is good. The decreasing of P/E ratio shows that investors are paying less for each unit of net income in 2008 as compared to 2007, so the stock is cheaper compared to one with higher P/E ratio of 2007. The increased DPS from 3.5 to 4 from 2007 to 2008 shows that stockholder will get more dividend for each share of stock he held. Current yield also increases from 35% to 40% shows the yield company pays out to its shareholders in the form of dividends is increased from previous year. The book value also increased from 89 to 98, which shows that company has strong image in the market and share holders have more confidence on the company’s financial position. In 2007 the market price was 11% to book value which is now decreased to 10% to book value in 2008.

Conclusion: The ratio analysis can help in understanding the liquidity and short-term solvency of the firm, particularly for the trade creditors and banks. Long-term solvency position as measured by different debt ratios can help a debt investor or financial institutions to evaluate the degree of financial risk. The operational efficiency of the firm in utilizing its assets to generate profits can be assessed on the basis of different turnover ratios. The profitability of the firm can be analyzed with the help of profitability ratios. However the ratio analyses suffer from different limitations also. The ratios need not be taken for granted and accepted at face values. These ratios are numerous and there are wide spread variations in the same measure. Ratios generally do the work of diagnosing a problem only and failed to provide the solution to the problem. After going through the various ratios, I would like to state that: • The short-term solvency of the company is quite satisfactory. • Immediate solvency position of the company is also quite satisfactory. The company can meet its urgent obligations immediately. • Credit policies are effective. • Over all profitability position of the company is quite satisfactory. • Stock turnover rate is satisfactory. Stock of the company is moving fast in the market. • The company is paying promptly to the suppliers. • The return on capital employed is satisfactory. The management should take care of inventory management and speed up the movement of stock. Effective selling technique or product modification may be adopted to face the competitors and to improve the financial position of the company by taking appropriate decisions.

(Annexure 1)

ICI Pakistan Limited Financial Ratios

Financial Ratios-- Summarized Comments Year 2008 2007

Spot Comment

Liquidity Ratios Cash Ratio

0.46

0.57

Slight decreasing trend. Fair

Current Ratio

1.922

1.448

Increasing trend, Satisfactory

Quick ratio

1.107

0.982

Increasing trend, Satisfactory

3951317

2804535

Increasing trend, Satisfactory

74.66

76.904

Decreasing trend, Satisfactory

Debt Ratio

26.80%

33.92%

Decreasing trend, Satisfactory, Low risk

Equity Ratio

73.10%

60.08%

Increasing trend, Low risk

6.56

7.507

Decreasing trend, Unsatisfactory

Accounts Receivable Turnover Days

17.58

18.425

Decreasing trend, Satisfactory

Inventory Turnover Days

57.08

58.47

Slight Decreasing trend, Unsatisfactory

149.79%

122.59%

Increasing trend, Satisfactory

Gross Margin

19.85%

20.34%

Slight decreasing, Fair

Operating Margin

11.21%

12.04%

Very slight decreasing, Fair

7.41%

7.76%

Decreasing, Unsatisfactory

Return on Assets

11.18%

9.62%

Increasing, Satisfactory

Return On Total Equity

15.16%

9.62%

Increasing, Satisfactory

Earning Per Share

14.9

12.85

Increasing, Satisfactory

Price Earning Ratio

0.67

0.77

Decreasing, Satisfactory

Dividend Per Share

4

3.5

Increasing, Satisfactory

40%

35%

Increasing, Satisfactory

98.31

89.41

Increasing, Satisfactory

10.71%

11.18%

Net Working Capital Operating Cycle (Days) Leverage Ratios

Times Interest Earned (TIE) Activity / Efficiency Ratios

Asset Turnover Profitability Ratios Margin Ratios

Net Margin Return Ratios

Marketability Ratios

Dividend / Current Yield Book Value Market to Book Ratio

Decreasing trend, Unsatisfactory (Annexure 2)

Summarized Financial Statements ICI Pakistan Limited

Balance Sheet As at 31 December 2008 Amount in Rs '000 2008

2007

Assets

2007

Liabilities

Non-Current Assets

10435258

Current Assets Cash & Bank Balances Stock in trade Stores & Spares Receivables Loans & Advances Other Current assets Total Current Assets Total Assets

2008

9725653

Non-Current Liabilities

739900

119571

Current Liabilities 1971081

3615056

2951956 538540 749388 193254 1828208

2311336 605480 683461 137680 1701757

8232427

9054770

18667685

18780423

6250235

Payables

4281110

Total Liabilities

5021010

6369806

1364667 5

12410617

Equity

Total Equity Total Liabilities & Equities

1866768 5

18780423

Summary of Balance Sheet of ICI Pakistan Limited Dec 31st 2008 The overall position of balance sheet shows that company operational activities are sound. The net worth has been increased fro year 2007 amount as compared to year 2008 amount, but cash and banks are at decreasing trend which is an issue to be check & resolve. The stock in trade and other receivables shows that company has growth due which decrease in cash occurs and as soon the stock in trade & receivables are settled, this temporary fall in cash will be recovered. Overall investment is also showing increase in plant & equipment but a high reduction in intangible is a crucial situation. Account payable has also decreased, which is also a good sign for company’s financial position. Overall with slight decrease, the company’s financial position is satisfactory.

(Annexure 2)

ICI Pakistan Limited

Income Statement For the year ended 31 December 2008 Amount in Rs '000 Year 2008

2007

Turnover Sales Tax, excise duty, commission & discounts

31921873

25988351

-3957958

-2964228

Net Sales, commission & Toll Income

27963915

23024123

Cost of Sales

-22316574

-18205369

Gross Profit

5647341

4818754

Operating Profit

3129908

2768523

-1061036

-983723

2068872

1784800

Tax

Net Profit

Summary of Income Statement of ICI Pakistan Limited Dec 31st 2008 The profit & Loss account of ICI Pakistan limited in on increasing trend from 2007 to 2008 year. Overall, cost of sales increases from 18million to 22million with increase in gross profit from 4millions to 5million. Profit before taxation has also been increased from 1million to 2million which eventually resulted into increase in net profit from year 2007 amount 1784800 to year 2008 amount 2068872. Overall, company is on increasing trend with maximizing its profit & minimizing its losses. Company has strong image in the market which increases the confidence of shareholders on the company.

(Annexure 2) ICI Pakistan Limited Balance Sheet (Common Size & Trend Analysis) As at 31 December 2008 Vertical Analysis 2008

%

2007

Horizontal Analysis %

Change in 2008

% change in 2008

2008 Liabilities NonCurrent 739900 Liabilities Current Liabilities

Assets Non-Current Assets Current Assets Cash & Bank Balances Stock in trade Stores & Spares Receivables Loans & Advances Other Current assets Total Current Assets Total Assets

Vertical Analysis

10435258

55.9

9725653

51.78

709605

7.30

1971081

10.55

3615056

19.24

1643975

45.48

2951956

15.81

2311336

12.3

640620

27.72

538540

2.88%

605480

3.22

66940

11.06

749388

4.01%

683461

3.63

65927

9.65

193254

1.03%

137680

0.733

55574

40.36

1828208

9.79

1701757

9.06

126451

7.43

8232427

44.09

9054770

48.183

822343

9.08

18667685

100%

18780423

100%

112738

0.60

%

2007

%

Amount in Rs '000 Horizontal Analysis % Change change in 2008 in 2008

3.96

119571

0.636

620329

518.80

Payables

4281110

22.93

6250235

33.28

1969125

31.50

Total Liabilities

5021010

26.89

6369806

33.91

1348796

21.17

Total Equity

13646675

73.1

12410617

66.08

1236058

9.96

Total Liabilities & Equities

18667685

100%

18780423

100%

112738

0.60

Equity

Summary of Balance Sheet (Common Size & Trend) of ICI Pakistan Limited Dec 31st 2008 The Vertical analysis of ICI company balance sheet shows that non current assets are 56% in 2008 which were 52% in 2007, increased by 5%. Cash & bank balances decreased from 19% to 10% with increase in stock in trade from 12% to 15%. Stores & spares have very slight decrease with only 1% change and same as for receivable which increased from 3% to 4% in 2008. Over all total current assets are decreased 4% from previous year and are now 44% of total assets. The non current liabilities have drastic increased with 3% of over all liability & equity in 2008. The total liabilities decreased from 33% to 26% due to decrease in account payable. Whole equity has been increased with 7% from 2007 to 2008 and is now 73% of total liabilities & Equity. Common size shows that current assets & liabilities decreased with increase in non current liabilities & Equity in 2008 as compared to previous year 2007. The trend shows that there is only 0.6%decrease side change in complete balance sheet in 2008 as compared to 2007.

(Annexure 2) ICI Pakistan Limited Income Statement (Common Size & Trend Analysis) For the year ended 31 December 2008 Amount in Rs '000 Vertical Analysis Year 2008 Turnover Sales Tax, excise duty, commission & discounts Net Sales, commission & Toll Income

%

2007

31921873 -3957958 27963915

100

25988351 -2964228 23024123

Cost of Sales

-22316574

79.8

-18205369

Gross Profit

5647341

20.2

4818754

Operating Profit

3129908

11.2

2768523

-1061036 2068872

3.79 7.39

-983723 1784800

Tax Net Profit

%

100 79.0 7 20.9 2 12.0 2 4.27 7.75

Horizontal Analysis % Change change in 2008 in 2008

4939792

21.45

4111205

22.58

828587

17.20

361385

13.05

-77313 284072

7.86 15.92

Summary of Income Statement (Common Size & Trend) of ICI Pakistan Limited Dec 31st 2008 The common size of income statement shows increase in net profit from 17 million to 20 million in 2008.The Net profit in 2008 is 2.3% of Net sales which is less than 2007 percentage of sales. It is due to percentage decrease in operating profit in 2008 which is 11% of sales in 2008, whereas, it was 12% of sales in 2007. Trend analysis shows that percentage change in 2008 in net profit is almost 16% as compared to 2007. The gross profit has 22% change and operating profit has 13% change in 2008 as compared to 2007.