Ittehad Chemicals Limited

Ittehad Chemicals Limited (PSX: ICL) is a manufacturer of caustic soda. It was set up as United Chemicals in 1962 and nationalized and renamed as Ittehad Chemicals in 1971. It was later denationalized in 1995 and acquired by Chemi Group of Industries. ILC produces a range of chlor-alkali products which include hydrochloric acid, liquid chlorine, sodium hypo chlorite, zinc sulphate, and calcium chloride.

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 biggest consumer of caustic soda in Pakistan is the textile sector.

The major players of the caustic soda and chlor alkali based products are Sitara Chemicals Industries Limited, ICL, 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 and financial overview

While sales have seen a generally rising trend, its gross profit margins have declined significantly since FY14. This is in part due to more competition in the caustic soda market, which puts pressure on prices, and in part due to higher energy costs.

Capacity utilisation improved in FY17 due to the better availability RLNG. However, Sui Northern Gas Pipelines Limited charged RLNG tariff instead of System Gas tariff, which depressed the gross profit margin. Gross profit margin was further squeezed by depressed prices of calcium chloride in the international market as well and has continued to decline in the latest financial results.

Over the previous fiscal year, ICL invested in increasing the capacity of hydrochloric acid by 50,000 tonnes as a result its production increased by nearly 20 percent. In terms of volume, hydrochloric acid is ICL’s top commodity with production of nearly 175,000 metric tons.

ICL decreased the capacity of caustic soda liquid by 20 percent, probably because of lower margins. Nevertheless, its production increased along with the production of caustic soda flakes. Capacity remained underutilised for all products because ICL pursues a strategy of demand based production.

The company issued 12 million rights shares at a premium of Rs15 per share in June 2017. The funds were raised to finance the building of the IEM Plant 3 which is expected to be a lot more power efficient than the current IEM Plant 1 that is being used.

9MFY18 Performance

ICL’s topline and bottomline saw significant growth year-on-year in 9MFY18. The increase in profitability was led in part by improved gross profit margins on the back of higher caustic soda prices in the domestic market as well as international market.

However, in 3QFY18, the margins dropped to 14 percent from 24 percent of the 2QFY18 because of higher prices of imported RLNG. Higher fuel costs were due to charging of 100 percent RLNG by SNPGL instead of a mix tariff of system gas & RLNG, higher global oil prices, and the devaluation of the currency.

Future outlook

ICL is considering the import of a caustic soda flakes plant with a capacity of 16,500 metric tons per anum to increase its production since its margins are higher than caustic soda liquid. Its Board of Directors has approved Linear Alkyl Benzene Sulphonic Acid (LABSA) Plant, which is likely to be commissioned by the end of FY19. IEM Plant 3 will most probably start production during the ongoing financial year. It will contribute towards decreasing costs and hence increasing ICL’s profitability.

Since the textiles industry is a big consumer of caustic soda, ICL’s fate is entwined with it. The government’s emphasis on increasing exports, the Rs180 billion package, and the improved energy situation has helped boost the textile sector. As per the latest PBS data, textile exports have improved by 12 percent year-on-year in 10MFY18. As the textile sector increases its production and enjoys higher growth rates, ICL’s profitability will rise as well.

The company’s performance however, remains strongly dependent upon the availability of power; consistent supply of gas to the units will help in maintaining margins and improving capacity utilisation. Higher RLNG tariff and government’s energy policies greatly impact its profitability. However, the company is making investments to better utilise capacity, diversify to more profitable lines, and manage power constraints.

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Ittehad Chemicals Limited


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(Rs mn)                                 9MFY18    9MFY17      YoY


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Net turnover                             4,329     3,623      19%


Cost of sales                           (3,568)   (3,114)     15%


Gross Profit                               761       508      50%


Selling and dist. expenses                (263)     (183)     44%


General and administrative expenses       (133)     (125)      6%


Other operating expenses                   (59)       (6)    883%


Other operating income                      48        33     -45%


Operating profit                           353       227      56%


Finance cost                              (117)     (133)    -12%


Profit before tax                          236        94     151%


Taxation                                   (34)       38    -189%


Profit/(loss) after tax                    202       132      53%


EPS (Rs)                                     3         2      53%


Gross Profit margin                         18%       14%     25%


Net Profit margin                            5%        4%     28%


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