With focus on Karachi, Sitara Chemical may earn record profits

Earnings have already grown 64% to Rs756m in nine months of FY13.

KARACHI:

Despite awfully tough business conditions in its home town, Faisalabad, Sitara Chemical Industries has performed quite well in the first nine months of fiscal year 2012-13 (FY13) and is all set to post record profits for the whole year, Global Research says in a report.

In nine months (July-March 2012-13), the company’s earnings grew 64% to Rs756 million (earning per share Rs35.3) compared to Rs461 million (EPS Rs21.53) in the first nine months of FY12.

“The performance of the company is good enough because its core consumers are textile units (but) they have faced extremely difficult business conditions during the past year owing to the energy crisis in the country,” Yousaf Rehman, an analyst at Global Research who wrote the report, told The Express Tribune.



Because of low consumption of chemicals in Faisalabad’s textile industry, the company was forced to sell its products to factories in Karachi that added to the freight cost, he says, adding now that the government is looking to increase gas supply to the industries in Faisalabad, the move is expected to help Sitara Chemical.

In the fourth quarter of FY13, the company will be able to register earnings of Rs286 million (EPS Rs13.3), taking total earnings for the year to Rs1.042 billion with EPS of Rs48.6, the report says.

The expected improvement in energy supply has revived hopes for Faisalabad’s struggling textile industry. With the textile industry coming back on track, high demand for caustic soda will be quite beneficial for Sitara Chemical.

Apart from this, freight cost for Sitara Chemical will come down, allowing the company to not only increase capacity utilisation, but also improve overall profit margins.



The company’s capacity utilisation had dropped to 51% in FY11 because of weak demand, competition from Engro Polymer Company and gas shortage.

Sitara Chemical has significantly de-leveraged its balance sheet as outstanding loans have dropped from Rs2.79 billion to Rs0.94 billion in three years. As the State Bank has brought down the discount rate to 9%, the company will be able to significantly reduce financial charges and increase overall profits.

To overcome the energy shortage, Sitara Chemical has shifted part of its energy production to coal-fired boilers. This move has cut costs and improved utilisation, the report says.

Investment risks

The company’s stock is highly illiquid. With a free float of 7.5 million shares, average daily turnover remains low at less than 25,000 shares. This makes it quite difficult to build or liquidate positions in the scrip without moving the share price considerably.

Both electricity and gas shortages that are currently affecting Pakistan, will hamper the company’s production process and capacity utilisation, says the report. Moreover, gas subsidies may be reduced and gas prices may increase, leading to a rise in the cost of fuel.

Valuation

At its last close, the stock was trading at a FY13 price to earnings (PE) of 4.2x, a considerable discount to the KSE-100 PE of 7.8x, and 73% discount to the Global Chemical Universe PE of 15x.

The company is anticipated to post earnings growth of 51% in FY13 and the stock price has already doubled during the same period. “We feel there is more potential of re-rating, as the capacity utilisation improves,” the report says.

Published in The Express Tribune, July 6^th, 2013.

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