Carpe Diem: Sitara Chemicals looking to raise up to Rs3 billion

Hopes to lower fuel costs and expand operations .

KARACHI:

Sitara Chemical Industries Ltd is planning to raise up to Rs3 billion through both the sale of convertible bonds and the sale of the company’s un-utilised land located in Faisalabad. In the statement issued by Sitara to the Karachi Stock Exchange on Tuesday, the land is to be sold at a starting point of Rs1.547 billion for the development of alternate fuel sources and “future expansions and other requirements.” This step is to be taken simultaneously with the sale of bonds with Rs1 billion, with a green shoe option of Rs500 million, the company is hoping to raise somewhere between Rs2.5-3 billion.

These announcements come at a particularly good period for Sitara, which specialises in the production of caustic soda, and whose main market is textile companies. Growth rate has been at 64% profits going up from Rs461 million in 2012 to Rs756 million in 2013.

However the company wasn’t always doing so well. These recent steps to look for more fuel have to do with the troublesome year 2011.  Sitara Chemicals is based out of Faisalabad, but with the power crisis affecting the Faisalabad Textile Industry, Sitara had to look south. The problem was not only was Sitara up against Engro Polymer and Chemicals Limited, which is based in Karachi, but its costs also went up simply due to transportation. The freight cost, combined with a gas supply shortage and only one eight megawatt gas fired power plant severely hampered Sitara’s production process.



The company took steps to resolve the issue. It deleveraged its balance sheets, with outstanding debt in 2009 at Rs2.79 billion dwindling to Rs0.94 billion in 2013. It was also helped with the new discount rate of only 9%. Exports to India, which account for 8% of sales, have seen a boost with the new government’s trade relations with India. The revival of textile industries in northern regions due to the new energy plan has also helped. Finally moving part of the energy production to coal fired boilers has also helped reduce costs.

Yet the fact is that even with new markets and less debt, Sitara still has to solve the long- term problem of where to get (cheap) extra fuel. The main reason for the decline in caustic soda productions since the fiscal year 2010 was electricity shutdowns. Fuel and power account for 37% of all costs, the single largest factor. Even with resumed electricity and gas supplies, in the most recent quarter Sitara faced a 50% reduction in earnings due to the winter season’s gas shortage. Clearly, Sitara still needs to prepare for the worst.

And for the first time is now in a position to do so. Its annual profit rose by 38 % in the last fiscal year. The raising of Rs3 billion in convertible bonds suggests the company is feeling pretty comfortable. Currently the price of stock at the KSE is Rs 03.45, with an 11% increase in price since December 2012. (This lag behind the market has to do with the fact that most of Sitara’s stocks are illiquid.) And the sale of Sitara’s un-utilised land for fuel suggests a more long-term goal to find more fuel and reduce costs; presumably so as to not end up in the position it was facing in 2011.

Published in The Express Tribune, July 11^th, 2013.

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