Originally set-up as a Trading House for ICI – UK, Chemical Industries Colombo (CIC) has pursued a policy of planned growth which has resulted in its diversification into a number of fields over the years. The company grew into agriculture, paints, pharmaceuticals, industrial raw material and packaging dwarfing the chemical business.

CIC Agri Businesses, the biggest contributor in terms of revenue and earnings to the group (a near 70%), comprises of companies that provide inputs to the agricultural sector. The construction sector is effectively CIC’s paints and surface coatings business (includes the flagship brand Dulux) which is under the group’s associate Akzo Nobel Paints Lanka. CIC’s quoted subsidiary Chemanex is a manufacturer and marketer of chemicals and industrial intermediates. The pharmaceutical business markets products from principals like Johnson & Johnson, Hilton Pharma and Solvay Pharmaceuticals and sells products from prescription drugs to diagnostic equipment to hospitals.

CIC reported a 1,635.2% YoY growth in net earnings to LKR327.2 mn during 3QFY10
whilst the 9 months too has grown 20.9% YoY to LKR478.3 mn. CIC’s 3QFY10 profits
have been driven predominantly by the key agriculture and livestock sector (EBIT up
242%YoY) coupled with 658.9%YoY increase in other income and improved contribution from the construction sector (EBIT up 180% YoY). The consumer and pharmaceutical sector along with packaging segment has weathered a challenging period where the EBIT contribution from these segments dipped 37% and 5% respectively whilstthat of the industrial raw material sector grew by 57% YoY.

Quarterly performance at a glance
CIC’s turnover grew by 45.1% YoY to post LKR4,816.02 mn in 3QFY10, boosted by higher turnover in the key agriculture and livestock segment(up 62% YoY) mainly due to improved performance in the seed and livestock business. The paints segment (inputs to Akzo Nobel Paints Lanka) (up 41% YoY) witnessed a substantial improvement with previously cash strapped consumers now gradually willing to spend on non-essentials. Revenue from consumer and pharmaceutical segment has grown by 21% YoY whilst that of industrial raw material dipped by 21% YoY due to the global economic downturn where demand for paints related raw materials, rubber and textile binder related materials was still sluggish. The packaging sector dipped (1% YoY) marginally signalling the improvement in the previously deteriorating market conditions.

Cost of sales (up 30.9% YoY to LKR3,827.9 mn) have also increased inline with the rise in turnover levels whilst Gross Profit increased by an impressive 150.1% YoY to LKR988.1 mn. Further, the gross margins have improved to 20.5% in 3QFY10 (vs 11.9% in 3QFY09) due to the group’s efforts on retooling the value chain.

Consequently, despite a rise in administration expenses by 38.9% YoY to LKR361.5 mn and distribution costs by 15.2% YoY to LKR235.8 mn, operating profit grew to an impressive LKR391.6 mn (vs a loss of LKR131.5 mn in 3QFY09). CIC’s main operational counters witnessed a significant growth in operating earnings. Accordingly, operating profit from the Agriculture segment grew 242% YoY to LKR275.6
mn whilst the construction sector posted LKR24.9 mn (vs a loss of LKR31.3 in 3QFY09).

The Other income has grown to LKR292.5 mn vs LKR38.5 mn posted in 3QFY09 mainly due to LKR250 mn released by the government as subsidy payments for Fertilizer sales during November’08 – March’09.
On the back of a flat macroeconomic milieu the Packaging sector too dipped 5% YoY to LKR20.7 mn. Meanwhile operating margins grew to 8.1% during 3QFY10 compared to -3.9% during the corresponding previous quarter.

CIC’s share of profit from associates has dipped 16% YoY to LKR56.5 mn in 3QFY10 on the back of the dip in profitability of construction sector (Akzo Nobel Paints Lanka).

Overall, CIC’s EBIT has witnessed an unprecedented growth to reach LKR740.5 mn in 3QFY10 (vs LKR(21.2) mn in 3QFY09).

Finance cost during the quarter dipped by 20.4%YoY to LKR139.2 mn mainly on the back of dip in interest rates. Subsequently, the Profit Before Tax has rocketed to LKR601.3 mn in 3QFY10 vs a loss of LKR196.1 mn in 3QFY09.

3QFY10 net earnings have reported a sharp increase to reach LKR327.2 mn (vs a net loss of LKR21.3 mn in 3QFY09) where net margins are at 6.8% in 3QFY10 compared to -0.6% in 3QFY09.

Agri business to propel growth?
CIC Agri Businesses, the biggest contributor in terms of revenue and earnings to the group (circa 70%), weathered a challenging period where the off take in crops was slow. Looking ahead, revival in agriculture is expected to propel earnings growth in the future. Whilst agribusiness remains the company’s key sector, CIC has acted to diverse its agri-revenue streams thereby reducing exposure to weather shocks. CIC
is positioned to successfully reap benefits from the changing macro environment of the country where we believe the company is to benefit significantly from an anticipated revival in the agribusiness sector specially stemming from the previously war torn North. CIC has already ventured into the recently liberated Eastern province with two large dairy farms. The expansion projects in the sector (banana export project
in the Eastern Province, 2,200 acre large scale dairy complex at Mutuwalla in East, Rice exports, etc) would be an added bonus, once the benefits materialize.

With the much anticipated economic integration of the previously war torn North & East and the untapped potential in these areas along with an extension to its out grower network we believe CIC agri business is prime to benefit in future.

The Construction business is effectively CIC’s paints and surface coatings business which comes under the group’s associate company Akzo Nobel Paints. CIC is into decorative, vehicle refinishing and industrial paints segments where 80% of the revenue comes from the decorative sector. CIC has a near 40% market share with paints under the brand names such as Dulux and Glidden targeting different income levels.The paints and coatings business had a turbulent period with circa 5% to 10% volume dip due to harsh market conditions. However, once fresh investments, rehabilitation activities and infrastructure developments commence in the North and East there would be enormous scope for growth.

The Consumer & Pharmaceutical and Industrial Raw Material businesses are also expected to witness a turnaround in FY11 with improved global economic environment.

Positive Outlook
Forecast FY 10E net profit to rise 42.9% YoY to LKR583.0 mn. On the back of improving economic conditions and anticipated payoffs from the new projects we revise the FY10 (which had a poor 1HFY10- net earnings LKR151 mn)) forecast upwards by 11.3% to LKR583 mn (up 42.9% YoY). With the group’s plans for growth, retooling of value chain and diversified risk we expect CIC to enjoy a 32.5%growth in earnings to reach LKR772.5 mn in FY11E.

The voting counter trades at 10.4x FY10E earnings (7.9x FY11E) and the non-voting counter trades at 6.5x FY10E earnings (4.9x FY11E) whilst trading at discount to market. Despite the current economic turmoil domestic growth would be observed from the vast potential in the North & East especially in the agriculture and paints sectors.On the back of prospects of steady growth along with growth stemming from agriculture in the long term and untapped potential in the North & East, we maintain- BUY.

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