The stock of paints and speciality chemicals major ICI India has been attracting a lot of interest on the bourses. Since its low in June, the stock has been on an ascent -- it has gained around 57 per cent since then, against the Sensex gain of 47 per cent for the same period. What has brought the stock in limelight seems to be the restructuring initiative that the company has undertaken.
ICI India is a 51 per cent subsidiary of ICI plc, UK. In line with its parent's strategy of greater focus (the parent has divested from over 50 activities since 1997), even ICI India has streamlined its portfolio over the years.
The company is now looking forward to focus on only its core business -- paints and chemicals. As a part of its restructuring exercise, the company has hived off, what it feels were its non core businesses. This year itself, the company has done away with two businesses -- Uniqema and more recently, Quest.
Getting focussed
Late last month, ICI, UK, divested from Quest, its flavours and fragrances business to the Switzerland-based Givaudan Group. In India too, ICI had a presence in this business through its subsidiary Quest India, which will be sold to Givaudan. ICI will get at least Rs 390 crore (Rs 3.90 billion) for this divestment. The deal should be completed in the next quarter.
Quest India was established as a joint venture between the ICI Group and Hindustan Lever (HLL) in 2001. ICI India acquired HLL's 49 per cent stake in May as per the joint venture agreement and later acquired the remaining one per cent that was held by a group company of ICI, UK, making Quest its wholly owned subsidiary.
In FY06, Quest India reported sales of Rs 116.33 crore (Rs 1.163 billion) and a profit of Rs 7.74 crore (Rs 77.4 million). Thus the consideration that ICI India would receive is 2.7 times FY06 sales, which is a good price. ICI had to invest around Rs 209 crore (Rs 2.09 billion) in Quest for which now it's getting 87 per cent more than what it has invested over the past five years.
Earlier this year in June, ICI India sold its surfactant business -- Uniqema -- to the UK based Croda group for Rs 260 crore (Rs 2.60 billion). Prior to this, the company sold its rubber chemical business to the PMC Group, nitrocellulose and international trading businesses to private equity player CDC and the pharma business to Nicholas Piramal India. ICI India had also sold its majority stake in its explosives business to Oreca.
Now, the company is left with only the paints and chemicals businesses (National Starch and Chemical Company). Paints accounted for 67 per cent of FY06 revenues and National Starch brought in 9 per cent.
Uniqema and Quest, which were disposed off this year, together chipped in Rs 259.33 crore (Rs 2.593 billion) or about 24 per cent to FY06 revenues (assuming 100 per cent of Quest revenues went to ICI). Henceforth, the company will be devoid of these revenues.
The core business
Analysts are seeing good demand growth in the paints business owing to factors like a boom in the construction space, anticipated growth in automobile sales and higher repainting.
ICI has a presence mainly in the decorative segment with brands like Dulux, Duco and Weathershield under its fold. The company has a 13-14 per cent share of the market and ranks third in terms of market share.
ICI expects the paints market to grow at around 12 per cent for the next three-five years and the company's paints segment to grow at around 15 per cent.
The growth of the chemicals division is aligned with the growth in the FMCG sector and the overall GDP, both of which are growing rapidly. The company expects even this segment to grow at 15 per cent.
Therefore annualising the half yearly numbers and assuming a 15 per cent growth rate, the company should report sales of around Rs 960 crore (Rs 9.60 billion) -- from paints and chemicals -- in FY07 and Rs 1,100 crore (Rs 11 billion) in FY08. Assuming that the Uniqema business grows by 10 per cent and Quest revenues grow at 15 per cent, together they would have contributed about Rs 300 crore (Rs 3 billion) each year to ICI revenues.
Money in the bank
While the company is strengthening its focus on its core business and in the process has generating a lot of cash for itself that will aid it in its expansion plans, one thing that is left to be answered is, will the company be able to make up for the lost revenues due to divesting?
In September, the company had announced that it has around Rs 1,500 crore (Rs 15 billion) available for expansions. At that point of time, the company had Rs 500 crore (Rs 5 billion) available in cash and had the capacity to raise another Rs 1,500 crore. The Quest sale will add another Rs 390 crore to this cash. The total resources now available for the company are nearly Rs 2,000 crore (Rs 20 billion) as per company sources.
For shareholders, what ICI does with this cash will make all the difference. Like many other MNCs, there are no debts to be repaid. Will it grow its business through acquisitions or a greenfield project?
The company had talked of both, organic and inorganic growth earlier, to increase its market share. But at present, the company has not announced its plans. Senior company officials say that they are looking at de-bottlenecking capacities at existing facilities first, but this does not need much investment.
There is another path it may take -- return cash to investors through a dividend or buyback. In September 2006, the company announced a buyback at a price of not more than Rs 350 and has earmarked around Rs 131 crore (Rs 1.31 billion) for the purpose.
While this buyback is open till September 2007, ICI has not bought a single share yet. While a hefty dividend is a good idea, the market will be happier if the company uses the money to grow the business.
After the Quest sale, the company has Rs 890 crore (Rs 8.90 billion) of cash (before taxes), accounting for 55 per cent of its Rs 1,621-crore (Rs 16.21 billion) market capitalisation (the company is debt-free). Thus, just Rs 731 crore (Rs 7.31 billion) of its market cap is expected to generate an EPS of Rs 14 in FY08.
If the company is able to achieve the same returns for the Rs 890 crore cash that it holds, the earnings of the company would rise by another Rs 17-18. Then the stock would trade at just 12 times its estimated FY08 earnings making it an attractive buy. This is possible if the company manages an acquisition at a reasonable price.
