Press Release

JCR-VIS Reaffirms entity ratings of Ittehad Chemicals Limited at A-/A-2

Karachi, December 22, 2014: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the medium to long-term entity rating of Ittehad Chemicals Limited (ICL) at ‘A-’ (Single A Minus) and short-term entity rating at ‘A-2’ (A-Two). Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on Mar 18, 2013.

The chlor-alkali sector can be termed as oligopolistic, with three key players; ICL is the pioneer in the industry having installed capacity larger than at least one of the two competitors. Since the advent of Engro Polymers Chemicals Limited, ICL and Sitara Chemical Industries Limited’s reach has been limited to the northern region. Sales volumes were lower for all three players in FY14. ICL’s market share in caustic soda was recorded at 22.5% in FY14 vis-à-vis 23.8% in the preceding year.

The production process for caustic soda, the main product of ICL, is power intensive; accordingly, fuel expenses account for a significant portion of cost of sales; this has however trended down in FY14 on the back of improved gas availability. The company is undertaking capex for multiple projects to enhance fuel efficiency. This includes replacement of the less efficient DSA plant by 75 TPD IEM plant and upgradation of gas fired power plant.

Despite notable decline in power related costs and increase in price of the company’s major products, gross margins declined slightly in FY14 on account of increase in other cost components. In 1Q15, margins have compressed further. Production volumes have also witnessed a decline in the last three years, on account of which fixed costs have to be absorbed by a lower base. Reduction in margins along with higher financial charges has had a negative impact on the company’s profitability and cash flows in FY14.

Over the last year, the company has acquired additional long term debt to undertake capex. Long term debt is projected to increase further in FY15. At current debt levels, principal payments due in the on-going year is expected to be comfortably met by the internal cash generation; meanwhile efficiency enhancements from the planned capex are likely to enhance the company’s cash flows to meet the enhanced debt servicing requirements over the medium to long term.

For further information on this rating announcement, please contact Ms. Sobia Maqbool, CFA at 021-35311681-70 or Mr. Maimoon Rasheed at 042-36610681-84.

Jamal Abbas Zaidi
Deputy CEO

Applicable Rating Criteria: Industrial Corporates (October, 2003)

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