THE plunge in global oil prices has proved a boon for AkzoNobel Pakistan, one of the country’s premium paint manufacturing companies, as its operating profit spiked by a hefty 27pc to Rs187m in the first quarter of the ongoing year to March from Rs147m a year ago.
This was in spite of a 26pc rise in the selling and distribution costs, primarily on account of a higher media spend and promotional schemes to increase the brand pull and secure bigger sales volumes, to Rs274m from Rs217m during the first quarter.
Besides a significant drop in the firm’s spending on raw and packaging materials on lower oil prices, growing sales (net sales were up by 9pc to Rs1.25b) due to a favourable product mix and 15pc cut in the administrative and general expenditure also helped control the growth in its cost of sales to just 2.3pc and spike its earnings.
The earnings per share were up by 23pc to 2.99.
AkzoNobel Pakistan is relatively a new entity created after AkzoNobel N.V. — which had bought ICI Pakistan in 2008 — decided to restructure its interests in ICI by separating its paint business into a new company through a scheme of demerger in 2011.
The remaining businesses of ICI were sold. This strategy seems to have delivered as producer of Dulux paints has almost doubled its (net) sales to Rs4.93bn and grown operating profits by 332pc to Rs671m in four years to 2015.
The present size of the decorative paints, surface coatings and special chemicals market is assessed to be roughly at Rs30bn
The breakup value of the company’s share (with surplus on revaluation) is though down to Rs62.03 from Rs129.03 in 2012, the year it was listed on the stock exchange, owing to the management’s decision to distribute the settlement proceeds of Rs3bn, the paint maker had received on account of demerger from ICI Pakistan, as dividend among the shareholders. ICI Omicron, a wholly-owned subsidiary of AkzoNobel N.V. — more than 300-year old Dutch company — holds75.81pc shares in AkzoNobel Pakistan.
“The management considered these funds surplus in view of the business prospects and future cash flow requirements of the newly formed entity … and announced a special non-recurring, one-off dividend of Rs76.10 per share in February 2013,” the company management said in response to an inquiry by Dawn.
AkzoNobel Pakistan controls almost a quarter of the market share of decorative paints, performance coatings and special chemicals. It’s the largest seller of the decorative paints in the country.
The company’s chief executive, Jehanzeb Khan, said the growth in his company’s earnings was consistent with the rise in the profitability of the industry. He was also candid to admit that the plunge in the global oil prices had played a crucial role in the firm’s surging profitability during 2015 and the first quarter of the ongoing year. But, he contended, the value addition in the products and higher turnover (which was 4pc greater than the previous year) had equally contributed to the company’s increasing profitability.
Though he refused to give size of money spent on media advertisement and promotional schemes, he said the amount was significant. “It is because of increase in media spend and promotions that the firm’s selling and distribution expense grew by almost a quarter during 2015. You cannot retain volumes unless you reinvest in the market,” he concluded.
Jehanzeb Khan, who had mostly remained associated with ICI Pakistan since 1983 before taking charge of AkzoNobel Pakistan in 2012, said no credible estimates of the country’s paint market were available.
“The present size of the decorative paints, surface coatings and special chemicals market is assessed to be roughly Rs30bn. The growth in the market size depends on expansion in the economy and investment in industry. With the per capita consumption of paints and coatings standing around half litre in Pakistan compared with 10 litres in Europe, five litres in the Far East and 6-7 litres in the Middle East, and half of the country’s population not part of this small market, you can imagine the growth potential of this industry,” he insisted.
The growth potential notwithstanding, the company does not plan any new capital investment in the foreseeable future. “The market size will be growing by 5-10pc annually. For this kind of incremental growth we do not require any capital investment to expand production capacity. We can easily claim our share in the growing market through increased efficiency,” Jehanzeb Khan argued.
According to him, simple improvements in technology, processes, planning and forecasting were sufficient to maintain and boost sales volumes in the slowly growing market. “There is no reason for us to make capital investment right now. But we are confident that AkzoNobel N.V. is committed to support us (for capacity expansion) when the time arrives.”
In response to a question, he said what distinguished his company from other paint makers in the country was its focus on environment and sustainability. “This philosophy is important to us despite the fact that it makes us more expensive than our competitors.”
Published in Dawn, Business & Finance weekly, May 9th, 2016