KARACHI, Jan 12: ICI Pakistan is looking for a senior or junior partner for its PTA business, hit by one of the worst recessions in this line of business, says a top ICI official.
It could be a joint venture partner with equity holding of around 37 per cent at par with ICI Pakistan, or one or two partners acquiring majority stakes. The paid-up capital of the Pakistan PTA Ltd is Rs5 billion. The PTA business was demerged by ICI last year and the new corporate entity is quoted at stock exchanges.
“We are interested in introducing a partner. It can be in the form of a junior or senior partner,” says the newly appointed chief executive of the company Azhar A. Malik. He took over on January 1, 2002.
The $490 million PTA project went into commercial production in June 1998. The plant, located at Port Qasim, Karachi, has a capacity of 400,000 tons. It manufactures Pure Terephthalic Acid(PTA), a raw material used in the manufacture of polyester staple fibre and PET bottle polymer.
Elaborating on the various options for sale of stakes in the PTA business he said: “the ICI Pakistan expanded fibre business, which requires something 20-25 per cent offtake from that project. There is an abiding interest to retain that kind of equity in that business. Twenty-five per cent stake is held by the general public.”
“Fifty per cent or marginally above could be available for sale, it could be one partner or two partners. It could be expansion of ICI’s current holding from current 25 per cent to 37 per cent and bringing in 37 per cent holding to create a joint venture. Those are all options, which will be discussed when a partner emerges.”
Asked whether a senior partner would mean handing over management of the PTA plant, Azhar A. Malik explained “If there is a majority shareholder, they would obviously want to manage the company. Obviously, the work force which has been running the plant and has been in the organization for sometime, would stay in place. Their (shareholders) control would be through the board of directors or the appointment of the Chief Executive. Our present chief executive is a nominee of the ICI. Whether he stays, will be the decision of the partner when he arrives.”
The 50 year old Azhar Malik, a chartered accountant, has been with the ICI for 23 years. He had exposure to ICI business in Western Europe and Asia. He has served as finance manager, ICI, ASEAN group comprising 16 ICI owned companies or joint ventures in Malaysia, Singapore, Thailand, Indonesia and Philippines. In 1990, he was seconded for three years as corporate finance manager for Western Europe for ICI Plc Group Headquarters in London. His assignment was a board support function with responsibility for mergers, corporate restructurings, financial arrangements, dividend policy and investment proposals. Before taking over as CEO, Malik was chief executive of Pakistan PTA Limited.
Since the ICI had expressed its interest for sale of PTA assets for sometime now, the company was in touch with 2-3 prospective partners, but September 11 events had put process on hold for a while. Those people, says company CEO, can’t travel and our people can’t travel.
The latest balance-sheet available for PTA’s nine month business for the year ending December 2000 (as reconstructed under de-merger scheme) shows an allocated loss of Rs6 billion. It has been set off against reserves of Rs963 million and adjusted against Rs5 billion share capital reduction. The accumulated loss has been arrived at Rs215 million.
“There has been some suffering for business” because of what Mr Azhar describes as one of the worst recession in the fibre business and spells out gains made. “Our company has done what it needs to secure itself. Our cost of manufacture has come down from $275 per ton to around $110 a ton.”
He adds: “Even at this uneconomic level of pricing, we are cash positive. We cover our variable cost, fixed cost and depreciation. We are not covering our interest expenses. For this purpose, we are restructuring our company and bringing in additional equity. The amount of that debt and equity and the timing is still under discussion but it would be a significant and such an amount that forecast of profit generation should be sufficient to recover interest expenses as well and we can start seeing reduction in debt year on year.”
The PTA plant achieved a production of 262,500 tons for nine months ending September 2000, up 49 per cent over 1999. Its domestic sales amounted to 196,400 tons. Over 49,000 tons were exported to Far East customers in China, Thailand, Malaysia and Indonesia. The company’s operating loss for nine months was reduced to Rs386.6 million in 2000 compared to operating loss of Rs1608.9 million for the corresponding period in 1999.
While reducing its stakes in Pakistan PTA, ICI has been making investments to strengthen its business. In a period when market demand for its products was contracting, ICI made strategic investments to retain its competitive advantage and its position as market leader. It has improved its market share in a declining business. It is also expanding its capacity in fibre production.
The Rs525 million Khewra soda ash project has been completed on December 31, 2001. It is a mechanical completion. A commissioning engineer from the UK arrived in Pakistan on Thursday. Under the warrantee, says the company CEO, the engineer has to give final blessings to that commissioning.
“It is a small expansion of capacity, there is automation process which is being introduced,” says Azhar Malik and adds “what we see in Pakistan is a recession, a contraction in demand and we are not seeing prices which make new investment possible.” In these circumstances, there is need to strengthen the business and investment is being done with that objective. “They reduce our cost, improve our efficiencies and make our business stronger. These are strategic investments and they are not of expansionist nature.”
The $20 million fibre project is an investment for expansion, which would double the production capacity and is scheduled to be completed by end of February. We are well on track. A team of seven or eight expatriates are carrying out the kind of commissioning that is necessary. The plant will be commissioned in April and on May 1, it will go into commercial production.
On the rationale for making investment in the fibre project ICI Pakistan, CEO explains: “Again this is an expansion in capacity because there is a market for it, market as we plan, even if the market does not grow to the extent we anticipate, this investment was necessary to protect the existing business because it would reduce our cost of business, absorbing this fixed cost on as large base.”
“The fibre industry in Pakistan has matured to a level where you have either a large player or exit, something less than 100,000 tons (production capacity) is not an option. There are two small players who produce 20,000-25000 tons, but their ownership is controlled by families that are looking at cash generation business. In case of multinationals, it has be ensured that you are the market leader and continue to look forward to strengthening your competitive advantage and making investments to strengthen your business.”