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ICI Pakistan Limited

Annual Report 1997

CONTENTS

COMPANY INFORMATION

Board of Directors

Desmond O'Shea

(Chairman)

Munnawar Hamid

(Chief Executive)

A Razak Dawood

Barry Hallam

M J Jaffer

Razi-ur-Rahman Khan

Azhar A Malik

Rashiq Sufi

M Nawaz Tiwana

Ijaz Ahmad

(Alternate Director to Desmond O'Shea)

Audit & Remuneration Sub-Committees of the Board

Audit Sub Committee

Senior Remuneration Sub Committee

M J Jaffer

M Nawaz Tiwana

(Chairman)

A Razak Dawood

Desmond O'Shea

Desmond 0'Shea

Munnawar Hamid OBE (by invitation)

Azhar A Malik (by invitation)

Ian D Black

(Group Chief Internal Auditor - by invitation)

General Managers

S Imran Agha

Ijaz Ahmad

Abid Aziz

J S Butt

Waqar A Malik

John D Mehta

Jehangir B Nawaz

Khalid B Osmany

Company Secretary

Nausheen Ahmad

Bankers

ABC international Bank Plc

Habib Bank Limited

ABN.AMRO Bank NV

Habib Credit & Exchange Bank Limited

A1 Faysal Investment Bank Limited

Habib Bank AG Zurich

Allied Bank of Pakistan Limited

Muslim Commercial Bank Limited

American Express Bank Limited

MashreqBank psc

ANZ Grindlays Bank Limited

Midland Bank plc

Askari Commercial Bank Limited

National Bank of Pakistan

Atlas Investment Bank Limited

National Development Finance Corporation

Australia & New Zealand Banking Group Limited

Oman International Bank

Bank Al Habib Limited

ORIX Investment Bank Pakistan Limited

Bank of America NT&SA

Pakistan Kuwait Investment Company (Private) Limited

Citibank NA

Societe Generale, The French and International Bank

Credit Agricole Indosuez

Soneri Bank Limited

Crescent Investment Bank Limited

Standard Chartered Bank

Deutsche Bank

The Bank of Tokyo-Mitsubishi, Ltd

Emirates Bank International PJSC

The HongKong & Shanghai Banking Corporation Limited

Faysal Bank Limited

United Bank Limited

Auditors

A F Ferguson & Co

Registration Office

ICI House, 5 West Wharf, Karachi-74000

STATISTICAL DATA

Year at a Glance

Rs Million

1997

1996

Turnover

8,472

8,152

Profit before taxation

223

814

Taxation

Current

134

Deferred

138

Profit after taxation

117

542

Dividend

325

Gross assets employed (excluding capital work-in-progress)

9,074

7,834

Paid-up capital

7,886

1,856

Shareholders' equity

9,436

9,304

Earnings per share after taxation and before exceptional items - Rupees

0.21

2.92

Earnings per share after taxation and exceptional items - Rupees

0.15

2.92

Number of employees

1,929

1,835

Report of the Directors for the Year Ended 31 December 1997

The Directors take pleasure in presenting their Report together

with the audited accounts of the Company for the year ended

31 December 1997.

Subsequent to the changes reported last year,

has vast international experience in

the following changes have taken place on the

manufacturing and engineering with ICI, and

Board during the year.

was General Manager and a member of the

Executive of the ICI/Far Eastern Textile PTA

Dr Mahmood Saeed relinquished office as

JV Company in Taiwan, before joining the ICI

Executive Director upon his retirement from

Pakistan Board.

the Company on 7 July 1997, having served for

over 30 years. This vacancy was filled by the

Mr Irtiza Hussain who had been a Director of

appointment of Mr Barry Hallam from

the Company for the last six years, resigned

Imperial Chemicals Industries Plc, UK, with

from the Board on account of other pressing

effect from 1 August 1997. Mr Barry Hallam

pre-occupation, with effect from 18 April 1997.

HONOUR

"During Her visit to Pakistan in October 1997, to celebrate the 50th Anniversary of Pakistan's

independence, Her Majesty Queen Elizabeth II saw fit to appoint your Chief Executive,

Mr Munnawar Hamid, an Honourary Officer of the Most Excellent Order of the British Empire (OBE).

This honour recognises ICI Pakistan's contribution to industrial growth in Pakistan through

British investment and Mr Hamid's individual contribution towards this objective. It is certain

that all shareholders will join me, the other Directors and the staff of the Company in

congratulating him." -- Desmond O'Shea, Chairman, ICI Pakistan Limited.

As a result of all the changes during the

industrial management and management

year, two new appointments were made to

education, and is also the Vice Chairman of

bring the Board to its full strength of

the National Management Foundation, Lahore,

nine Directors.

and Rector of the Lahore University of

Management Sciences.

Mr M. Nawaz Tiwana, presently Chairman of

the State Cement Corporation, was appointed

The Board places on record its appreciation of

Director with effect from 17 April 1997.

the valuable services rendered by the outgoing

Mr Tiwana has vast experience in aviation

Directors and extends a warm welcome to the

and management and has held the positions

new appointees.

of Managing Director PIA and Chairman Port

Qasim Authority.

In line with the Company's commitment to

good governance, the Board has also

Mr A. Razak Dawood, who is presently

appointed a Senior Remuneration Sub-

Managing Director of Descon Engineering

Committee to overview remuneration policy

(Pvt) Ltd., Dawchem (Pvt) Ltd., Delta

for Executive Directors. The Sub-committees

Industries (Pvt.) Ltd., and a Director of

of the Board for Audit and Senior

Pakistan International Airlines, was appointed

Remuneration met regularly during the year

Director with effect from 18 April 1997.

and submitted their considered

Mr Dawood has vast and varied experience in

recommendations to the Board.

Overview

During 1997, your Company achieved the

· Market shares were increased in Soda

following significant corporate milestones:

Ash, Sodium Bicarbonate, Paints and

Chemicals.

· 15.1 million manhours without a

reportable injury accident, in the

· Portfolios were expanded in Paints,

construction of the PTA project, creating

Chemicals, Agrochemicals and

a new world record in ICI.

Pharmaceuticals.

· 50% improvement in overall safety

· Manufacturing efficiencies were

performance in all Businesses.

improved significantly in Soda Ash and

Paints enabling these businesses to

· Mechanical completion of the PTA

achieve new production records from

project.

existing assets.

· Successful commissioning of the

· Overall turnover was increased by 4%,

Polyester Staple Fibre plant expansion

higher earnings were achieved in Paints,

and its full operational capacity at

Agrochemicals and Chemicals, and the

optimal efficiency.

decline in Soda Ash was very largely

contained.

In trading however, poor GDP growth in the

fiscal year 1996/97, continuing high inflation

However, in spite of the above, it was not

and macro imbalances, created intensely

possible to mitigate the colossal combined

adverse conditions during the first half of the

impact of the difficult trading conditions,

year. In the second half, this was accentuated

and operating profit at Rs 720 million was

by the sharp fall in import tariffs of Soda Ash,

lower than 1996.

renewed customer and Government pressure

on prices in general, and imbalances in some

In an increasingly competitive environment,

downstream customer sectors which

it was also considered appropriate to focus

adversely affected either margins and/or

the Company's business portfolio on areas of

market growth in varying degrees across all

sustainable competitive strength. As a

Businesses. In particular, the Polyester Fibre

result, your Directors considered it prudent

and the Pharmaceuticals Businesses

to close down the Consumer Products and

experienced severe erosion of margin, the

Calcium Carbonate Businesses. An

Soda Ash Business experienced some decline

exceptional provision on account of

in margin as well as a contraction in market

consequent write-offs amounting to

size despite reduction in prices as tariffs fell,

Rs 70.6 million has therefore been made.

and there was also a marginal reduction in

the Paint market size.

Your Directors are pleased to report that

Efforts were singularly focused, therefore,

commercial production from the PTA plant is

on protecting profitability. As a result,

expected to commence by April 1998, and

during the year:

progress on the proposed Joint Venture with

DuPont in this Business is satisfactory.

· Productivity was increased further to

32% over 1995, when the restructuring

programme began.

The Board wishes to express its deepest

appreciation for the hard work and efforts put

· Cost increases were contained across the

in by staff at all levels and the cooperation and

company to much below inflation level.

support of all its customers, distributors and

dealers in a year of unprecedented difficulties.

· Sales volume in Polyester and Paints

were increased by 42% and 6%

respectively.

A detailed review follows.

"...export driven expansion in value added textiles led to an

unprecedented conversion of spindlage from cotton to blended yarn.

As a result, the Business achieved a significant sales volume

improvement of 42% over the previous year."

Polyster

The expanded plant achieved full

meet the APTMA requirement or accept a

efficiency and capacity and demand for

"no duty, no draw back" regime for the

polyester staple fibre also remained

import of PSF, an option with relatively far

strong during the year, as favourable

more serious consequences and therefore

blend economics and export driven

unacceptable. As a result, despite the

expansion in value added textiles led to an

benefits of a 38% reduction in unit fixed

unprecedented conversion of spindlage

costs from economies of scale of an

from cotton to blended yarn. As a result,

expanded plant, including a 12%

the Business achieved a significant sales

improvement in real productivity,

volume improvement of 42% over the

profitability was completely wiped off in

previous year. However, due to intense

the second half of the year, and

domestic competition, as a consequence of

although an operating profit was achieved

persistent overcapacity, relatively high

in the first half, there was an overall

raw material prices, and softening export

operating loss of Rs 206.5 million for the

prices of fibre from Korea, the Business

full year.

suffered an intense erosion in margins

particularly in the second half of the year.

To compound these adversities, the All

Pakistan Textile Mills Association

(APTMA) successfully convinced the

Government on the need for even lower

prices to boost export, which led to

pressure on the fibre producers to either

"... overall turnover of the Business was 2% lower than the previous

year despite the growth in Sodium Bicarbonate sales. However, with a

strict control on costs and improved manufacturing efficiencies, the

decline in profitability was very largely contained and an operating

profit of Rs 615.5 million was achieved"

Soda Ash

The successful commissioning of the

glass, the recession in the silicate sector

40 tph steam boiler and improved

was the result of excessive smuggling of

manufacturing efficiencies helped to

soap, and a gradual shift from laundry

mitigate the adverse impact of the

soap to powder detergents. In these

traditional winter gas curtailment in the

conditions, whereas the Business was

Khewra Works. As a result, production

successful in increasing market share

remained above capacity during the year

through improved customer service and

and reached an all time new record of

loyalty of an established distributor

194,160 tonnes, 2% above the previous

network, sales volume still remained lower

year. This was achieved despite

compared to the previous year. On the

unprecedented rains and heavy floods in

other hand, Sodium Bicarbonate sales

the river Jhelum, which caused a

showed impressive growth and increased

complete plant shutdown for three

market share.

days and curtailed production for several

more.

Since import duty on Soda Ash came down

from 55% to 25%, and prices had to be

The Soda Ash market, for the first time in

reduced by 9% in aggregate during the

years, declined by 7% over the previous

year, overall turnover of the Business was

year on account of recession in the glass

2% lower than the previous year despite

and silicate sectors, which account for

the growth in Sodium Bicarbonate sales.

approximately 50% of the market. While

However, with a strict control on costs and

the contraction in the glass sector was

improved manufacturing efficiencies, the

primarily due to the imposition of sales

decline in profitability was very largely

tax on the beverage industry and

contained and an operating profit of

reduction of duties on imported sheet

Rs 615.5 million was achieved.

"...the Decorative segment was able to increase market share through

new product launches, improvements in existing products and

innovative in-market initiatives. The Refinish segment also consolidated

its market share through improved distribution of its 2-pack system and

entry into the major low-tier sector, enabling the Paints Business as a

whole to achieve a 2% increase in market share over the previous year,

in a reduced market."

Paints

The trading environment remained

the manufacturing processes, enabling unit

sluggish throughout the year as a result of

raw material costs to remain below 1996

political and economic uncertainty.

levels. Margins, as a result, significantly

Consequently, the decorative market size

improved, which together with the

remained static, and demand from the

increased market share resulted in

motors segment, which also suffered from

operating profit for the year to be

an anomalous tariff structure, considerably

significantly higher than the previous year.

weakened, producing an overall decline of

1% in the national paints market. However,

To bring the unorganised sector in line

the Decorative segment was able to

with the organised sector, the 1997

increase market share through new

Finance Bill replaced the fixed capacity

product launches, improvements in existing

tax with a 10% excise duty and 12.5% sales

products and innovative in-market

tax regime. However, in early 1998, the

initiatives. The Refinish segment also

Government reverted to the previous tax

consolidated its market share through

arrangement thereby once again giving the

improved distribution of its 2-pack system

unorganised sector an unfair competitive

and entry into the major low-tier sector,

advantage. In addition, the new tariff

enabling the Paints Business as a whole to

regime currently does not recognise the

achieve a 2% increase in market share over

logical differential required between

the previous year, in a reduced market.

custom duties on major raw materials and

finished paint, which is a fundamental

The effect of Rupee devaluation during the

anomaly, Your Company continues to lobby

year was negated to some extent by the

for the removal of these anomalies to

lower import duties, but very largely

ensure fair competition both locally as well

contained by a significant optimisation of

as against imports.

"Despite difficult trading conditions in Agrochemicals, the strong

performance by Seeds enabled the Business to enhance overall

turnover, which supported by an efficient management of fixed costs

and increased sales force productivity, has resulted in an improvement

in profit over the previous year."

Agrochemicals & Seeds

The Agrochemicals segment was adversely

increased sales force productivity, has

impacted by a delayed pest attack in the

resulted in an improvement in profit over

1997 season. In addition, the liquidity

the previous year.

squeeze in the economy led the industry to

extend credit, as the race for market share

intensified in the traditionally very short

selling season. The Seeds segment, on the

other hand, continued to grow and achieved

a significant increase in turnover despite

widespread unseasonal rains and,

supported by strong farmer education

programmes, maintained its lead position in

the sunflower and fodder hybrid markets.

Despite difficult trading conditions in

Agrochemicals, the strong performance by

Seeds enabled the Business to enhance

overall turnover, which supported by an

efficient management of fixed costs and

"...despite intense competition from cheaper generic drugs, 'Tenormin,'

the Company's leading cardiovascular drug, continued to show volume

growth, as did the anaesthetics and antiseptic groups. Encouraging

growth was also recorded in the two recently introduced drugs,

Meronem (injectable antibiotic) and Zoladex (anti-cancer)."

Pharmaceuticals

Conditions remained subdued and

with the Government's reluctance to

uncertain, due to a combination of

compensate increasing raw material costs

slowdown in the industry, difficult

through price increases for both controlled

regulatory conditions and frequent

and decontrolled drugs, despite the

changes in sales tax regulations.

devaluing Rupee, destroyed overall

profitability,

The Medical segment nevertheless still

managed to increase turnover and despite

Whereas the Business continues

intense competition from cheaper generic

vigorously to control costs and improve

drugs, 'Tenormin,' the Company's leading

productivity, future profitability depends

cardiovascular drug, continued to show

largely on a more equitable Government

volume. growth, as did the anaesthetics

pricing policy and a consistent overall

and antiseptic groups. Encouraging

regulatory and tax framework.

growth was also recorded in the two

recently introduced drugs, Meronem

(injectable antibiotic) and Zoladex (anti-

cancer). In the Animal Health segment, on

the other hand, the combined effects of

reduced farmer buying power, cheaper

generic products and a crisis in the

poultry industry led to a fall in demand.

Overall, therefore, sales of the combined

Business declined in 1997. This together

"...although there were product availability problems with some major

suppliers, the Business managed to increase margins by selling a more

profitable product mix ..."

"...the Business, overall, supported by higher productivity and cost

control, improved its performance over 1996."

Chemicals

With a renewed focus on Textile

Business, overall, supported by higher

Auxiliaries, the Specialty Chemicals

productivity and cost control, improved its

Business was able to increase its market

performance over 1996.

share and improve margins. This, together

with improved productivity, enabled the

Business to achieve a significant increase

in profit over the previous year.

The General Chemicals Business was

significantly benefited by the buoyant

demand for Titanium Dioxide from the

Company's Paints Business. In addition,

although there were product availability

problems with some major suppliers, the

Business managed to increase margins by

selling a more profitable product mix, and

achieved higher sales of NALCO water

treatment chemicals, solvents and nickel

catalysts. Consequently, despite the major

Polyurethanes segment being adversely

affected by a downturn in all major

market sectors, as well as reducing