AkzoNobel Pakistan (PSX: AKZO) has posted lackluster results with the modest growth in the top-line being offset by a higher cost of sales for the first half of this calendar year. This trend is expected to carry for the rest of 2018.
Increase in cost of sales was the result of higher raw material prices, primarily due to currency devaluation. Price increases were announced on most of the product lines but margins continued on their downward trajectory as cost increases were not fully mitigated by pricing.
In part, higher prices resulted in the single digit growth in sales. Increase in demand for tractor segment may have led to a slight volumetric increase in the top-line. New product launches and ongoing customer development also supported net revenue. In terms of product development the Dulux Promise range was introduced to increase share in the mass market segment as it includes primer and putty along with interior and exterior emulsions.
Sales generated by the metal coatings range and to energy and infrastructure projects contributed in preventing a further dip in profits. This included the recently inaugurated Haveli Bahadur Shah Power Plant project for which AkzoNobel supplied various paint and coatings solutions.
Regulatory duty on key raw materials was another factor because of which AkzoNobel's 1HCY18 profits were lower than the same period last year. Though all multi-national competitors increased their prices for some products at least, presence of the informal sector prevented a steeper rise in its prices. Higher activity in the unorganized segment through more discounts and lucrative incentives intensified competition in the sector, requiring a large advertising and publicity budget which comprises of its highest overhead.
Nearly a third of AKZO's net profit comprises of other income in the form of profit on short-term and call deposits, scrap sales, provisions, and profit on disposal. Increase in interest rate may have resulted in higher returns on short-term deposits.
2017 was a good year for AkzoNobel with revenue and profits posing double digit growth. 2018 however is not shaping up in the company's favour. While tractor production is growing, slowdown of infrastructure projects as the country struggles to stem its deficits may impact its specialty chemicals segment which was a major driver of profits last year. Having said that, as part of its parent company's strategy, the separation and sale of its specialty chemicals business into a legal entity is underway.