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FM Project Archroma Final

Archroma Pakistan Limited is a Pakistan-based color and specialty chemicals company. It saw a large increase in working capital in 2020 after maintaining negative working capital for the previous three years. The company's debt-to-equity ratio has been rising over the past five years, reaching its highest point in 2020, though it remains lower than the industry average. The company's dividend payout ratio has been decreasing in recent years and is currently 87.54%, reflecting lower profit margins.

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Rameen Nadeem Iqbal
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157 views10 pages

FM Project Archroma Final

Archroma Pakistan Limited is a Pakistan-based color and specialty chemicals company. It saw a large increase in working capital in 2020 after maintaining negative working capital for the previous three years. The company's debt-to-equity ratio has been rising over the past five years, reaching its highest point in 2020, though it remains lower than the industry average. The company's dividend payout ratio has been decreasing in recent years and is currently 87.54%, reflecting lower profit margins.

Uploaded by

Rameen Nadeem Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Archroma Term Report

A rchroma Pakistan Limited (ARPL),


formerly Clariant Pakistan Limited, is
a Pakistan-based colour and specialty
chemicals company.
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A Rs.1400million increase in working capital (2020) after a steady average working capital of negative
Rs.1400m for the last 3 years. It is also important to note that the company started off with a negative
beginning cash balance for the year 2019 for the first time in the last 5 years due to the repayment of a
previous debt and the interest charges on it.

-Changes in capital structure.


Changes in the capital structure are dependant on the company’s decisions to secure it’s financial position
through the type of security used and the ratios of those securities. Ie:
Their debt to equity ratio has increased from 38.7% to 58.4% over the past 5 years which is lower than the
industry avg which is 116% but still shows an increase. The ratio has shifted between 30% to 57% since the
past few years, reaching its highest point in 2020.
https://simplywall.st/stocks/pk/materials/kase-arpl/archroma-pakistan-shares#:~:text=Debt%20to%20Equity
%20History%20and%20Analysis&text=Reducing%20Debt%3A%20ARPL's%20debt%20to,over%20the
%20past%205%20years.
Shares: Over the past 4 years up to 2019, the sales per share had been increasing but saw a drop in 2020 by
13.34% for the first time. The reason for this is the increase in the price to sales in 2020.
The nature of the business and being an MNC has meant that the company relied on its shareholders mainly
for the finance and since the the operations of the business were being handled from it’s headquarters
directly. The shift towards more debt can be explained by the turbulent textile sector and the way it was
impacted in the last year due to covid. The high average means that other player have been more open to the
idea of borrowing for company finances.
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-Whether or not the current structure of firm is optimal according to nature of business,
industry and would it want to maintain that structure. Comparison with rest of the
industry.
The current nature of the firm isn’t optimal yet as its debt to equity ratio for MRQ is 52.94%
compared to the industry’s average ratio of 116.07%. There have been noticeable change sthat
have been made to move towards a lower WACC in 2020 that has shown an increase in the debt
to equity ratio of the company but hasn’t quite yet gotten close to what it ideally should be. It
should maintain this path and lower the return on equity even further as it still surpasses the
industry average by 5%.
The overall performance of the company has fallen in comparison to the year 2019. The revenue
and gross profit showed slight decreases but the operating income and net income have decreased
by a larger margin. This is reflective of the shift in the statement of financial position by taking on
a larger debt and decreases the assets and share holder equity which would eventually help the
company reach their optimum capital structure. The changes in cash flow have been unstable, ie:
negative net change in cash for the years 2017 and 2018, a rapid shift exceeding the level of cash
in 2019 and then a slightly decreased but balanced level of income for the year 2020. The
instability in the cash flow was seen in the dividend yield for the years 2016 to 2020.
Companies often operating in risky business reach their point of optimum capital very quickly
since their graph of WACC rises and falls steeply. However, for stable companies in business that
are staple services.
The change in overall liabilities of the firm hasn’t changed as the increase in non current assets
and decrease in cash in the year 2020 was due to the large issuance of retirement of debt and the
increase in long term debt to move towards a lower WACC eventually.
Comparison: In comparison to two companies, one somewhat larger than Archroma and one
smaller, to get a better understanding of where our company stands since the market that they
operate in does not have a competitor having the exact same size. https://www.wsj.com/market-
data/quotes/PK/XKAR/ARPL/financials
Dawood Hercules Corporation (Much larger in size compared to Archroma):
Stock price of Rs.114
Market Cap 52.208Billion
Dividend per share Rs.9

Total Debt to equity 346.67%


Archroma Pakistan Limited:
Stock price of Rs.556
Market Cap 18.98Billion
Dividend per share Rs.30

Total debt to equity 61.02%

Compared to Dawood Hercules, Archroma is a firm that hasn’t been around for too long and
doesn’t have the privilege of being well known amongst bulk buying stakeholders who are willing
to compromise on quality for costs. For that reason, most other local firms perform much better in
comparison to Archroma in the Pakistani market.
-The factors considered in making financial decisions.
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Previously the main motive seemed to be the best interest of the shareholders and has now shifted
to stabilising its position in the market hence the increase in the debt and decrease in shareholder
equity.
Apart from that, Archroma makes most investment decisions based on the projection of the textile
industry and ventures mostly towards equipment that is sustainable and environmentally friendly.
Since it is an MNC, its goals and objectives are not exactly tailored to the Pakistani market but
are yet dependant on it. Their main focus is on innovation, which explains the increase in long
term assets in 2019 in line with their goal to decrease water consumption and become more
efficient in terms of electricity usage as well. An example of this can be the 2023 project that
pledges to increase sales by 35% through these methods. Their long term goals are pre defined
and rigid despite facing losses, as was seen in the financial year of 2015.
https://finbox.com/KASE:ARPL/dividends
https://sourcingjournal.com/denim/denim-mills/archroma-chemical-dyes-sustainability-report-2023-targets-
water-waste-management-243650/
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-The dividend policy of the company individually and in comparison with industry.
(dividend yield)
For Dawood Hercules: Dividend yield 7.8%
For Archroma Pakistan: Dividend yield 5.4%
Industry Average: Dividend Yield 7.7%

https://www.investing.com/equities/archroma-pak-ratios
Important to note that till 2020, Archroma was able to keep up with the industry average but in
unlike much larger companies, wasn’t prepared for the effects of the pandemic and was hit
severely since their main buyer was the textile industry whereas other firms had ventured into
multiple types of health care chemicals and agricultural chemicals. Since the textile industry has a
direct affect on them, they cut down on the dividends paid and have maintained the same levels
till now.
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-Relation of company’s FCFF and dividends.
The FCFF of the company currently stands at 1.62B and has seen an increase due to the increase
in debt. The last time this has happened was in 2016 when the number of shareholders were
significantly lower to compared to 2020. The company requires Free cash flow in order to fund
the dividend payouts and to be making a profit each year. This can be understood by the variation
in the payout ratio discussed in question 2.
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-Factors considered before deciding dividends & Is the payout consistent? Why is the
payout changing? -Conclude with dividend payout ratio.
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Referring to picture above, we can see that the pay out ratio has not been consistent over the past
years but has been slowly decreasing since the past 3 years. The payout ratio of a company
depends on the state of liquidity of the company, the retained profits of the firm and the cash flow
of the company. Here we see that the payout ratio is reflective of the profit margin that the
company has had. Currently the dividend payout ratio of the company is 87.54% whereas the
highest point in the past 5 years was in 2016 at 119.01% which shows that the company is not
performing well.
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