ICI struggles to stay in trim

IMPERIAL Chemical Industries, formerly tagged by the stock market as the bellwether of British industry, is in many investors' eyes only half the company it used to be.

That is a direct consequence of the demerger of Zeneca two years ago, when ICI hived off its pharmaceuticals operations. The feeling was that the pharmaceutical side was being undervalued as part of the wider group, so it was split off to reveal its true value.

The corollary is that the real value of the rest of ICI was exposed to public scrutiny. And now, as the chemical industry approaches the top of its cycle, the City's analysts are questioning how well the group is positioned to cope with the approaching downturn.

Sir Ronald Hampel, who took over as chairman from Sir Denys Henderson last month, was chief executive at the time of the demerger, and his response to ditching the glamorous pharmaceutical interests was to give the new ICI tough performance standards, claiming that in the 1980s the good businesses had not been driven hard enough.

First he effectively carried out a second demerger, by pulling out of the loss-making petrochemicals and chlor-alkali industries. The remaining parts of the group - paints, explosives and industrial chemicals - were told they had to earn an average return on capital employed of at least 20 per cent over five years. That was to be subject to a minimum of 10 per cent at the bottom of the cycle, implying that they really had to rake in the money in the good times - or else the "for sale" sign would go up pretty fast.

The tidying-up operation shows no sign of abating. Last week ICI paid £180m for Grow Group, the US architectural paints and coatings company, transferred its end-user liquid CO2 business to Norsk Hydro in return for long-term bulk CO2 supply contracts, and went into a joint venture in India with Zeneca to make crop protection products.

Sir Ronald arranged a fine send-off for Sir Denys, with first-quarter figures showing pretax profits more than doubled from £103m to £244m. This deluded some commentators into claiming that at a stroke it justified the Zeneca demerger, but the more cautious analysts took the view that it only heralded the beginning of the real battle.

Charles Lambert, chemicals analyst at Smith New Court, said: "The numbers are being driven up rapidly by the commodity chemicals side of the business, which is deemed least reliable. The more buoyant the numbers, the more the concern about how long that will continue. It makes it hard to see what the future holds."

While this may seem unfair and even curmudgeonly, it is a fact of life in cyclical industries. On the way down it is hard for investors to think of anything else, but on the way up the critics are wondering what happens on the other side of the hill.

As Sir Ronald stepped up to be chairman, so the chief executive's baton passed to Charles Miller Smith, who had previously been beaten in races to run Unilever and Barclays, and joined the ICI board last year.

Mr Miller Smith pointed out: "We are going to do the same as before, but pursued more energetically. ICI has gone through a lot of change in the last five years, but we have concentrated on three themes:

"1 Strong focus on businesses where we can have real competitive advantage by our technology and our position in the market;

"2 Rigorous search for value, building stronger businesses;

"3 Responding to changes in the worldwide market. We are enjoying rapid growth in Asia."

Apart from the relentless search for more productivity and efficiency, Mr Miller Smith wants to add value to some of the products by targeting them at particular specialist markets. In this way he hopes to lift them out of the commodity category and find reasons for raising their prices and squeezing more profit out of them.

As part of that drive, ICI has separated out its car paints business into a strategic business unit, ICI Autocolor, aiming at the world's 500,000 car bodyshops and commercial bodybuilders. They buy £3bn of paint a year in repairing 20 million vehicles, subject to a variety of environmental laws and the varying requirements of the leading car-makers.

That means more intensive training of ICI staff and the repairer-customers, but the payback is fatter profit margins.

As far as the bulk chemical business is concerned, no amount of smart marketing will open the industrial customers' chequebooks any wider. Mr Miller Smith is confident - well, he would be, wouldn't he? - that ICI is pushing efficiencies hard enough to withstand the downturn he agrees is not far off.

He said: "You can't protect yourself wholly, but you can make the business as robust as possible. If you are in genuine leadership positions, it's easier to deal with the downturn."

While the analysts on average expect ICI to improve 1996 profits from £713m to £870m, Mr Lambert's view is that ICI's medium-term fate is out of its own hands, in that it is dependent on the course of the US, UK and Australian economies.

"Given those economies' combined prospects, the outlook for 1996 could be pedestrian," he warned.

The shares should be avoided until the chemicals cycle shows signs of turning up again.

Activities Paints (Dulux, Glidden, ICI Autocolor); materials (acrylics, plastic films, polyurethanes); explosives; industrial chemicals (PET resins, surfactants, catalysts, titanium dioxide pigments, CFC replacements). Share price 745p Prospective yield 4.8% Prospective price-earnings ratio 13.8 Dividend cover 1.9 1993 1994 1995* Turnover £8.4bn £9.2bn £10bn Pre-tax profit £374m £408m £713m Net profit £257m £188m £367m Earnings per share 35.7p 26p 54p Dividend per share 27.5p 27.5p 29p (* forecast)