So who needs drugs?

Imperial Chemical Industries seems to be coping well with the loss of its tag as the bellwether of British industry.

Shorn of Zeneca, its hi-tech, high-growth pharmaceuticals business after a demerger in 1993, its dull commodity-type markets seemed to offer little excitement and the way ahead looked like a long, arduous slog. Nevertheless, the Zeneca move was masterfully timed to coincide with the crest of the chemicals industry cycle. So fears that ICI would be unable to keep up speed sans Zeneca appeared to be unfounded.

Just recently, however, those concerns have resurfaced: what does the company do to offset a downturn in its main markets, without the cushion afforded by pharmaceuticals? The problems were highlighted in April by the decision to postpone a pounds 200m investment in a Tyneside plant for the polyester intermediate PTA, following a weaker-than-expected set of first quarter results.

Profits fell 9 per cent to pounds 202m, while sales inched ahead 3 per cent to pounds 2.57bn. Hopes for better figures were dashed by European client industries running down their stocks of goods rather than replenishing them, which hit many firms. Prices for polyester, a star performer in 1995, were under pressure. Growing worries over polyester, especially, have been enough to send the shares into a tail spin and wipe out the strong rise from the end of 1995. On Thursday, the next set of interim figures are only likely to confirm the pessimists' fears.

Despite these dampeners, the restructuring begun by former chairman Sir Denys Henderson has brought huge efficiency improvements. For Charles Miller Smith, who moved into the chief executive's chair last year after 31 years at Unilever, the central aim will be industry leadership in the company's chosen markets. ICI, already the world's number one in paints, consolidated its position with the purchase in March of Bunge, of Brazil, for pounds 255m. A virtually debt-free balance sheet means the company can still afford more hefty acquisitions.

Mr Miller Smith has also set tough financial targets, the most onerous being a 20 per cent return on net assets (Rona) over the length of the business cycle. Some businesses - such as paints - will produce returns of 30 per cent occasionally, he explained. But it is the average for the group's entire product range which matters.

The magical 20 per cent figure, however, has yet to be realised. In 1995, Rona hit around 18 per cent, and that at the peak of the cycle. Even so, the target gives investors a clear measure of ICI's ambitions and its desire to look after shareholders. Dr Peter Blair, an analyst at Salomon Brothers, who rates the shares a buy, says: "We consider the target tough but feasible for the longer term." A Rona higher than the company's cost of capital also shows the business is creating value for investors.

The targets are tough but Mr Miller Smith has won the confidence of his senior managers. His background in consumer goods and his focus on serving customers better has gone down extremely well in the divisions.

ICI is also coming to terms - quicker than many of its European counterparts - with the emergence of important new markets in Asia and Latin America. A quarter of its sales now go into Asia and the Pacific. ICI has also embarked on a big overseas expansion drive, with 21 per cent of its production located in this region. Alongside well-established operations in Australia, India and Pakistan - the old Commonwealth connection - it has expanded into Japan, Taiwan and China. It has promised to spend pounds 650m in China, including a pounds 6.5m polyurethane plant which went into production last month.

Closer to home, Mr Miller Smith has put costs under the microscope. He hopes to make pounds 400m in further annual savings, which will see further job losses in the UK, and in the United States' paints and explosives divisions.

Analysts predict a further 7,000 jobs going over the next few years, out of a 65,000-strong workforce. And the company has begun to examine every aspect of its businesses, from purchasing to sales, to see how it can squeeze out further cost savings. One problem is that margins at its US competitors tend to be much higher. This "value-gap" project, as it has been dubbed, will try to correct this shortcoming.

Even if only half of Mr Miller Smith's plans come to fruition, ICI will be a changed company. Leaner and more resilient, it will have recovered some of the ground lost to its German and US rivals.

Over the next year or so, the share value is likely to be held back by weakness in the company's industrial chemical markets. But if ICI can improve its ability to ride out the vicissitudes of its cyclical businesses, investors should reap substantial rewards as well. Given a strong balance sheet, and continuing management ambition, the shares are a long-term buy.

ICI

Share price 794p

Prospective p/e 11*

Gross dividend yield 3.5%

Year to 31 Dec 1994 1995 1996* 1997*

Turnover pounds 9.19bn pounds 10.27bn pounds 10.77bn pounds 11.32bn Pre-tax profits pounds 408m pounds 927m pounds 968m pounds 1.112bn

Earnings per share 26p 74p 77p 89p Dividend per share 27.5p 30p 31p 34p

*Salomon Brothers forecasts