Shield Corporation Limited

Shield Corporation Limited (PSX: SCL) was established in 1975 as a public limited company under the Companies Act, 1913. It manufactures, trades, and sells oral care, baby care products and hygiene products with baby care being the largest contributor to revenue.

Shareholding pattern

As at June 30, 2021, over 74 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, major shareholders are Mrs Kulsum Bano, Ebrahim Qassim and Mohammad Haroon Qassim. The local general public owns over 25 percent shares, while the remaining less than one percent shares are with the rest of the shareholder categories.

Historical operational performance

Shield Corporation Limited has largely seen a growing topline with the exception of FY14 and fairly recently in FY20. Profit margins, in the last six years have been more or less stable between FY16 and FY20, before rising again in FY21.

In FY18, revenue growth was marginal at one percent. This is attributed to the company giving discount for maintaining market share. While this was accounted for in topline, gross sales, on the other hand, saw an increase of six percent. Despite the minimal change in topline, gross margin improved to over 36 percent compared to 34.5 percent in FY17, as negotiation with vendors and suppliers reduced production cost. This also reflected in the bottomline with net margin also slightly better year on year at four percent.

Topline growth in FY19 stood at almost six percent to reach Rs 1.8 billion, whereas gross sales were higher by nine percent. The difference was due to trade discounts. However, the higher topline was accompanied by higher costs as well, as cost of production rose to consume nearly 69 percent of revenue. This was due to currency devaluation that increased the cost of inputs. As a result, gross margin fell to 31.3 percent. With finance expense also rising due to higher interest rates, net margin fell further to 1.35 percent.

In FY20, revenue contracted by almost four percent. Export sales that already make a small contribution to total revenue nearly disappeared as they fell from Rs 5 billion in the previous year to less than Rs 1 billion in FY20. The local sales were also adversely impacted as hygiene products almost disappeared while oral care sales fell considerably from Rs 749 million in FY19 to Rs 298 million in the current period. Owing to inflationary pressure and currency devaluation that increased cost of inputs, gross margin fell to an all-time low of 24.3 percent. With finance expense continuing to rise, the company eventually posted a loss of Rs 19 million for the year.

In FY21 at 25.7 percent, revenue posted the highest growth seen since FY13, to reach over Rs 2 billion in value terms. This was the highest seen since FY09. The double-digit revenue growth was attributed to a volumetric gain. This resulted in better absorption of fixed costs that allowed gross margin to improve. The latter was recorded at 30.9 percent. With distribution expense as well as finance expense making a smaller share in revenue, net margin was recorded at an all-time high of 7.2 percent. Bottomline was also at its highest of Rs 155 million. Finance expense almost halved year on year due to decrease in utilization of short-term financing and a lower bank rate from Rs 101 million in FY20 to Rs 53 million in the current period.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was lower by a marginal 1.3 percent year on year. This was largely attributed to the global supply chain crisis that resulted in an increase in cost of inputs. Additionally, freight costs also escalated, whereas ensuring availability of material also became a challenge for the company. This reflected in the higher cost of production at over 73 percent of revenue. As a result, net margin fell to 2.4 percent compared to 4.1 percent in 1QFY21.

Revenue in the second quarter of FY22 was higher only marginally by less than one percent. Experiencing similar business environment, cost of production escalated to 77 percent of revenue compared to 67 percent in the same period last year. This also trickled to the bottomline with a net margin of one percent versus almost 11 percent seen in 2QFY21.

The third quarter of FY22 saw significantly better revenue higher by over 48 percent year on year. Production cost was again higher year on year as a share in revenue at 73 percent of revenue versus 67 percent in the same period last year. This was attributed to the general economic and political uncertainty as well as the inflationary pressures seen globally. Thus, net margin fell significantly to two percent compared to 10 percent in 3QFY21. Revenue in the nine months cumulatively in FY22 has exceeded 9MFY21 by 15 percent; however, rising cost of inputs has considerably dented profitability. Similar trend is likely to pursue given the prevalent political and economic situation.