Hi-Tech Lubricants Limited

Hi-Tech Lubricants Limited (PSX: HTL) is incorporated in Pakistan as a public limited company. The company is engaged in the procurement and distribution of lubricants and petroleum products. In 2017, the company was granted a license by OGRA to establish an OMC and in 2019, the company received permission to operate new storage facility at Sahiwal and to distribute petroleum products in the province of Punjab under the brand name of HTL fuel stations. HTL products are largely sold under the brand name “ZIC” which are available at over 20,000 retail outlets and wash stations across the country. In 2017, the company stepped into retail industry and established HTL Express Centers which provide one-stop vehicle maintenance solution. Later, HTL adopted franchise model for its Express Centers.

Pattern of Shareholding

As of June 30, 2022, HTL has a total of 139.205 million shares outstanding which are held by 5908 shareholders. Directors, their spouse and minor children have the majority stake of 70.54 percent in the company. This is followed by local general public holding 17.02 percent shares of HTL. Associated companies, undertakings and related parties have a representation of 5.90 percent in the outstanding share capital of HTL. Insurance companies and Modarabas and Mutual funds hold 1.82 percent and 1.23 percent shares of HTL respectively. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Except for a drop in 2020, the sales of HTL had been improving since 2018. Conversely, the company posted net losses in 2019 and 2020. The gross margin of the company after experiencing a dip in 2019 recovered in 2020 however started tapering off in the subsequent years. On the other hand, operating margin and net profit margin of HTL posted a freefall in 2019 but then posted an unabated growth. The detailed performance review of each of the years under consideration is given below.

In 2019, HTL’s topline posted a marginal year-on-year growth of 2 percent which was on the back of price increase while volume was down by 4 percent year-on-year. Low demand in 2019 was on account of high inflation and discount rate which not only pushed up the cost of doing business for the companies but also restricted the consumer from spending on vehicle related products and services. This halted the sales of lubricants as well as HTL Express Centers in 2019. Cost of sales grew by 11 percent year-on-year in 2019 on account of Pak Rupee depreciation as well as import overhead cost, translating into a 33 percent year-on-year decline in gross profit with GP margin plunging to 13.7 percent in 2019 from 20.8 percent in 2018. Distribution expense grew by 31 percent year-on-year which mainly came on account of increase in advertisement and sales promotion in 2019 coupled with high payroll expense. Administrative expense also inched up by 14 percent year-on-year in 2019, reflecting high inflation. Higher exchange loss on account of Pak Rupee depreciation, massive jump in allowance for expected credit losses, slow moving and damaged inventory items as well as doubtful advances to suppliers translated into a 64 percent year-on-year rise in other expenses. Other income posted a meager 5 percent year-on-year growth which came primarily on the back of higher profit on bank deposits, credit balances written back as well as scrap sales. Operating profit shrank by 96 percent year-on-year in 2019 with OP margin sliding down to 0.4 percent in 2019 from 10.4 percent in 2018. Finance cost magnified by 185 percent year-on-year in 2019 due to high discount rate and also because of a substantial rise in HTL’s borrowings in 2019. HTL’s debt-to-equity ratio rose from 18.14 percent in 2018 to 39.13 percent in 2019. High finance cost resulted in a negative bottomline of Rs.434.81 million in 2019 with a loss per share of Rs.3.75 as against the net profit of Rs.554.43 million and an EPS of Rs.

In 2020, HTL’s topline slumped by 40 percent year-on-year. The year began with low GDP growth and ended with COVID-19 pandemic bringing the economic activities at a standstill. Delving into the details of sales revenue shows that while the sales revenue from lubricants dropped in 2020, sales revenue from spare parts sales, services at HTL Express Centers, dispensing pumps and petroleum products performed well in 2020. Lower sales volume resulted in lower production which pushed the cost of sales down by 45 percent year-on-year in 2020, but GP margin improved to 20 percent due to better prices and sales mix. Lower freight charges as well as curtailment on advertising and promotion expense trimmed the distribution cost down by 14 percent year-on-year in 2020. Administrative expense also inched down by 12 percent year-on-year mainly on account of low payroll expense as the company reduced its permanent employees from 366 in 2019 to 335 in 2020. Other expense posted a nosedive of 76 percent year-on-year in 2020 particularly as the company didn’t book any allowance for expected credit losses in 2020 and also because the company didn’t incur any exchange loss unlike the previous year. Other income grew by 14 percent year-on-year in 2020 due to reversals booked against expected credit losses, higher dividend income and profit on bank deposits as well as exchange gain earned in 2020. All these factors resulted in a 258 percent year-on-year rise in operating profit while OP margin jumped to 2.4 percent in 2020. Although finance cost dwindled by 21 percent year-on-year in 2020 due to significant reduction in HTL’s short-term loans in 2020, yet finance cost of Rs.186.33 million was huge enough to produce a net loss of Rs. 40.12 million and a loss per share of Rs.0.35, down by 91 percent year-on-year.

2021 appeared like a light at the end of a tunnel. After two successive years of lackluster sales and net losses, HTL’s topline grew by a massive 88 percent year-on-year in 2021. This came on account of resurfacing of the demand that was restricted during the COVID period. The sale of petroleum products posted an impressive growth of 6.5 times in terms of revenue, the revenue from lubricants almost doubled during 2021. Services at HTL Express Centers and sale of dispensing pumps weren’t encouraging in 2021. Cost of sales grew by 95 percent year-on-year. While gross profit surged by 60 percent in 2021, GP margin climbed down to 16.9 percent. Distribution and administrative cost grew by 14 percent and 23 percent year-on-year respectively in 2021 mainly on account of higher payroll expense as number of employees grew to 383 in 2021 from 335 in 2020. Other expense grew by 69 percent year-on-year on account of higher charities and donations, receivables written off during the year as well as allowance booked for expected credit losses. Other income slid by 13 percent year-on-year as lower discount rate trimmed down HTL’s profit on bank deposits. Operating profit grew by 333 percent in 2021 with OP margin climbing up to 5.5 percent. Significantly lower short-term borrowings during the year coupled with monetary easing resulted in a 56 percent year-on-year drop in finance cost. HTL was able to post a net profit of Rs.361.32 million in 2021 with an NP margin of 3.4 percent. EPS clocked in at Rs.2.6 in 2021.

2022 mustered another 67 percent year-on-year growth in the net sales of HTL as the company expanded its distribution channels and invested in its brands. Sales revenue from lubricants, petroleum products, dispensing pumps as well as franchise and joining fee increased during the year. Cost of sales grew by 71 percent year-on-year on the back of inflation and Pak Rupee depreciation which drove the GP margin down to 15.3 percent in 2022 despite 51 percent year-on-year growth in gross profit in 2022. Higher salaries, freight expense, advertising expense as well as utilities expense pushed up the distribution and administrative expense by 34 percent and 20 percent year-on-year in 2022. Other expense grew by an exorbitant 472 percent in 2022 due to massive exchange loss borne by the company during the year coupled with higher WWF and WPPF. However, other expense was offset by a 240 percent year-on-year rise in other income due to handsome dividend income from the subsidiary company, Hi-Tech Blending (Private) Limited. This resulted in a 107 percent year-on-year rise in operating profit with OP margin climbing up to 6.8 percent in 2022. Finance cost mounted by 141 percent year-on-year in 2022 due to high discount rate coupled with high short-term loans obtained during the year. This coupled with the imposition of super tax and recognition of deferred tax liabilities diluted the growth of bottomline. Yet, net profit rose by 104 percent year-on-year in 2022 to clock in at Rs.737.92 million with an NP margin of 4.2 percent. EPS grew to Rs. 5.3 in 2022.

Recent Performance (9MFY23)

During 9MFY23, HTL’s topline grew by 6 percent year-on-year which came on the back of both lubricants and fuel segments. While other companies are grappling against supply chain impediments amidst import restrictions, HTL had prudently maintained excess stock through prudent ordering. Pak Rupee depreciation as well as rise in the commodity prices due to Russia-Ukraine crisis resulted in a 15 percent year-on-year rise in the cost of sales of HTL during 9MFY23. This pushed the gross profit down by 36 percent year-on-year in 9MFY23. GP margin also shrank from 18 percent in 9MFY22 to 10.8 percent during 9MFY23. Operating expenses grew by 11 percent year-on-year on the back of high inflation which drove up salaries and wages expense, freight charges, utilities charges etc. Other expense slid by 36 percent year-on-year maybe on account of lower WWF and WPPF while other income grew up by 38 percent year-on-year in 9MFY23 due to remarkable dividend income from the subsidiary company as well as profit on bank deposits. Operating profit inched down by 61 percent year-on-year in 9MFY23 with OP margin slipping to 3.8 percent from 10.3 percent during the same period last year. Finance cost posted a steep rise of 157 percent year-on-year in 9MFY23 due to high discount rate and additional short-term loans obtained during the period. This pushed the bottomline down by 85 percent year-on-year to clock in at Rs.121.25 million in 9MFY23 with an NP margin of 1.1 percent compared to 7.6 percent in 9MFY22. EPS also fell to Rs.0.87 in 9MFY23 from Rs.5.95 during the same period last year.

Future Outlook

During 9MFY23, the company received an approval from OGRA to operate its storage facility in KPK. The company conducted an IPO for raising funds for the same and is in the process of building 35 pumps in the province of KPK which are expected to become operational by December, 2023. This will not only improve the profitability of the company but will also allow it to cover depreciation costs that are already being charged owing to the capital expenditures that are made to date. Moreover, the excess funds raised in IPO are invested by HTL as bank deposits, TDRs and mutual funds which will also yield returns and increase the “other income” of the company.