Synthetic Products Enterprises Limited

Synthetic Products Enterprises Limited (PSX: SPEL) was incorporated in Pakistan as a private limited company in 1982. The company changed its status into a public limited company in 2008. The principal activity of the company is the manufacturing and sale of plastic auto parts, plastic packaging for food and FMCG industry as well as moulds and dies.

Pattern of Shareholding

As of June 30, 2023, SPEL has a total of 199.736 million shares outstanding which are held by 2341 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of SPEL with a stake of 66.39 percent followed by Local general public accounting for 14.48 percent shares of the company. Associated companies, undertakings and related parties hold 8.932 percent shares of SPEL while Modarabas & Mutual funds hold 2.62 percent shares. Around 1.584 percent shares of the company are held by foreign general public. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a plunge in 2020, the topline of SPEL has been making positive strides over the period under consideration. Conversely, its bottomline plunged in 2019 and 2023. The margins of the company dipped in 2019 and then considerably recovered thereafter to boast their finest version in 2021. In 2022, SPEL’s margins significantly eroded. In 2023, gross margin and operating margin improved while net margin continued to slide. The detailed performance review of the period under consideration is given below.

In 2019, SPEL’s topline grew by 14.85 percent year-on-year on the back of growth momentum shown by local sales. Conversely export sales witnessed a downtick in 2019. Pak Rupee depreciation rendered the raw materials costly for SPEL which took a toll on its gross profit. SPEL’s gross profit slid by 6.68 percent year-on-year in 2019 with its GP margin clocking in at 16.7 percent versus 20.6 percent in 2018. To counterbalance the rising cost of sales, the company restricted its operating expenses which only grew by 6 percent during the year despite inflationary pressure. Yet operating profit posted a plunge of 11.83 percent year-on-year in 2019 with OP margin standing at 11.3 percent versus 14.7 percent in 2018. Other expense provided a much needed breather as the company did lesser provisioning done for WWF and WPFF during the year. Other income nosedived by 19.8 percent year-on-year in 2019 on account of lower income earned from non-financial assets. Finance cost gave another major blow to the bottomline as it expanded by a whopping 64.43 percent year-on-year on the back of high discount rate as well as increased borrowings during the year. The result was a bottomline slide of 29.94 percent year-on-year in 2019 to clock in at Rs.241.19 million with NP margin of 7 percent versus 11.5 percent in 2018. EPS stood at Rs. 2.73 in 2019 versus Rs.4.05 in 2018.

In 2020, local as well as the global economy was under the headwinds of COVID-19 which took its toll on the performance of SPEL in the last quarter. In the initial quarters of 2020, the government imposed ban on the purchase of vehicles for the non-filers of income tax and then imposed excise duty on the vehicles. This increased the prices of automobiles and affected SPEL’s sales to the auto sector. The FMCG and food packaging segment of SPEL performed quite well during the year, yet the topline plunged by 9.72 percent year-on-year in 2020. During the year, export sales grew by 27 percent year-on-year, however, the wretched local performance didn’t let it create any impact on the topline. Low offtake also reduced the cost of sales which helped in keeping the gross profit intact at Rs.573 million in 2020. GP margin grew to 18.5 percent in 2020. The company also controlled its operating expenses which plunged by 4 percent in 2020. This enabled a marginal 1.74 percent year-on-year growth in operating profit. OP margin climbed up to 12.7 in 2020. Other income boasted 152 percent year-on-year growth primarily on account of income on unwinding of long-term receivable. Other expense dropped on the back of lesser momentum of loss on the disposal of fixed assets. Financial cost also offered support to the bottomline as it slid by 3 percent year-on-year despite high discount rate in the initial quarters of 2020. While long-term loans grew as SPEL availed the refinance scheme initiated by SBP for the payment of wages and salaries, short-term borrowings dipped during the year owing to lesser demand and capacity utilization. The bottomline was able to post 7.31 percent year-on-year growth to clock in at Rs. 258.82 million in 2020 with EPS of Rs.2.92. NP margin also improved to 8.4 percent in 2020.

In 2021, the company initiated its new production facility in Karachi to cater to the demand recovery. As economic activity began to stabilize, topline grew tremendously by 35 percent year-on-year in 2021 which was the result of an improved performance in both local and export markets across both auto as well as food & packaging division. Rising raw materials cost, fuel and electricity charges as well as repair and maintenance of fixed assets pushed the cost of sales up by 30 percent in 2021, yet gross profit was able to boast 57 percent improvement over last year. GP margin clocked in at 21.5 percent in 2019. Operating expenses also grew by 12 percent year-on-year in 2021 on the back of inflationary pressure as well as improved sales volume and instigation of a new production facility during the year. Operating profit boasted a stunning 77 percent year-on-year growth in 2021 with OP margin hovering in the range of 17 percent. While SPEL secured increased long-term borrowings to finance various capital expenditures, short-term financing considerably reduced during the year which also provided impetus to a 37 percent slip in finance cost in 2021. The bottomline grew by a striking 78 percent year-on-year in 2021 to clock in at Rs.460.24 million with NP margin of 11 percent. EPS dropped to Rs. 2.3 in 2021 as the company issued 4.5 percent right shares during the year to finance the setup of its new manufacturing facility.

2022 brought along myriad new challenges for the company. The political and economic instability coupled with increase in the prices of raw materials and imposition of super tax wreaked havoc on the margins of the company. The topline achieved a significant 51 percent rise mainly coming on the back of a fabulous 78 percent growth in auto segment sales. Food and packing division also grew by 40 percent during the year. Inflation, high discount rate, Pak Rupee depreciation and increase in raw material prices drove up the cost of sales, yet SPEL could attain 38 percent year-on-year rise in its gross profit during 2022. GP margin, however, slid to 19.7 percent during the year. Operating expenses posted a massive jump of 37 percent during the year. The main culprits behind the elevated operating expense were the market induced increase in salaries, travelling expense and depreciation on fixed assets. Operating profit expanded by 39 percent year-on-year in 2022. Other income grew on the back of scrap sales made during the year coupled with amortization of deferred grant and reversal of provisions for doubtful debts. Conversely, other expense didn’t buttress the bottomline as it grew on account of increased provisioning for WWF and WPFF during the year. Finance cost gave a major hit to the bottomline as it magnified by 123 percent during the year due to high discount rate coupled with a drastic rise in both short-term and long-term borrowings during the year. The imposition of super tax further eroded the bottomline growth which could rise by 17 percent during the year to clock in at Rs.538.93 million in 2022. NP margin dropped to 8.5 percent while EPS clocked in at Rs.2.7 during 2022.

In 2023, the auto segment sales came under pressure owing to import restrictions. The company focused on its food and packaging segment and was able to muster 1.94 percent year-on-year growth in topline in 2023. During the year, SPEL faced increased raw material prices, currency depreciation and exorbitant fuel and energy prices, however, its ability to invest in technology up-gradation and automation as well as renewable energy restricted its cost of sales. Hence, gross profit rebounded by 5.52 percent in 2023 with GP margin mounting to 20.4 percent. Administrative and selling expense also collectively grew by 13 percent in 2023 mainly on account of heightened payroll expense, travelling expense as well as advertisement expense incurred during the year. It is to be noted that the company considerably streamlined its workforce to 550 employees in 2023 from 653 employees in the previous year. Operating profit marched up by 3.52 percent in 2023 with a marginal uptick in OP margin which stood at 15.6 percent. Other income built up by 26.17 percent in 2023 due to hefty profit earned on bank deposits as well as amortization of deferred grant. Other expense escalated by 10.97 percent in 2023 mainly on account of higher profit related provisioning. Finance cost spiraled by 31.71 percent in 2023 due to unprecedented level of discount rate as well as higher short-term borrowings. Towering finance cost coupled with the retrospective imposition of 10 percent super tax translated into 8.87 percent thinner bottomline in 2023. SPEL’s net profit stood at Rs.491.10 million in 2023 with EPS of Rs.2.47 and NP margin of 7.6 percent.

Recent Performance (1HFY24)

During 1HFY24, SPEL’s net sales grew by a paltry 0.78 percent. This was on account of economic slowdown and sluggish demand from the auto sector. To recompense for the weak auto segment sales, the company has diverted its attention towards food and personal care segment which constitute more than 80 percent of its sales mix. By investing in renewable energy, the company mitigated the impacted of high energy cost which coupled with stable local currency in the 2QFY24 resulted in 2.02 percent lower cost of sales for SPEL. Consequently, its gross profit improved by 14.64 percent in 1HFY24 with GP margin rising up to 19 percent from 16.8 percent in 1HFY23. Operating expense shot up by 29.25 percent during the period under consideration mainly on account of inflation which drove up its payroll expense despite workforce rationalization. Operating profit picked up by 8.64 percent in 1HFY24 with OP margin clocking in at 12.8 percent versus 11.9 percent during the same period last year. Other income posted a staggering 149.21 percent rise in 1HFY24 which mainly comprised of profit earned of bank deposits. Other expense surged by 53.19 percent during the period due to higher profit related provisioning. SPEL was able to cut down its finance cost by 27.61 percent during 1HFY24 due to sound cash flow management which reduced the need of external financing. Net profit progressed by 17.04 percent in 1HFY24 to clock in at Rs.234.629 million with EPS of Rs.1.22 versus EPS of Re.1 during the same period last year. NP margin recovered from 6.6 percent in 1HFY23 to 7.7 percent in 1HFY24.

Future Outlook

With rising prices and eroded purchasing power of consumers, auto sector contribution to SPEL’s revenue has considerably shrunk. Nevertheless, food and packaging sector will continue to muster revenue growth for the company; however, margins may face pressure owing to soaring inflation and discount rate. The company’s plan to enhance its export sales may rescue its margins which are at the mercy of economic vulnerabilities in the home market.