Sardar Chemical Industries Limited

Sardar Chemical Industries Limited (PSX: SARC) was incorporated in Pakistan as a private limited company in 1989 and was converted into a public limited company in 1993. The company is engaged in the manufacturing and sale of dyestuffs for leather, paper and textile industries.

Pattern of Shareholding

As of June 30, 2023, SARC has a total of 6 million shares outstanding which are held by 1705 shareholders. Local general public has the majority stake of 66.37 percent in the company followed by Directors, CEO, their spouse and minor children holding 26.04 percent of its shares. Around 3.868 percent of SARC’s shares are held by joint stock companies and 3.288 percent by NIT & ICP. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

During the period under consideration, SARC’s topline dipped in 2020 and 2023. Conversely, its bottomline plunged in 2022 and 2023. Its margins portray a mixed pattern over the period. In 2019, gross margin plummeted while operating and net margins rose. This was followed by two successive years of progression in margins. In 2022, all the margins significantly eroded while in 2023, gross and operating margins improved while net margin continued to decline (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, SARC’s topline grew by 31.05 percent year-on-year. This was on account of 1.79 percent increase in the sales volume of the company which clocked in at 386,160 kgs. The company also revised its selling prices in line with soaring cost of sales on account of elevated prices of energy, transportation, essential raw materials as well as Pak Rupee deprecation. Despite increase in the prices, SARC couldn’t completely pass on the onus of cost hike to its customers, which is evident in the fall of GP margin from 25.81 percent in 2018 to 23.70 percent in 2019. This was despite 20.34 percent year-on-year growth in gross profit. Administrative and distribution expenses surged by 4.02 percent and 7.34 percent respectively in 2019 which was on account of higher payroll expense, depreciation as well as travel & conveyance charges. Operating profit improved by 51.88 percent in 2019 with OP margin climbing up from 8.19 percent in 2018 to 9.49 percent in 2019. Finance cost escalated by 29.85 percent in 2019 on account of higher discount rate as well as increased borrowings. This resulted in a hike in SARC’s debt-to-equity ratio from 19 percent in 2018 to 24 percent in 2019. Net profit strengthened by 76.62 percent in 2019 to clock in at Rs.18.65 million with EPS of Rs.3.11 versus EPS of Rs.1.76 in 2018. NP margin picked up from 5.16 percent in 2018 to 6.95 percent in 2019.

SARC succumbed to the deceleration of economic activity on account of COVID-19 and registered 3.9 percent year-on-year shortfall in its topline in 2020. This was on account of drop in sales volume due to lockdown imposed during the year as well as decline in demand. During the year, SARC operated at 35 percent capacity versus 53 percent capacity utilization achieved in the previous year. This culminated into production of 230 M.tons in 2020. Due to Pak Rupee depreciation, imported chemicals became much more expensive during the year. This coupled with higher electricity and gas prices could have marred the gross profit of the company in the absence of effective cost control and price modification strategies. During 2020, SARC’s gross profit improved by 21.54 percent resulting in GP margin of 29.97 percent. Administrative expense multiplied by 32.11 percent in 2019 of increased salaries (including directors’ remuneration), repair & maintenance, rent, rates & taxes as well as loss allowance booked during the year. Distribution expense dropped by 3.4 percent in 2020 on the back of lower carriage & cartage as well as travel & conveyance charges incurred during the year. Operating profit built up by 20.4 percent in 2020 with OP margin rising up to 11.89 percent. Finance cost mounted by 117 percent in 2020 due to higher discount rate for most part of the year coupled with increased borrowings. This drove up the debt-to-equity ratio to 55 percent in 2020. Net profit progressed by 12.67 percent in 2020 to clock in at Rs.21.02 million with EPS of Rs.3.5 and NP margin of 8.15 percent.

SARC posted 32 percent year-on-year growth in its net sales in 2021. This was mainly on account of upward revision in the prices of the company’s products due to hike in raw material prices, energy tariff, freight charges as well as Pak Rupee depreciation. The increase in prices was not accepted by the customers and hence SARC couldn’t attain any significant growth in its off-take during the year. Capacity utilization stood at 40 percent or 267 M tons. Due to passing on the onus of cost hike to its customers, SARC registered 45 percent growth in its gross profit with GP margin rising up to its optimum high level of 32.97 percent in 2021.

Administrative expense magnified by 18.72 percent in 2021 on account of higher payroll expense as number of employees grew from 108 in 2020 to 122 in 2021 and also because of higher depreciation expense incurred during the year. Distribution expense inched up by 2.39 percent in 2021 due to higher utility charges and carriage & cartage charges on account of increased prices of petroleum products. Higher profit related provisioning drove up other expense by 116 percent in 2021 while profit on sale of fixed assets resulted in 123 percent rise in other income. All these factors translated into 86.72 percent higher operating profit recorded by SARC in 2021 with OP margin clocking in at 16.82 percent. Finance cost shrank by 26.25 percent on account of monetary easing and settlement of all the outstanding short-term borrowings during the year. This took down debt-to-equity ratio to 20 percent in 2021. Net profit improved by 84.93 percent in 2021 to clock in at Rs.38.87 million with EPS of Rs.6.48 and NP margin of 11.42 percent.

SARC’s topline grew by 21.2 percent in 2022 which was primarily due to upward price revision with no significant movement in sales volume. Capacity utilization stood at 60 percent or 394 M tons. Despite price modification, the company couldn’t completely pass on the impact of cost hike to its customers. This resulted in 7.26 percent lower gross profit in 2021 with GP margin dropping to 25.23 percent. Administrative and distribution expense grew by 8.73 percent and 9.48 percent respectively in 2022 mainly on account of higher payroll expense which also includes directors’ remuneration, increased depreciation expense as well as carriage & cartage charges. Operating profit nosedived by 21.54 percent in 2022 with OP margin contracting to 10.89 percent. Finance cost raised its head yet again owing to monetary tightening. This was despite the fact that SARC replaced its short-term external loans with loans from directors which had 1 percent lesser mark-up than the existing KIBOR. Debt-to-equity ratio stood at 39.66 percent in 2022. Net profit tumbled by 25.26 percent year-on-year in 2022 to clock in at Rs.29.05 million with EPS of Rs.4.84 and NP margin of 7.04 percent.

SARC’s topline withered by 11.24 percent year-on-year in 2023. This was on account of closure of industries on account of high inflation, elevated cost of borrowings, crippling demand as well as import restrictions. Capacity utilization stood at 49 percent or 322 M tons. SARC increased the prices of its products to compensate for the soaring cost of sales. This resulted in a paltry 3.76 percent uptick in gross profit with GP margin climbing up to 29.49 percent in 2023. 10.52 percent higher administrative expense incurred in 2023 was the result of higher payroll expense and directors’ remuneration as well as bad debts written off during the year. Distribution expense escalated by 32.5 percent year-on-year in 2023 as high prices of petroleum drove up carriage & cartage charges as well as travelling expense. Higher salaries also contributed in an elevated distribution expense in 2023. Operating profit dwindled by 7.49 percent in 2023 with OP margin slightly growing up to 11.35 percent. Finance cost surged by 133.20 percent in 2023 on the back of higher discount rate. Debt-to-equity ratio was lowered to 31.23 percent in 2023. SARC recorded 16.26 percent lower net profit to the tune of Rs.24.33 million in 2023 with EPS of Rs.4.05 and NP margin of 6.64 percent.

Recent Performance (1HFY24)

With constant hike in the cost of sales owing to Pak Rupee depreciation, spike in energy tariffs, high indigenous inflation and elevated transportation charges, SARC has been constantly revising the prices of its products. Customers are also cognizant of the fact that businesses can’t survive without sharing the burden of cost hike with their customers. Hence, 73 percent year-on-year increase in the company’s net sales during 1HFY24 was the combination of both volumetric sales and price revision. Gross profit strengthened by 124 percent year-on-year in 1HFY24 with GP margin climbing up to 32.95 percent from 25.39 percent during the same period last year. Administrative expense grew by 5 percent year-on-year in 1HFY24 on account of inflationary pressure and increase in minimum wage rate while distribution expense mounted by 26 percent year-on-year during the period on the back of improved volumes coupled with high freight charges. Higher profit related provisioning resulted in other expense of Rs.3.47 million during the period under consideration. However, it was greatly counterbalanced by superior exchange gain and profit on bank deposits which resulted in other income of Rs.2.38 million in 1HFY24, up 1361 percent. Operating profit multiplied by 572 percent year-on-year in 1HFY24 with OP margin clocking in at 19.5 percent, up from 5 percent during the same period last year. Finance cost built up by 17 percent due to high discount rate. The company was able to register net profit of Rs.33.15 million in 1HFY24 with EPS of Rs.5.52 and NP margin of 12.43 percent. During the same period last year, SARC made net loss of Rs.0.075 million with loss per share of Rs.0.01.

Future Outlook

With the gradual demand recovery and upward price revisions, SARC is not only enhancing its net sales but also strengthening its margins. Increasing focus on export market will further buttress the company’s financial performance. The company’s ability to meet its short-term financing requirements through directors’ loan is also keeping a check on its finance cost.