Shield Corporation Limited

Shield Corporation Limited (PSX: SCL) was established in 1975 as a public limited company under the Companies Act, 1913 (now Companies Act, 2017).

The company has three line of businesses- oral care, baby care and hygiene products, with baby care contributing the most to the total revenue. Although the company also exports its products in the international market, a large part of the revenue is generated locally.

Shareholding pattern

Shield corporation is primarily held by its directors, CEO, their spouses and minor children as around 74.5 percent of the shares are held under this category. Further breakdown reveals that Mrs, Kulsum Bano holds the largest number of the shares within the category. Some 25 percent shares are distributed with the local general public while less than 1 percent is with “others”.

Historical operational performance

While the topline of the company has largely followed an increasing trend, gross profit margin seems to have been declining since FY18, while net margin has relatively remained stable throughout the decade and seems to have followed the downward trend post FY18.

After a gap of two years, the company saw double digit growth in its topline in FY16. This could be explained by the heavy expenditure on advertising and sales promotion as reflected in the high selling and distribution expenses. Advertising expense increased by a whopping 69 percent, making 60 percent of the total selling and distribution expenses. On the other hand, a decline in oil prices helped to reduce cost of production as a percentage of revenue; this meant that gross margin saw an improvement to nearly 33 percent, up from last year’s 30 percent. However, net margin actually reduced year on year, although only marginally due to a higher share of distribution expense in total revenue.

Topline growth at a little over 7 percent in FY17 was subdued in comparison to that seen in the earlier part of the decade. While there were several product launches within the baby feeding category, the diaper category saw the highest growth in market sales at 70 percent. It also introduced new flavours in the kids’ toothpaste category seeing the growing emphasis on oral health and hence anticipating demand. Cost of production declined as a percentage of revenue since the company was able to negotiate with suppliers and vendors thereby increasing gross margin to 34 percent. Although other income increased notably, its effect was offset by the increase in administrative expense driven by salaries expense and depreciation. The increase in salary expense was associated with hiring of professional staff where higher depreciation was a result of change in physical office space.

There was a marginal growth in topline during FY18 at 1 percent. This was primarily attributed to the uncertainty regarding the general elections. Moreover, the company offered additional discounts in order to maintain market share. These discounts were adjusted for in sales revenue, otherwise gross sales had actually increased by nearly 6 percent. Despite the high interest rates and currency devaluation, Shield Corporation managed to curtail its cost of production as a percentage of revenue; this allowed gross margins to peak at 36.5 percent. This also translated into the highest net margin at 4 percent. The latter was also supported by lower administrative and distribution expenses since it reduced advertisement expense due to the offering of trade discounts that had already been incorporated in the total revenue.

During FY19 Shield Corporation witnessed a near 6 percent growth in its net revenue while actual growth in sales was registered at nearly 9 percent; the difference was due to the trade discounts; this meant that the company had reduced its expenditure on advertising. However, the higher revenue was accompanied by a high cost of production- at close to 69 percent, up from 63 percent in FY18. This was a result of currency devaluation that made imported raw materials costly while inflationary pressure also drove up the production cost. therefore, gross margin dropped to 31 percent, from its peak of more than 36 percent in the preceding year. Net margin was also brought down to 1 percent due to an escalation in finance cost- a result of high bank rate and increase in short term borrowing.

Recent results and future outlook

The first half of FY20 was noted by high inflation and a decrease in purchasing power, while the second half was marred by the outbreak of Coronavirus that was declared a pandemic by the end of the third quarter. Due to the outbreak economic activity was suppressed due to the resultant lockdown following the outbreak. Thus, the decrease in total revenue by almost 4 percent comes as no surprise. This was also accompanied by a high cost of production that stood at close to 76 percent of revenue; production cost was driven up by currency devaluation, increase in cost of raw materials, and increase in depreciation expense due to high capital expenditure. This collectively brought down gross margin to 24 percent- the lowest seen thus far. Although selling expense was curtailed, the decrease was offset by increase in finance cost that eventually led the company to post a loss of Rs 18 million for the first time.

The country fears the onset of a second wave of the Coronavirus that makes the economic and business environment uncertain. However, apart from identifying new product categories, the company hopes that the capital expenditure undertaken will provide profitability in the future.