Leather Up Limited (PSX: LEUL) was initially set up in 1990 as a private limited company. Subsequently, in 1993 it was converted into a public limited company. The company is in the business of producing and exporting leather goods such as jackets, purses, wallets, laptop bags, etc. It mostly exports to European markets such as France, Germany, Italy, and UK.
Shareholding pattern
As at June 30, 2020, over 97 percent shares are under the category of “individuals”. Further breakdown reveals that over 27 percent shares are owned by Mr. Khalid H. Shah, the CEO of Leather Up Limited. Close to 2 percent shares are categorized under “others” while the remaining roughly 1 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has seen a declining topline over the years with the exception of FY16 and FY17. Net revenue has shrunk over the years, from Rs 165 million in FY14 to Rs 27.4 million in FY20. Profit margins, on the other hand, have fluctuated over the years.
In FY17, revenue increased by 4.3 percent. This was relatively lower than that seen in last year. The decline in rate of growth was attributed to the increase in rupee value of exports, from Rs 128 million in the previous year to Rs 133 million. On the costs, side, cost of production fell very marginally, therefore keeping gross margin more or less flat at 23 percent. However, net margin grew from 8.5 percent to nearly 10 percent on the back of declining expenses. Production overheads were better absorbed, while finance and administration costs also went down, along with taxation expense. The decline in administration expense was due to decline in salaries expense and fees and subscription.
In FY18, the company saw a major drop in revenue, with topline more than halving year on year. This was attributed to certain factors inherent with nature of the product. Globally, the leather industry did not get the same priority as it had in the last decade. Moreover, a material alternative to leather had been introduced by China that had an adverse effect on the global leather industry. Thus, demand transferred from pure leather to the new and cheaper alternative. The drop in revenue from Rs 133 million to nearly Rs 52 million meant that costs made a larger share in revenue; it was recorded at over 97 percent. Despite this, the net margin for the year was at a whopping 87 percent. This was due to other income recorded at Rs 57 million, exceeding the revenue for the year. The higher revenue was a result of a sale of plot valued at Rs 72 million.
Revenue continued to contract in FY19, albeit at a relatively lower rate of 7 percent. This was attributed to lower production as well as lower business activity in Europe. The lower production is also reflected in the capacity utilization figures that reveal production of bags at 11,481 pieces for the year, compared to 22,162 pieces in FY18. Cost of production was slightly lower at 94.6 percent of revenue. The decline was due to outsourcing some part of the production to market vendors as this seemed a more cost friendly alternative compared to having 100 percent in-house production. This is reflected in the higher gross margin at 5.35 percent. However, since the full benefit of outsourcing is not reflected in the current period, the company incurred a loss of Rs 8 million, in the absence of higher other income supporting the bottomline that was seen last year as a one-off event.
FY20 saw another major drop in revenue, by nearly 43 percent. This is also seen in the lower production of bags at 5,874 pieces, and 50 pieces of jackets in the entire year. Some part of the decline can also be attributed to the shut down of factories subsequent to the outbreak of the Covid-19 pandemic. This not only brought a halt in production but also in trade as several countries in the world imposed a lock down and canceled flights and orders. Therefore, costs continued to make over 90 percent of revenue. However, there was a notable decline in distribution and finance expenses. While mark-up and interest charges disappeared entirely, bank charges shrunk from Rs 2.3 million to Rs 0.2 million. Combined with this, was the Rs 2 million brought in through other income; this arose from reimbursement of penalty. Thus, the loss for the period fell to Rs 0.8 million.
Quarterly results and future outlook
Further contraction in revenue continued in the first quarter of FY21. Costs also made an over 90 percent share in revenue leaving little room for absorption of other costs. Leather Up Limited saw a loss of Rs 0.8 million in 1QFY21 alone. As per expectations, the second quarter saw even lower revenue, with cost of production exceeding revenue, therefore incurring loss of Rs 2 million for the period. Similar trend was seen in the third quarter as well. Despite the decline in expenses, revenue could not cover costs. Given the financial performance in FY20 and in the three quarters of FY21, it is likely that orders will continue to be fewer.
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