Aruj Industries Limited

Aruj Industries Limited (PSX: ARUJ) was set up in 1992. It manufactures Fusible Interlining and dyeing/bleaching/stitching of fabric. The company’s manufacturing facility is located in Lahore. Aruj Industries revenue largely comes from export sales. Some of its export markets are UK, Europe and US.

Shareholding pattern

As at June 30, 2021, over 86 percent shares were owned by the directors, CEO, their spouses and minor children. Within this category, major shareholders are: one of the directors, Mr. Ali Maqsood Butt and Miss Aruj Butt. Close to 2 percent shares are held in associated companies, undertakings and related parties. This category solely includes Aruj Constructions (Private) Limited. The local general public holds over 11 percent shares while the remaining less than 1 percent shares are with the rest of the shareholder categories.

Historical operational performance

Aruj Industries Limited has mostly seen a growing topline with the exception of FY18 and FY20 when it contracted by almost 16 percent and over 18 percent, respectively. Net margin between FY18 and FY21 has been relatively stable while gross and operating margin has seen some movement in the last six years.

In FY18, topline contracted by almost 16 percent which is the largest decline seen thus far. Majority of this decrease was associated with the export sales that fell by 30 percent, while local sales remained more or less stable. Since the company is chiefly present in the export market from which it earns majority of the revenue, it also had to face intense competition, particularly from the regional peers that had advantage of relatively cheaper cost of labour. Pakistan, on the higher hand, has a higher cost of production that is also reflected in the company’s lower gross margin for the year at 9.4 percent, compared to 11.6 percent in FY17. This also trickled to the bottomline that reduced to Rs 6 million at a net margin of less than 1 percent.

Revenue bounced back in FY19 as it posted a growth of over 23 percent to reach an all-time high of Rs 1.4 billion. While export sales continued to grow, local sales saw a spectacular increase from Rs 26 million in FY18 to Rs 246 million in FY19. This was attributed to the void left behind by the unregistered sector due to change in tax policies as the new government took office. However, profitability could not take off due to the continuous rise in cost of production, largely attributed to the currency devaluation. But administrative and distribution expense making a smaller share in revenue allowed net margin to increase slightly to 0.9 percent.

Aruj Industries witnessed the biggest contraction in revenue in FY20 by over 18 percent. Export sales again rose, by 5.4 percent, while local sales recoiled to its pre-FY19 levels, at Rs 87 million. Segment-wise, majority of the loss in revenue is attributed to the decrease in the garment division, while the processing division continued to grow despite the outbreak of the Covid-19 pandemic that wreaked havoc globally. On the other hand, cost of production fell to 87 percent of revenue that allowed gross margin to improve to 12.8 percent. But operating and finance expenses restricted the net margin that remained close to 1 percent for the year.

Revenue in FY21 grew by almost 19 percent. Export sales contracted by 2 percent attributed to the closure of the export markets, while local sales grew to Rs 164 million, from last year’s Rs 87 million. Segment-wise, again majority of the increase was associated with the processing division while the demand for textiles is gradually regenerating. With cost of production growing to nearly 90 percent, gross margin shrunk to 10 percent. However, net margin grew marginally to 0.93 percent, from last year’s 0.85 percent, due to a reduction in finance expense. The latter can be attributed to a decline in policy rate.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was lower by over 19 percent year on year. This was due to a customer in the garments division delaying their order from the company since they had experienced slower sales in the last quarter of FY21. However, the company claims that the delayed orders are back on track. With the loss in revenue, profitability also reduced year on year to 0.2 percent compared to a net margin of 1 percent in 1QFY21.

The second quarter saw revenue lower by 6 percent year on year. This was again attributed to a delay in shipping. In addition, with the continuous rise in cost of production, the company is unable to immediately pass on the burden of higher costs to its customers that lowers profitability in the short term. The loss of revenue coupled with higher costs reduced net margin for the second quarter as well, to 1.7 percent versus over 3 percent in 2QFY21. Again, the currency devaluation, and increases in prices of inputs is expected to keep profits in check while the inflationary pressure will adversely impact the consumer’s purchasing power and propensity to spend.