Sapphire Fibres Limited

Sapphire Fibres Limited (PSX: SFL) was set up as a public limited company in 1979 under the Companies Act, 1913 (now Companies Act, 2017). The company is part of the Sapphire Group. The company manufactures and sells yarn, fabric and garments at its three production plants, two of which are located in Sheikhupura and one in Lahore.

Shareholding pattern

As at June 30, 2021, close to 52 percent shares are held in associated companies, undertaking and related parties. Within this category, a major shareholder is Sapphire Holding Limited. Over 20 percent shares are held by the directors, CEO, their spouses and minor children within which Mr. Yousuf Abdullah, the chairman of the company, is a major shareholder. Another 20 percent shares are held in local general public, followed by nearly 4 percent in the “others” category. The remaining roughly 4 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline with the exception of a few years. On the other hand, in the last six years, operating and net margin have improved after FY19, while gross margin increased between FY17 and FY19 after which it increased marginally.

Revenue in FY18 grew by over 23 percent to reach Rs 17.8 billion in value terms. The company predominantly earns from export sales that posted a growth of over 25 percent. This was attributed to the currency devaluation that primarily occurred in the last quarter of FY18. In addition, the export package announced by the government also encouraged exports of the sector that saw an increase of 9 percent. With cost of production falling to almost 90 percent of revenue, down from last year’s over 93 percent, gross margin improved to 10.24 percent. However, net margin decreased to 6.4 percent compared to nearly 8 percent in FY17, due to a reduction in other income that made up almost 13 percent of revenue. In addition, finance expense also increased as a share in revenue due to a rise in markup on long term finances.

Topline continued to grow in FY19, by 22 percent to reach Rs 21.7 billion in value terms. Export sales grew by 23 percent while local sales inclined by 34 percent. Cost of production further reduced to nearly 87 percent that allowed gross margin to increase to 13 percent. However, with a significant fall in other income combined with an almost doubling of finance expense owing to rising interest rates, net margin fell to an all-time low of 3.5 percent.

Growth in revenue in FY20 was subdued at 3.4 percent. While exports continued to make the dominant share in revenue, it grew by 5.8 percent, whereas local sales registered a growth of nearly 22 percent. Due to the outbreak of the Covid-19 pandemic, trade was adversely impacted as borders were closed, while orders were also cancelled or delayed that allowed topline to incline only marginally. Cost of production grew to over 87 percent causing gross margin to reduce to 12.5 percent. But dividend income resulted in other income to increase to Rs 1.4 billion that contributed significantly to the overall profitability for the year as noted by a higher net margin of 5 percent. But increase in net margin year on year was less pronounced than the increase in operating margin due to a continuous rise in finance expense.

Growth in revenue bounced back in FY21 as it posted a growth of 22.4 percent to reach an all-time high of Rs 27.5 billion. This was attributed to an improvement in operating performance of spinning and denim divisions. Export sales registered a growth of 19.4 percent while local sales grew by a whopping almost 44 percent to cross Rs 7 billion. Moreover, cost of production fell further to 85.7 percent of revenue allowing gross margin to increase to an 8-year high of 14.3 percent. But the increase in distribution expense due to export freight expenses and sales promotion, coupled with a reduction in other income due to lower dividend income kept operating margin flat. However, net margin picked up to reach over 8 percent on the back of a reduction in finance expense that was attributed to lower borrowing rates and an improvement in cash flows that decreased the average short-term borrowing.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by over 64 percent year on year as trade and business activities returned to normal. Cost of production was significantly lower at almost 80 percent, compared to nearly 88 percent seen in 1QFY21.This can be attributed to the company’s attempts to procure raw material effectively as it makes a large part of the cost of production. Although distribution expense was notably higher and other income also shrunk, but the rise revenue made up for it, allowing net margin to be recorded at a higher 12 percent versus 9.8 percent in 1QFY21.

Topline in the second quarter was also higher year on year at nearly 57 percent. Cost of production was again considerably lower at nearly 78 percent. With other income bouncing back at Rs 617 million compared to Rs 188 million, profitability also took off at over 16 percent for the period compared to 4.8 percent in the same period last year. Despite the growing cost of inputs, the company has managed to maintain its profitability on the back of product diversification and effective raw material procurement.