Shezan International Limited

Shezan International Limited (PSX: SHEZ) was established in 1964. It has three production plants located in Lahore, Karachi and Hattar Industrial Estate. The company manufactures, trades and sells juices, pickles, jams, ketchup, etc.

Shareholding pattern

As at June 30, 2021, the directors, CEO, their spouses and minor children own 23 percent shares in the company. Within this, a major shareholder is Mr. Muneer Nawaz, the chairman of the company. The local general public holds over 46 percent shares followed by over 22 percent shares held in modarabas and mutual funds. The remaining about 8 percent shares is with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline throughout the years, while profit margins in the last six years specifically declined between FY18 and FY20, before improving again in FY21.

In FY18, topline registered a growth of almost 5 percent reaching Rs 7.5 billion in value terms. Local sales made up majority of the revenue. The former grew by 5.3 percent. With cost of production growing marginally to 72 percent of revenue, gross margin declined slightly almost 28 percent. However, net margin improved to 5.26 percent of revenue compared to 3.6 percent in FY17, due to a notable reduction in distribution expense. The latter decreased from over 17 percent of revenue to almost 14 percent of revenue, due to sizeable decrease in advertising and promotions expense.

Revenue in FY19 grew by 2.7 percent, however, this was accompanied by a significant rise in costs that consumed 80 percent of revenue, reducing gross margin to almost 20 percent. The rise in costs was attributed to the inflationary pressures that drove prices of raw material upwards. Oil prices also followed an upward trend. Due to competition, the company was unable to pass the burden of higher cost to the consumer, thus taking a hit on profitability. Despite considerable support from other income, net margin fell to 1.5 percent- the lowest seen thus far.

Revenue in FY20 contracted by 5 percent. This was attributed to two reasons. Firstly, the long winter season deterred consumption of the company’s products. By the time the winter season ended, the Covid-19 pandemic broke out that led shops, malls, parks cinemas, etc. to be shut that also adversely impacted consumption. With costs intact, cost of production consumed 85 percent of revenue, the highest seen, thus reducing gross margin to an all-time low of 15 percent. Additionally, interest rates drove finance expense upwards, eventually causing the company to incur a net loss for the first time of Rs 236 million.

Topline contracted further in FY21 by almost 10 percent. Majority of this reduction was seen in local sales that fell by 12.8 percent. This was attributed to again Covid-19 pandemic that hindered consumption from schools/colleges canteens, parks, zoos, etc. Reduced travel has also impacted sales coming from the transport sector. Despite the lower topline, the company managed to improve gross margin to over 21 percent on the back of cost efficiency measures. This also trickled to the bottomline that saw a net margin of 1.9 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 7.5 percent year on year as educational institutions and recreational activities resumed. The company had also been exploring export destinations that is reflected in the 39 percent growth in export sales. However, the rising cost of inputs increased cost of production to almost 79 percent of revenue from 76 percent in the same period last year. This also trickled to the bottomline, with a net margin of 2.6 percent versus 5.6 percent in 1QFY21.

The second quarter of FY22 also saw higher topline year on year by over 26 percent, again attributed to resumption of relevant activities. However, due to continuous rise in prices of raw material, particularly sugar, for the company, combined with facing the winter season, the burden of higher costs could not be passed on. Thus, the company incurred a slightly higher net loss of Rs 51 million for the period compared to Rs 45.6 million net loss seen in the corresponding period last year.

The third quarter of FY22 saw revenue higher by 15 percent year on year as summer season arrived earlier than usual thus encouraging consumption of the company’s products. The improved revenue also reflected in better profit margins as seen by a higher gross margin of 26.6 percent compared to 18.7 percent in the same period last year. This also trickled to the bottomline that was also better year on year with a net margin of 4.3 percent compared to 2.5 percent in 3QFY21. While the company is growing its sales volumes and also expanding its export destinations, the ongoing political and economic uncertainty along with rising cost of inputs can most likely hinder growth in profit margins.