Dawood Hercules Corporation Limited

Dawood Hercules Corporation Limited (PSX: DAWH) was established in 1968 as a public limited company under the Companies Act, 1913 (now Companies Act, 2017). The company manages investments that includes its subsidiaries and associated companies.

Shareholding pattern

As at December 31, 2021, 30 percent shares are held under the associated companies, undertakings and related parties. Within this category, a major shareholder is Dawood Lawrencepur Limited. The foreign public owns close to 54 percent shares while the directors, CEO, their spouses and minor children own 2.6 percent shares. Within this a major shareholder is Hussain Dawood, the chairman of the company. The remaining about 13 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline barring a few years. Profit margins, on the other hand, in the last five years have been relatively stable. Note that the results are based on consolidated statements.

In CY18, revenue posted a growth of over 33 percent. Of this, majority was earned through own manufactured products. In addition, export sales also improved year on year by over 74 percent. On an unconsolidated basis, the company earned majority of its dividend income from its stake in Engro Corporation Limited. The latter had earned a consolidated profit higher by 45 percent year on year. With some decline in cost of production, gross margin for Dawood Hercules stood at close to 30 percent, net margin was significantly better at 19.3 percent due to considerable other income that came from gain on sale of associate, among other avenues.

Revenue in CY19 was higher by close to 32 percent with revenue from manufactured products higher by 47 percent. Moreover, export sales also witnessed double-digit growth by over 24 percent. On an unconsolidated basis, it received significant dividend income from its subsidiary Engro Corporation Limited as the latter posted a 32 percent higher consolidated revenue. While gross margin for Dawood Hercules remained flat at around 30 percent, net margin was considerably lower at 13.3 percent as finance expense escalated to consume over 7 percent of revenue. This was largely due to an increase in long term borrowings. The higher long term borrowings expense can be attributed to the rise in policy rate that grew to 13.25 percent during the year.

In CY20, revenue grew by over 10 percent to reach almost Rs 249 million in value terms. Revenue from manufactured goods posted a growth of close to 20 percent, while export sales continued its growth momentum as it increased by 14.4 percent. Consolidated revenue of Engro Corporation Limited also registered a growth by 10 percent that was attributed to full-year operations of Thar energy projects. While gross margin continued to remain flat at around 30 percent, net margin increased to 17 percent as it received support from both, other income and share of profit from associate. The latter grew from over Rs 1 billion in CY19 to Rs 2.8 billion in the current period.

Topline registered a growth of over 25 percent in CY21 to reach an all-time high of almost Rs 312 billion. Revenue from own manufactured products grew by over 25 percent while export sales nearly doubled year on year to reach close to Rs 8 billion compared to Rs 4 billion in CY20. Engro Corporation, from which Dawood Hercules earns significant dividend income, saw a 25 percent higher consolidated revenue. With cost of production falling to 68 percent, gross margin rose to almost 32 percent. However, net margin fell marginally to 16 percent as contribution from other income reduced as a share in revenue, while taxation expense increased. The year-on-year decrease in net margin was not as pronounced due to considerable contribution coming from share of profit from associate that stood at Rs 3.2 billion for the year. At Rs 50.7 billion, net profit for the year was recorded at a 5-year high.

Quarterly results and future outlook

Revenue in the first quarter of CY22 was higher by almost 25 percent year on year. On a consolidated basis, the company earns a significant portion of the revenue from the fertilizer business that witnessed revenue growth of 25 percent year on year. The polymer segment saw revenue growth of over 47 percent year on year. On the other hand, cost of production on a consolidated basis made over 69 percent of revenue, compared to 65 percent in the same period last year. Thus, gross margin was lower in 1QCY22 at 30.7 percent. This also trickled down to the bottomline that saw a net margin of 16.6 percent versus 20.7 percent in 1QCY21. In 1QCY22, there was a significant rise in other expenses, followed by finance expense that also drove profitability down. Engro Corporation Limited is expected to continue to grow thus also contributing to the company in terms of higher dividends. While gross margin for the company has not depicted large movements, it is factors such as share of profit from associate and other income that has contributed to fluctuations in net margin.