Service Industries Limited

Service Industries Limited (PSX: SRVI) was established in 1957 as a private limited company under the Companies Act, 1913 (now Companies Act, 2017). The company purchases, manufactures and sells footwear, tyres, and tubes and technical rubber products. In addition to catering to the local market, the company also exports to countries like Europe, US, Australia and the Middle East.

Shareholding pattern

As at December 31, 2021, close to 45 percent shares are owned by the directors, CEO, their spouses and minor children. Within this category, an executive director, Mr. Hassan Javed is a major shareholder owning over 19 percent shares followed by 10 percent held by each of the following: the CEO, Mr. Arif Saeed and Mr. Omar Saeed, another executive director. The local general public owns over 27 percent shares while 13 percent shares are held in NIT & ICP. The remaining roughly 14 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has largely seen a growing topline through the years, with the exception of CY20 when it contracted by 6.5 percent. Profit margins in the last six years have been more or less stable with a slight decline seen in CY21.

In CY18, revenue registered at over 15 percent rise to reach Rs 24 billion in value terms. While footwear exports witnessed a growth of 45 percent due to a combination of an increase in volumes and prices, the domestic sales reduced. Tyre division, that is also a major contributor to the total revenue, saw a 21 percent growth. But cost of production remained close to 82 percent, thus keeping gross margin also flat at around 18 percent. While net margin also grew marginally to 4.4 percent, bottomline was recorded at its second highest in decade at over Rs 1 billion.

Revenue in CY19 posted a growth of close to 9 percent to cross Rs 26 billion in value terms. Majority of this growth was concentrated with the local sales, while export sales declined by 13 percent. Export sales for footwear reduced, whereas within the tyre division, both local and export sales inclined, with local sales of tyres being the largest contributor to revenue. With cost of production reducing to below 82 percent, gross margin improved slightly to 18.7 percent. However, the same could not be observed for net margin that reduced to 3.4 percent due to higher interest rates that increased the finance expense significantly.

Topline contracted in CY20 by 6.5 percent. This is largely attributed to the outbreak of Covid-19 towards the end of the first quarter. This resulted in strict lockdowns which meant that operations and production were hampered for a number of weeks. Demand was also impacted, particularly for footwear sales as consumers remained indoors. Thus, there was a 69 percent drop in footwear export sales as borders were also closed and trade also halted. The tyre division, however, continued to sell due to the nature of the product. With cost of production reducing to almost 80 percent, gross margin grew to 20 percent. But as finance expense continued to consume a larger share in revenue, net margin fell to its lowest thus far at 2.8 percent.

In CY21 the company witnessed the biggest increase in revenue by nearly 34 percent to reach its highest of Rs 32.7 billion. The biggest contributor to revenue- the tyre division registered a growth of 38 percent while footwear division posted a growth of 21 percent as demand somewhat recovered a year after the pandemic. However, due to a sharp increase in the prices of raw materials, cost of production increased to nearly 84 percent of revenue, thereby reducing gross margin to 16 percent. This also reflected in the net margin that was recorded at its lowest of 1 percent for the year.

Quarterly results and future outlook

Revenue in the first week of CY22 was higher by almost 25 percent year on year as the tyre division grew by 31 percent. The latter was a result of expansion in production capacities. However, profit margins in this segment have been adversely impacted by the rise in input costs, exchange rate fluctuation and the general inflationary pressure. Footwear sales also posted a double-digit growth at 11 percent. The retail business, although under stress as claimed by the company, has seen expansion from 91 stores in December 2021 to 104 outlets in 1QCY22. Although, overall gross margin was better in 1QCY22 at 19 percent, net margin was lower at less than 1 percent (1QCY21: 2.3 percent) due to an exorbitant increase in finance expense.

The second quarter also saw higher revenue year on year, by 46.6 percent as tyre division saw overall growth of 33 percent in 1HCY22, while footwear division grew by 53 percent in the same time period. The higher topline also reflected in the net margin that grew to 3.6 percent in 2QCY22 versus 0.4 percent in 2QCY21. With the expansion in production capacities coupled with the widening of the retail network, topline will continue to increase, however, profit margin will depend on changes in input costs that have mostly been inclining.