Frontier Ceramics Limited (PSX: FRCL) was incorporated in Pakistan as a public limited company in 1982. The company is engaged in the manufacturing and sale of wall and floor ceramic tiles, sanitary wares and other related products.
Pattern of Shareholding
As of June 30, 2022, FRCL has 37.8 million shares outstanding which are held by 882 shareholders. Directors and their spouse and minor children have the major stake of around 95 percent in FRCL. General public hold 4.11 percent shares of the company. The remaining shares are held by other categories of shareholders each holding less than 1 percent shares of the company.
Historical Performance (2018-22)
The topline of FRCL has been ascending since 2018; however, the bottomline shows a mixed pattern. In the span of five years under consideration, the bottomline has shown an upward movement only in 2020 and 2022. In 2019, FRCL made a net loss despite a reasonable year-on-year growth of 18 percent in the topline. In 2022, the net revenue grew by a tremendous 33 percent year-on-year, yet the bottomline slid by 76 percent year-on-year, however, managed to stay in the profit zone. Let’s find out the real culprit that didn’t let the topline growth trickle down into healthy bottomline in 2019 and 2022.
In 2019, the 18 percent year-on-year growth was led by higher volumes. However, cost of sales grew by 37 percent year-on-year on the back of heavy consumption of LPG to cater to the issue gas loadshedding. Increase in gas tariff and Pak Rupee devaluation also played their due role to push up the cost of sales and squeeze the GP margin to 2.2 percent in 2019 versus 16 percent in 2020. To top it off, operating expenses also grew in line with inflation which resulted in FRCL making operating loss of Rs. 22 million in 2019 as against operating profit in 2018. Other income didn’t provide any respite either and plunged by 90 percent year-on-year in 2019. Then finance cost gave another major blow to the bottomline by expanding by over 240 percent year-on-year in 2019. Not only did the company’s short-term and long-term borrowings grow during the year, high discount rate also did the trick. Consequently, FRCL posted a net loss of Rs. 88.5 million in 2019 as against the net profit of Rs.39.43 million in 2018.
The next two years were characterized by bottomline growth and improved margins. Sales growth was led by both improved volumes and upward revision in the sales price. 2021 saw uproar in construction activity post COVID-19 and resulted in the highest topline growth of 154 percent year-on-year. Cost of sales was kept in check which led the GP margin in the range of 10 percent in both 2020 and 2021. Operating expenses were higher in both the years on the back of improved sales coupled with inflationary effect. Other expense also posted a hefty growth owing to workers’ welfare fund and workers’ profit participation fund. Finance cost, on the contrary, buttressed the bottomline as discount rate was dropping to bring the economic activity back on the track post COVID-19. FRCL posted NP margin of 3.9 percent and 5.7 percent respectively in 2020 and 2021.
The merry time enjoyed by FRCL for the two consecutive years seems to be over in 2022 as the company once again faced a bottomline dip and constricted margins. During 2022, the country faced a halt in both public and private construction activities owing to low purchasing power of consumers and a meteoric rise in the prices of construction materials. FRCL altered its sales portfolio to focus more on the high margin products. However, cost of production continued to rise as the company shifted its plant operations on RLNG which is much more expensive than the natural gas. This coupled with Pak Rupee devaluation and a surge in the prices of other basic raw materials took a toll on the GP margin which dipped to 6.4 percent in 2022. Operating expenses also succumbed to inflationary pressure which squeezed the OP margin to 4.6 percent in 2022 as against 8.3 percent in the previous year. Finance cost grew on the back of high discount rate and also because the company secured fresh long-term financing during the year. NP margin for the year stood at a skimpy 1 percent.
Recent Performance (1HFY23)
The bottomline slide and margins contraction which began in 2022 persisted in the 1HFY23. While the topline grew by 13 percent year-on-year, the increased cost of sales marred the gross profit which plunged by 39 percent year-on-year in 1HFY23. GP margin clocked in at 11 percent in 1HFY23 as against 20 percent during the same period last year. Other expense gave a major hit to the bottomline as it grew by over 200 percent in 1HFY23 to reach Rs. 88 million. While the detailed financial statements are not yet available, it can be assumed that the high other expense might be the result of exchange losses. The OP margin shrank to 4.8 percent in 1HFY23 as against 17.4 percent during the same period last year. Finance cost continued to enlarge on the back of high discount rate. Consequently, net profit dropped by 78 percent year-on-year with NP margin clocking in at 2.6 percent in 1HFY23 as against 13.3 percent in 1HFY22.
Future Outlook
With no demand upsurge in sight in the near future, the volumes are to stay in pressure. Unless the government projects are initiated and subsidized housing schemes are resumed, FRCL will continue to face lackluster demand. On the contrary, cost of sales is showing no respite on the back of inflationary wave, Pak Rupee devaluation and increase in the prices of raw materials, particularly gas and power. This coupled with high discount rate will continue to take its toll on the bottomline and margins of the company.
Recently, the shortage of gas and restrictions on the import of raw materials has led the company to shut down its operational activities for an indefinite period of time. Amidst all these off-putting factors, the future seems excruciating for FRCL.
Comments
Comments are closed.