Archroma Pakistan Limited

Archroma Pakistan Limited (PSX: ARPL) is a limited liability company which was previously known as Sandoz (1963-1995) and Clariant (1996–2013). The principal activity of the company is the manufacturing, import and sale of chemicals, dyestuffs, coating, adhesives and sealants. It is also engaged in the indent business for textile, paper, adhesives, sealants, and coating and construction industries. ARPL is a subsidiary of Archroma Textiles Gmbh having its headquarters in Reinach, Switzerland.

Pattern of Shareholding

As of September 30, 2022, ARPL has a total of 34.118 million shares outstanding which are held by 1923 shareholders. Archroma Textiles Gmbh is the major shareholder of ARPL holding 75 percent of its shares. It is followed by local general public having 14.25 percent stake in the company. 4.46 percent of its shares are held by Modarabas and Mutual Funds while 2.46 percent shares are held by Insurance companies. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

With the exception of 2020, ARPL’s topline followed a growth trajectory in all the years under consideration with the highest year-on-year growth witnessed in 2021. The bottomline slid twice during the period i.e. in 2020 and 2022. The margins which had been deteriorating until 2020, posted a rebound in 2021, however, subsided again in 2022. The detailed performance review for each of the years under consideration in given below.

In 2019, ARPL’s topline posted a 21 percent year-on-year rise. While sales volume remained depressed during the year due to sluggish market demand, the company was able to attain the topline growth by revising its price upwards and passing on the onus of cost increase to the customers. 33.1 percent of the sales were contributed by Paper & Packaging segment while Business line Brand & Performance textile accounted for 24.9 percent of the net sales in 2019. Cost of sales grew by 23 percent year-on-year in 2019 due to inflation, Pak Rupee depreciation and increase in commodity prices in the international market. ARPL posted an 18 percent year-on-year growth in its gross profit; however, GP margin slid from 31.6 percent in 2018 to 30.8 percent in 2019. Distribution expense grew by 18 percent year-on-year in 2019 mainly due to tremendous rise in the royalty fee payable to Archroma Management Gmbh, an affiliated company of ARPL and also because of a hike in outward freight and handling charges on the back of high fuel charges. Administrative expense rose by only 2 percent year-on-year in 2019 due to higher outside service charges incurred during the year. During the year, ARPL booked an impairment allowance of Rs.143.41 million which was 138 percent higher than the allowance booked in 2018. Other expense also grew by 6 percent year-on-year in 2019 due to higher provisioning for WWF and WPPF while other income slid by 33 percent during the year as no mark-up income was earned from retirement benefit plan. Operating profit posted a 19 percent year-on-year growth in 2019; however, OP margin posted a marginal downtick from 16.6 percent in 2018 to 16.3 percent in 2019. 58 percent year-on-year spike in finance cost on account of higher discount rate and increased borrowings diluted the bottomline which grew by 12 percent year-on-year to clock in at Rs.1722.38 million with an NP margin of 9.9 percent in 2019 versus 10.8 percent in 2018. EPS grew from Rs.45.03 in 2018 to Rs.50,48 in 2019.

2020, scarred by COVID-19 resulted in a 13 percent year-on-year drop in ARPL; s topline as its major customers operated at less than 50 percent capacity during the period due to lockdown, supply chain disruptions and demand contraction. Cost of sales slid lower by 10 percent year-on-year in 2020, translating in a 21 percent year-on-year dip in gross profit. GP margin plunged to 28 percent in 2020 – the lowest among all the years under consideration as low capacity utilization resulted in an increase in fixed overhead cost. Distribution expense posted a 10 percent year-on-year slide in 2020 due to lower royalty charges and outward freight and handling charges. Administrative expense continued to grow and posted a 10 percent hike in 2020 mainly on account of market induced rise in salaries and wages while there was a drop in the number of employees from 284 in 2019 to 276 in 2020. Impairment allowance on trade receivables tremendously fell to Rs.13.18 million in 2020 as the company started the policy of cash collection over sales during the year. Other expense shrank by 18 percent year-on-year in 2020 which was the result of lower provisioning against WPPF. Other income grew by 62 percent year-on-year in 2020 on the back of higher scrap sales. Despite a check in expenses, lower sales volume pushed the operating profit down by 30 percent year-on-year in 2020 with OP margin settling down to 13.1 percent. Finance cost contracted by 35 percent year-on-year in 2020 due to lower discount rate, lesser exchange loss and a slump in short-term borrowings. Net profit plunged by 32 percent year-on-year in 2020 to clock in at Rs.1169.266 million with an NP margin of 7.8 percent. EPS climbed down to Rs.34.27 in 2020.

ARPL’s net sales recovered in 2021 and burgeoned by 32 percent year-on-year in 2021. This came on the back of a staggering rise in sales volume as the major customers of ARPL i.e. Textile and Construction sector boasted tremendous growth on account of regional competitiveness, fiscal measures to boost textile exports and the government initiated low-cost housing and infrastructure related projects. Increased demand also spurred upward price revision which also buttressed the topline in 2021. Cost of sales grew by 26 percent year-on-year in 2021 as the resumption in demand post-COVID resulted in supply chain delays due to non-availability of containers and vessels globally. This increased the cost and lead time of raw materials. ARPL managed to record a 47 percent year-on-year surge in its gross profit with GP margin bouncing back to 31.1 percent in 2021. Distribution expense piled up by 26 percent year-on-year in 2021 due to rise is sale volume which incited outward freight and handling charges. Moreover, higher royalty fee paid to the holding company and higher payroll expense also contributed towards hefty distribution expense incurred in 2020. Administrative expense ticked up by 4 percent year-on-year in 2021 due to higher payroll expense. During 2020, the company booked reversal on its trade receivables due to improved cash generation as business sentiment grew stronger as the signs of COVID-19 caved in. Other expense magnified by 120 percent year-on-year in 2021 due to higher provisioning for WWF and WPPF. Higher indenting commission, grant income and scrap sales also drove the other income up by 124 percent year-on-year in 2021 with its standing vis-à-vis net sales grew from 0.2 percent in 2020 to 0.3 percent in 2021. Operating profit jumped up by 75 percent year-on-year in 2021 with OP margin growing up to 17.4 percent – the highest among all the years under consideration. Due to low discount rate and lesser borrowings on account of improved cash generation, Finance cost tapered off by 38 percent year-on-year in 2021. Net profit grew by an incredible 98 percent year-on-year in 2021 with OP margin mounting to 11.6 percent. EPS also grew to Rs.67.69 in 2021.

In 2022, ARPL’s net sales mustered a 27 percent year-on-year rise. The year began with a robust note with textile and construction sector attaining new highs, however, in the last quarter, both the sector started underperforming as political uncertainty, high energy and commodity prices, record high inflation, Pak Rupee depreciation as well as devastating floods during the year translated into demand compression, Cost of sales grew with an even higher magnitude of 31 percent due to the factors stated above, squeezing the GP margin to 28.7 percent in 2022. Distribution expense ascended by 31 percent year-on-year due to massive rise in royalty fee coupled with a hike in outward freight and handling on the back of higher fuel charges. Administrative expense grew by 7 percent year-on-year in 2022 which was the consequence of higher payroll expense and outside service charges. The company also booked reversal of impairment allowance on trade receivables in 2022. Other expense nosedived by 1 percent year-on-year due to lower provisioning for WWF and WPPF in 2022 while other income grew by 2 percent due to higher indenting commission earned during the year. Operating profit mounted by 11 percent year-on-year in 2022, however, OP margin dived to 15.2 percent. Finance cost gave a major blow to the bottomline as it surged by 155 percent year-on-year on account of hefty exchange loss, higher discount rate as well as increased short-term borrowings. Sizeable growth in finance cost translated into an 18 percent year-on-year decline in the net profit in 2022. Net profit stood at Rs.1885.064 million in 2022 with an NP margin of 7.5 percent – the lowest among all the years under consideration. EPS also marched down to Rs.55.25 in 2022.

Recent Performance (Nine months ended June 2023)

During the nine monthly period of 2023 (year ending September 2023), ARPL’s topline posted a marginal 8 percent year-on-year rise which came on the back of increased sales to textile effects as well as paper, packaging and coatings business.

Macroeconomic and political challenges which included record high inflation and discount rate, steep depreciation in Pak Rupee, higher energy and commodity prices triggered by Russia-Ukraine conflict and devastating floods in the southern region of the country during the period resulted in the tamed performance of Textile and Construction sectors among others. Lackluster demand resulted in ARPL operating at less than 50 percent of its installed capacity. Cost of sales grew by 13 percent year-on-year during the nine month period, resulting in 3 percent shrinkage in gross profit. GP margin also tumbled to 25.8 percent during the nine months of 2023 versus 28.8 percent during the same period last year.

Distribution and administrative expense grew by 9 percent and 30 percent year-on-year respectively during the nine month period of 2023. Other expense and other income shrank by 36 percent and 28 percent respectively during the period. The company also booked 81 percent lesser reversals of impairment loss against trade receivables during the nine months of 2023. All these factors collectively contributed towards a 14 percent drop in operating profit with OP margin slipping to 12.3 percent during the nine months of 2023 versus 15.5 percent during the same period last year. Finance cost gave no respite and grew by 143 percent during the nine month period of 2023 on account of massive exchange loss, high discount rate and increased amount of borrowings obtained during the period to manage its working capital. Bottomline narrowed down by 38 percent year-on-year during nine months of 2023 to clock in at Rs.903.139 million with an NP margin of 4.3 percent versus 7.6 percent during the similar period last year. EPS also settled down to Rs.26.47 during nine months of 2023 versus Rs.43 during the same period last year.

Future Outlook

While the import restrictions have been eased, its impact on the textile exports is yet to be seen keeping in view the global recession which has wiped out the demand. Moreover, with the upward revision in the PSDP spending in the recent budget, construction and infrastructure spending is expected to take an upward flight. This will also bode well for the ARPL offtake in the coming times.

Furthermore, the upcoming merger of Archroma Chemicals Pakistan (Private) Limited into ARPL after its merger with Huntsman Textile Effects Pakistan (Private) Limited will strengthen and diversify the product portfolio of the company and boost its consolidated earnings.