Highnoon Laboratories Limited

Highnoon Laboratories Limited (PSX: HINOON) was incorporated in Pakistan as a private limited company in 1984 and was converted into a public limited company in 1995. The principal activity of the company is the manufacturing, import, sale and marketing of pharmaceutical and allied consumer products.

Pattern of Shareholding

As of December 31, 2022, HINOON has a total outstanding share volume of 41.884 million shares which are held by 3519 shareholders. Local general public is the largest shareholding category of HINOON with 40.86 percent shares. This is followed by Directors, CEO, their spouse and minor children accounting for 22.52 percent of the outstanding shares of the company. Around 12.27 percent of HINOON’s shares are held by foreign companies while 11.9 percent shares are held by Insurance companies. Modarabas and Mutual funds have a stake of 3.09 percent in the company. Associated companies, undertakings and related parties have 1.92 percent shareholding of HINOON while NIT and ICP accounts for 1.51 percent shares. Joint stock companies also have 1.5 percent shares of HINOON. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

HINOON’s topline and bottomline have posted a steady growth in all the years under consideration. The margins have also progressed over the years to reach their optimum level in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, HINOON’s topline posted a 20.6 percent year-on-year growth which mainly came on the back of a growth in local sales. Export sales which constituted 5.1 percent of HINOON’s total sales revenue in 2018 slid to 4.2 percent of its net revenue in 2019 due to insignificant growth posted by the export sales. Export sales are led by sales to Afghanistan which dropped in 2019 while sales to other destination posted an uptick during 2019. Higher local sales volume coupled with better sales mix on account of successful innovative product launches during the year kept the GP margin almost intact at 46 percent despite high cost of raw materials and Pak Rupee depreciation. Distribution expense and administrative expense inched up by 16 percent and 14 percent respectively primarily due to higher payroll expense, advertising and promotion budget as well as trainings, seminars and symposia charges. Other expense also grew by 36 percent on the back of higher provisioning against WWF and WPPF as well as central research fund (CRF). Other expense was largely offset by 158 percent rise in other income which was the result of higher returns on deposits coupled with gain in disposal of operating fixed assets in 2019. Operating profit registered a 28 percent spike in 2019 with OP margin jumping up to 15.1 percent from 14.2 percent in 2018. Finance cost rose by 185 percent year-on-year in 2019 on account of higher discount rate and higher lease liabilities. The company didn’t have any short-term borrowings on its books in 2019. Net profit posted a 34 percent year-on-year rise in 2019 to clock in at Rs.971.01 million with an NP margin of 10.7 percent versus 9.7 percent in 2018. EPS also climbed up from Rs.23.07 in 2018 to Rs.28.05 in 2019.

In 2020, HINOON’s topline grew by 18.2 percent year-on-year which was mainly backed by the growth of the company’s respiratory portfolio during the year on account of COVID-19. Both local and export sales revenue posted a growth in 2020 with export sales now constituting to 5 percent of HINOON’s topline. Cost control measures put in place by the company are evident by a growth of gross profit by 23 percent year-on-year in 2020 despite increase in the prices of imported raw materials due to Pak Rupee depreciation. GP margin swelled up to 47.9 percent in 2020. Distribution and administrative expense registered a year-on-year growth of 11 percent and 21 percent respectively during the period with main growth propellers being payroll expense, advertising and publicity expense, traveling expense as well as trainings, seminars and symposia charges incurred during the year. Higher provisioning against WWF, WPPF and CRF coupled with a significant hike in exchange loss drove the other expense up by 49 percent in 2020. Other income registered a decent 22 percent growth on the back of dividend income from short-term investment and gain on sale of operating fixed assets in 2020. Operating profit attained a 43 percent growth in 2020 with OP margin further improving to 18.2 percent. Finance cost grew by 1 percent as discount rate was cut significantly during the year. This was despite the fact that the lease liabilities grew during the year. Moreover, the company also availed SBP refinance scheme for the payment of salaries and wages in 2020. Net profit grew by 46 percent to clock in at Rs. 1420.74 million with an NP margin of 13.31 percent and an EPS of Rs.37.31 in 2020.

In 2021, HINOON’s topline posted a 21.5 percent year-on-year rise driven by both local and export sales growth. During the year, the company launched eight new products that further enriched its product portfolio and contributed a great deal to the sales growth. With efficient sourcing and supply chain management, well organized working capital management and robust sales, the company was able to drive its gross profit up by 25.3 percent year-on-year in 2021 with GP margin growing up to 49.3 percent in 2021. Distribution expense posted a steep 29 percent spike in 2021 which was primarily the effect of a hefty payroll expense coupled with higher promotion and advertising expense. Administrative expense grew by 18.5 percent year-on-year in 2021 as the number of employees grew from 1825 in 2020 to 2315 in 2021 which pushed up the payroll expense. Higher provisioning against WWF, WPPF, CRF and expected credit losses also culminated into a 19.6 percent hike in other expense in 2021. This was largely offset by a 57 percent year-on-year rise in other income which was the result of dividend income on short-term investments earned in 2021. Operating profit grew by 24 percent year-on-year in 2021 with OP margin setting a new benchmark of 18.5 percent. Despite monetary easing scenario prevailing in the country in 2021, HINOON’s finance cost jumped up by 49 percent year-on-year in 2021. This was due to increased liabilities. However, since HINOON had a very low gearing ratio of 7 percent in 2021 which grew from 2 percent in 2020, its finance cost stayed at less than 1 percent of its sales in all the years under consideration. Net profit grew by 27 percent year-on-year in 2021 to clock in at Rs.1808.03 million with an NP margin of 13.9 percent and an EPS of Rs.43.17.

A further 21.7 percent uptick in HINOON’s topline was seen in 2022. The company made 6 new product launches in the primary care and specialized segments. Furthermore, its export sales posted a tremendous 42 percent rise in 2022 which was the result of an increased foothold in the African region. Increased sales to Afghanistan and Iraq also played a pivotal role in attaining a robust growth momentum in the overall sales of HINOON during the year. Despite high raw material prices due to Russia Ukraine crisis which was further exacerbated by steep depreciation of Pak Rupee, the company, with its effective cost planning and control, was able to attain a 25 percent growth in gross profit with GP margin attaining the highest ever mark of 51 percent in 2022. Distribution and administrative expense grew by 17 percent and 16 percent year-on-year respectively which were in line with higher sales volume which resulted in an increased workforce requirements and hence higher payroll expense. Moreover, higher advertisement and promotion budget for the market penetration of new and existing products also contributed a great deal to higher operating expenses in 2022. Other expense grew by 50 percent year-on-year in 2022 on account of higher provisioning while other income grew by 87.5 percent year-on-year in 2022 due to sizeable increase in dividend income. Operating profit multiplied by 41 percent year-on-year in 2022 with OP margin jumping up to 21.5 percent. HINOON’s gearing ratio significantly grew from 7 percent in 2021 to 13 percent in 2022. This was due to a high amount of working capital related borrowing obtained by the company in 2022. Higher borrowings coupled with higher discount rate translated into a 51 percent hike in finance cost in 2022. The imposition of super tax during the year also diluted the bottomline which grew by 34 percent year-on-year in 2022 to clock in at Rs.2417.17 million with an NP margin of 15.3 percent and an EPS of Rs.57.71.

Recent Performance (1HCY23)

HINOON was able to protect its margins from the disastrous effect of inflation, Pak Rupee depreciation, cost of borrowing and taxation until 2022 through innovative product launches, increased product penetration and growing foothold in the export market. However, it appears that the company is slowing giving in to the external pressure. This is evident by the fact that its margins diluted during 1HCY23 despite sales growth of 25 percent year-on-year. GP margin tumbled from 50.2 percent in 1HCY22 to 45 percent in 1HCY23. Distribution expense grew by 3.3 percent in 1HCY23 due to novel marketing drives launched during the year. Administrative expense grew by 20 percent year-on-year in 1HCY23 due to high inflation and also because new product launches and increased sales volume required human resource induction which increased the payroll expense. Other expense and other income slumped by 7 percent and 41 percent respectively during 1HCY23. Although operating profit grew by 18.6 percent during the period, OP margin dropped to 18.7 percent from 19.6 percent during 1HCY22. Finance cost posted a staggering 86 percent year-on-year hike in 1HCY23 due to high discount rate and increased borrowings during the period. Net profit grew by 10 percent year-on-year in 1HCY23 to clock in at Rs.1201.63 million with an NP margin of 12.2 percent from 13.9 percent in 1HCY22. EPS slightly grew from Rs.20.64 in 1HCY22 to Rs.22.68 in 1HCY23.

Future Outlook

While HINOON is putting its best foot forward by launching new and innovative products to diversify its sales mix, by undertaking marketing and promotional campaigns to make them recognized and accepted in the market and also by embarking on cost optimization and operational efficiencies to strengthen its margins and bottomline. However, macroeconomic malfunctioning is taking its toll on the financial performance of the company resulting in squeezed margins and thin bottomline. With more than 10 new product launches in the pipeline in 2023, how strategically HINOON alters its sales mix to attain better financial results is yet to be seen.