Shabbir Tiles & Ceramics Limited

Shabbir Tiles & Ceramics Limited (PSX: STCL) was incorporated in Pakistan as a public limited company in 1978. The principal activity of the company is the manufacturing and sale of tiles under the brand name “Stile”. STCL has also diversified into trading of building and installation products.

Pattern of Shareholding

As of June 30, 2022, STCL has a total of239.32 million shares outstanding which are held by 3640 shareholders. Foreign companies have the highest stake of 54.81 percent in the company followed by Modarabas & Mutual funds holding 18.11 percent shares of STCL. Local general public accounts for 17.49 percent of the outstanding shares of the company. Around 2.95 percent of STCL’s shares are held by its Directors and their spouses and minor children. Thal Limited, which is an associated company of STCL owns 1.3 percent of its shares. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-23)

Barring a drop in 2020, STCL’s topline has been posting decent growth since 2018. Conversely, its bottomline couldn’t follow the suit and appreciated in just two years – 2019 and 2021. The margins of the company have oscillated during the period under consideration. In 2019, gross and operating margins ascended while net margin stayed constant. In the subsequent year marked by COVID-19, all the margins plunged. In fact, operating and net margins entered negative territory in 2020. 2021 appears to be a recovery year for STCL whereby all its margins posted a strong rebound. However, the recovery didn’t prove to be sustainable as 2022 and 2023 saw steep decline in margins (see the graph of profitability ratios for visual representation of this trend). The detailed performance overview underscoring the reasons of STCL’s financial performance is given below.

In 2019, STCL’s topline grew by 20 percent year-on-year which was on account of improved product range, rigorous market penetration as well as capacity enhancement during the year to meet additional demand. Upward price revision across various categories to counter high cost of production (particularly gas tariff) and elevated borrowing also contributed to the growth of net sales in 2019. During the year, STCL commissioned its enhanced capacity during the year which took the total capacity to 14.04 million square meters in 2019 from 12.76 million square meters in 2018. Cost optimization and operational efficiency kept the cost in check which grew by 18 percent year-on-year resulting in 28 percent year-on-year rise in gross profit with GP margin improving from 21.8 percent in 2018 to 23.2 percent in 2019. Higher freight cost on account of increased volume and hike in the prices of POL products pushed the distribution cost up by 24 percent year-on-year in 2019. Targeted advertising and sales promotion also played a role in driving up the distribution expense during the year. Higher payroll expense on account of soaring inflation culminated into a 41 percent year-on-year spike in administrative expense in 2019. STCL registered a net other income of Rs.32.95 million in 2019, up 124 percent year-on-year which was on account of gain earned from sale of scrap and operating fixed assets during the year. Operating profit measured up by 33 percent year-on-year in 2019 with OP margin climbing up to 6.6 percent versus 6 percent in 2018. Despite high prevailing discount rate in 2019, STCL’s finance cost slid by 11 percent year-on-year. This was the consequence of significantly less long-term financing obtained during the year which took STCL’s gearing ratio from 31.27 percent in 2018 to 24.7 percent in 2019. The effect of prior year taxation and deferred taxation diluted the bottomline growth in 2019. Net profit stood at Rs.234.34 million in 2019, up 21 percent year-on-year with an NP margin of 3.4 percent, same as the previous year. EPS grew from Rs.0.81 in 2018 to Rs.0.98 in 2019.

Net sales lost its footing in 2020 on account of COVID-19 which put brakes on the economic as well as construction and real-estate development activities in the country, leading to reduced demand of STCL’s products. Even before the outbreak of the pandemic, the market size of tiles shrank as the federal government introduced the requirement of CNIC for sale to unregistered persons coupled with the classification of tiles in the third schedule of Sales Tax Act, 1990. Cognizant of demand destruction, STCL produced 8.11 million square meters of its products, down 22 percent year-on-year, resulting in a capacity utilization of 58 percent in 2020. Despite tamed off-take, cost of sales grew by 1 percent year-on-year due to 31 percent hike in gas tariff. This combined with Pak Rupee depreciation and supply chain hindrances inflated the cost of imported raw materials and squeezed the gross profit by 32 percent year-on-year in 2020. GP margin drastically fell to 16.9 percent in 2019. Distribution expense continued to rise due to higher freight charges and restriction on the movement of people and goods during the lockdown period. Number of employees slipped from 869 in 2019 to 766 in 2020, however, high inflation continued to fuel the payroll expense, resulting in a 2 percent growth in administrative expense. STCL booked an allowance worth Rs.37.09 million for ECL in 2020, up 411 percent year-on-year, due to economic breakdown during the year, shrinking the pockets of many of STCL’s customers. STCL registered a net other income of Rs.38.56 million in 2020, up 17 percent year-on-year which was due to no provisioning done for WPPF in 2020. The company incurred an operating loss of Rs.193.74 million in 2020. Finance cost showed a meager 0.2 percent growth in 2020 due to significantly lesser loans obtained during the year. STCL’s gearing ratio further marched down to 18.66 percent in 2020. STCL incurred a net loss of Rs.325.77 million in 2020 with a loss per share of Rs.1.36.

STCL’s financial performance which took an ugly turn in 2020, seems to have recovered in 2021 with 53 percent year-on-year rebound in net sales mainly due to enhancement in construction activity during the year on account of construction stimulus package introduced by the government coupled with accommodating monetary policy. In response to demand recovery, the company produced 12.37 million square meters of tiles, up 53 percent year-on-year. This led to 88 percent capacity utilization in 2020. Since STCL is a high fixed cost based company, increased capacity utilization resulted in better absorption of cost, resulting in a 169 percent year-on-year rebound in gross profit with GP margin of 30.9 percent in 2021. Distribution expense grew by 35 percent year-on-year due to high freight charges on account of increased volume, higher payroll expense and cut-throat advertising to attain greater market penetration. Administrative expense grew by 13 percent year-on-year in 2021 on account of higher payroll expense despite a drop in HR tally from 766 in 2020 to 742 in 2021. STCL posted a robust net other income of Rs.162.03 in 2021 on account of gain on re-measurement of GIDC payable. The company posted a staggering operating profit of Rs.1557.19 million in 2021 with an OP margin of 15.7 percent – the highest among all the years under consideration. Despite monetary easing and lesser borrowings, finance cost spiraled by 23 percent year-on-year in 2021 as a consequence of unwinding of finance cost of GIDC. STCL’s gearing ratio fell to 7.06 percent in 2021. Net profit stood at an impressive Rs.924.89 million in 2021 with an EPS of Rs.3.86 and an NP margin of 9.3 percent.

2022 also witnessed topline growth, albeit, with a lower magnitude of 20 percent year-on-year which came on the back of improved product mix and price revision. The production volume ticked down to 11.9 million square meters, culminating into capacity utilization of 85 percent in 2022. Reduced volume was the result of high inflation and discount rate which halted the construction activities in the country on account of reduced purchasing power. The development spending also took a plunge in 2022 as the government was grappling against current account and fiscal slippages. Exorbitantly high energy prices as well as gas shortages also led to reduced capacity utilization during the year and also contributed towards 30 percent year-on-year cost hike in 2022. Gross profit narrowed by 2 percent year-on-year in 2022 with GP margin declining to 25.2 percent. Distribution expense posted a 15 percent year-on-year hike which was due to sharp spike in freight cost on account of elevated petroleum prices. Administrative expense also measured up by 15 percent year-on-year in 2022. STCL registered a net other income of Rs.85.25 million in 2022, down 47 percent year-on-year as re-measurement gain on GIDC payable was no longer available in 2022. Operating profit tapered by 28 percent year-on-year with OP margin considerably plummeting to stand at 9.4 percent in 2022. Finance cost enlarged by a mere 8 percent in 2022 as the company incurred low unwinding of finance cost of GIDC and lease liabilities. STCL’s gearing ratio grew to 9.03 percent in 2022. Net profit inched down by 46 percent year-on-year in 2022 to clock in at Rs.497.332 million with an EPS of 2.08 percent and an NP margin of 4.2 percent.

Recent Performance (2023)

Slowdown of construction activity in the country forced many tile manufacturers to either hold back or shut down their production activities in 2023. In such uncertain economic backdrop, STCL’s topline showed resilience as it grew by 19 percent year-on-year in 2023. While the demand remained sluggish, STCL altered its sales mix and pricing strategy to keep its topline buoyant. However, the topline growth couldn’t trickle down amid 26 percent high cost of sales on account of Pak Rupee depreciation, unprecedented inflation and unparalleled energy cost. This pushed the GP margin down to 21.1 percent, the lowest among all the years under consideration. High operating expense and a drop in net other income suppressed chopped down the operating profit by 56 percent year-on-year with an OP margin of 3.5 percent in 2023. 67 percent higher finance cost added to ado. Net profit stumbled by 92 percent year-on-year to clock in at Rs.37.61 million with an NP margin of 0.3 percent and an EPS of Rs.0.16 in 2023.

Future Outlook

With political and economic turmoil showing no signs of improvement in the near term, the construction climate will continue to stay gloomy. With company’s margins already on the downhill path, further shrinkage in demand could by alarming. The company has already started sourcing its materials locally to evade exchange losses, however, with low demand and low-capacity utilization, STCL may not be able to spread its fixed cost, resulting in shrinking margins and thin bottomline.