Pak Leather Crafts Limited

Pak Leather Crafts Limited (PSX: PAKL) is incorporated in Pakistan as a public limited company. It was established in 1971. The company is engaged in leather tanning, manufacturing of leather garments as well as export of leather and leather garments.

Pattern of Shareholding

As of June 30, 2022, PAKL has a total of 3.4 million shares outstanding which are held by 555 shareholders. Directors, their spouse and minor children have the majority stake of 44.13 percent in the company followed by sponsors’ associates & friends holding 37.72 percent shares of PAKL. Other individuals account for 13.06 percent shares of the company. Public sector companies & corporations hold 4.94 percent shares of PAKL. The remaining 0.16 percent shares are held by mutual funds.

Financial Performance (2018-23)

Barring 2021 and 2023, PAKL’s topline has been growing since 2018; however, its bottomline shows a positive figure only in 2019 and 2020. In the rest of the years, the company has made consistent net losses. In all the years under consideration, PAKL has a negative equity because of the accumulated losses as the company has been making losses since 2014. PAKL’s liabilities are quite higher than its total assets. This shows that even if the company liquidates its assets, it will not be able to pay off its dues. Exorbitant level of current liabilities also translates into negative working capital in all the years under consideration. PAKL’s margins registered a strong rebound in 2019. In 2020, gross margin slid; however, operating and net margins posted a staggering rise. 2021 again witnessed a freefall of margins with operating and net margins striking the negative zone. Gross margins improved in the subsequent years while operating and net margins continued to stay in the negative territory. The detailed performance review of each of the years under consideration is given below.

In 2019, PAKL’s net sales grew by 48 percent year-on-year. Despite depressed macroeconomic backdrop characterized by high inflation, Pak Rupee depreciation, monetary tightening as well as regulatory measures, the company was able to push its bottomline into net profit after five uninterrupted years of net losses. While export sales slightly shrank in 2018, the topline growth was mainly the consequence of local income derived from leather processing. Cost of sales grew by 24 percent year-on-year in 2019 as the company achieved economies of scale because of higher volume. Gross profit magnified by 695 percent year-on-year in 2019 with GP margin jumping up from 3.6 percent in 2018 to 19.5 percent in 2019. Operating expense grew by 26 percent year-on-year on in 2019 on account of higher payroll expense as the number of employees grew from 21 in 2018 to 40 in 2019. Fee and subscription charges and balances written off also escalated in 2019. PAKL registered an operating profit of Rs.5.86 million in 2019 versus an operating loss of Rs.4.13 million in 2018. OP margin was recorded at 7.7 percent in 2019. The company had a total debt of around Rs.250 million as of 2019 out of which Rs.12.99 million was long-term and interest free, acquired from directors’ associates. The remaining short-term loan had mark-up over due for which the banks had filed suit for recovery. PAKL only paid bank commissions which grew by 25 percent in 2019. PAKL posted a net profit of Rs.4.146 million in 2019 as against the net loss of Rs.5.29 million in 2018. EPS clocked in at Rs.1.22 in 2019 versus loss per share of Rs.1.56 in 2018. NP margin stood at 5.4 percent in 2019.

PAKL’s topline boasted a tremendous 183 percent year-on-year rise in 2020 because of a splendid 5 times growth in export sales. PAKL achieved huge order from Hong Kong, Cambodia, China, Indonesia and South Korea which gave a significant boost to its export sales in 2020. Conversely, local sales slid by 64 percent in 2020. However, substantial rise in material cost on account of COVID-19 pushed the cost of sales up by 217 percent in 2020. Gross profit grew by 42 percent in 2020, however, GP margin drastically fell to 9.7 percent. Operating expense surged by a massive 725 percent in 2020 which was the consequence of high provisioning for doubtful debts as well as elevated freight charges on account of COVID-19. Number of employees also rose to 48 in 2020 which pushed up the payroll expense during 2020. Other income grew by over 132 percent in 2020 as the company received waiver of Rs.79.89 million and Rs.34.83 million on loan liability and mark-up on loan respectively. This drove the operating profit up by over 8 times in 2020 with OP margin registering an overwhelming rise to clock in at 25.2 percent. Bank charges grew by 330 percent in 2020. Net profit surged by over 10 times in 2020 to clock in at Rs.48.79 million with an EPS of Rs.14.35 and NP margin of 22.5 percent.

The splendid topline growth of 2020 was followed by 50 percent decline in net sales in 2021. While local sales showed some improvement during the year, the drastic fall of around 61 percent in export sales squeezed the topline in 2021. Thin export sales were on account of lockdown imposed in various export destinations of PAKL. Cost of sales plunged by 47 percent year-on-year in 2021. Gross profit slipped by 82 percent year-on-year in 2021 with GP margin marching down to 3.5 percent. Operating expense also nosedived by 80 percent year-on-year in 2021 as the company didn’t book any provisioning against doubtful debts and also because of lower freight charges because of lower export sales. Other income also slumped by 94 percent year-on-year in 2021 due to high-base effect as the company got waivers on loan and mark-up in 2020. PAKL recorded an operating loss of Rs.6.43 million in 2021. Bank charges tumbled by 56 percent year-on-year in 2021. As a consequence, PAKL posted a net loss of Rs.8.7 million in 2021 with a loss per share of Rs.2.56.

PAKL’s topline registered 23 percent year-on-year improvement in 2022 due to rise in both export and local sales during the year. Pak Rupee depreciation proved to be good omen for the company and drove its gross profit up by 255 percent in 2022. GP margin also rose to 10.1 percent in 2022. Operating expense stood at almost the same level as of previous year as the company reduced its workforce to 40 employees and also because of lower freight charges. Other income nosedived by 59 percent year-on-year due to lower balances written back during the year. PAKL’s operating loss slipped by 90 percent in 2022. Bank charges also narrowed down by 57 percent year-on-year in 2022, translating into 67 percent lower net loss incurred during the year. Net loss stood at Rs.2.90 million in 2022 with a loss per share of Rs.0.85.

Recent Performance (2023)

In 2023, PAKL’s topline sustained 32 percent erosion. The company couldn’t maintain its growth momentum due to exorbitant increase in the prices of materials. Wet blue and chemical prices hiked by 25 percent and 50 percent respectively. Electricity prices also spiked during the year. Moreover, only 50 percent of the company’s gas requirement was met by the gas pipeline. The thin liquidity of the company and its inability to meet its financial obligations didn’t allow it to obtain more loans from external parties. Hence, it couldn’t afford to switch to LPG and purchase costlier raw materials to continue its operations. Due to lower sales volume, cost of sales also slid by 32 percent in 2023. Gross profit slid by 28 percent year-on-year in 2023, however, GP margin slightly improved to clock in at 10.6 percent. Operating expense surged by 14 percent year-on-year in 2023 which might be the consequence of higher freight charges on account of escalated prices of POL products. Unprecedented level of inflation and higher utility charges may also have driven up the operating expense in 2023. Operating loss magnified by 13 times in 2023. Bank charges grew by 28 percent year-on-year in 2023 resulting in 2.9 times higher net loss incurred during the year. Net loss stood at Rs.11.21 million in 2023 with a loss per share of Rs.3.30 – the highest among all the years under consideration.

Future Outlook

With inflation at unparalleled levels, incessant hike in electricity tariff and erratic gas supplies, the company may not be able to sustain its production activities for a longer period. Banks and financial institutions are also hesitant in lending to PAKL due to its history of non-payments. In such precarious situation, continuing operations seem a far-fetched dream for PAKL in the absence of substantial equity injection or loan from directors/sponsors.