Thal Limited

Thal Limited (PSX: THALL) was incorporated in Pakistan as a public limited company in 1966. The principal activity of the company is the manufacturing of jute goods, engineering goods, laminate sheets and paper sacks.

Pattern of Shareholding

As of June 30, 2023, THALL has a total of 81.029 million shares outstanding which are held by 4403 shareholders. Foreign investors have the highest stake of 40 percent in the company followed by local individuals holding 29.68 percent shares of the company. Banks, DFIS, NBFIs, insurance, pension funds and other financial institutions collectively holds 11.22 percent shares of THALL while Directors, CEO, their spouse and minor children account for 5.34 percent shares of the company. Public sector companies and mutual funds hold 4.25 percent and 4.21 percent shares respectively. Around 3.16 percent of THALL’s shares are held by joint stock companies while the remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-23)

During the period under consideration, THALL’s topline and bottomline plunged twice i.e. in 2020 and 2023. Its margins, which were on a downhill journey until 2020, posted a rebound in 2021. In the subsequent year, gross margin slightly ticked up to recede in 2023. Conversely, operating and net margins resumed their descending trend since 2022 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, THALL’s topline grew by 16 percent year-on-year. This was backed by the growth of 18.4 percent in the engineering segment and 11.3 percent in the packing, building material and allied products segment. Except for jute, all other products produced by the company i.e. auto air conditioners, wire harness, paper bags, alternators and starters registered an uptick in production and sales volumes. Cost of sales surged by 17 percent year-on-year in 2019 on account of higher commodity prices and weakening of Pak Rupee. Gross profit rose by 14 percent year-on-year in 2019, however, GP margin fell from 19 percent in 2018 to 18.6 percent in 2019. While there was a hike in distribution expense due to higher provisioning done for ECL and warranty claims, lower payroll expense, repair & maintenance charges, legal & professional expense as well as depreciation translated into a 3 percent thinner operating expense in 2019 compared to previous year. Higher provisioning for WWF, WPPF as well as impairment of investment property pushed the other expense up by 28 percent year-on-year in 2019. However, all of the THALL’s operating and other expense was nullified by a fat other income of Rs.1528.28 million earned by the company in 2019, which was up 6 percent year-on-year. This was on account of tremendous dividend from mutual funds, interest income as well as gain on the disposal of fixed assets. As a consequence, operating profit in 2019 turned out to be 14 percent bigger than in 2018, yet OP margin slightly slid from 19.8 percent in 2018 to 19.4 percent in 2019. Finance cost mounted by 11 percent year-on-year in 2019 due to higher discount rate as well as bank commission. Net profit expanded by 17 percent year-on-year in 2019 to clock in at Rs. 3,154.67 million while NP margin stayed afloat at 14 percent. EPS inched up from Rs.33.15 in 2018 to Rs.38.93 in 2019.

In 2020, THALL’s topline registered a 26 percent year-on-year plunge. The company’s engineering segment posted a 46 percent year-on-year decline in revenue in 2020 on the back of shrunken demand of automobile industry. This was on account of Pak Rupee depreciation and the imposition of additional duties and taxes which inflated the auto prices. The drop in automobile sales was further exacerbated by the outbreak of COVID-19. As against engineering segment, packaging, building materials and allied products segment posted a 12 percent year-on-year rise in revenue in 2020 mainly on account of an encouraging demand of paper bags due to rise in online sales and an enhanced focus on meticulous packaging during the lockdown period. Owing to the growing demand, the company also upgraded its cement sack manufacturing plant during the year and installed a production line. Cost of sales slumped by 23 percent year-on-year in 2020 which translated into a 39 percent lower gross profit and GP margin falling down to 15.4 percent. Operating expense mounted by 12 percent in 2020 on account of elevated freight expense. Lower provisioning against WWF and WPPF pushed other expense down by 53 percent year-on-year in 2020. Other income also shrank by 27 percent year-on-year in 2020 primarily due to lower dividend income. Operating profit contracted by 45 percent year-on-year in 2020 with OP margin plummeting to 14.4 percent. Finance cost soared by 72 percent in 2020 which was particularly due to higher bank charges and commissions. Net profit slumped by 41 percent year-on-year in 2020 to clock in at Rs.1,867.16 with NP margin slipping to 11.2 percent and EPS of Rs.23.04.

In 2021, THALL’s net sales registered a strong rebound of 64.6 percent. This was on the back of a splendid 100 percent year-on-year rise in the revenue from engineering segment as the automobile sector thrived during the year due to discount rate cuts, economic recovery after the ease of lockdown as well as entry of new market players such as Hyundai Nishat Motor (Private) Limited and Master Motor Corporate (Private) Limited which increased the number of alternatives available to the consumers. Packaging, building and allied products industry also grew by 31 percent year-on-year in 2021 due to higher export sales. Cost of sales spiked by 61 percent in 2021, yet better volume and progressive pricing culminated into 83 percent bigger gross profit in 2021 versus previous year. GP margin also picked up to 17.1 percent in 2021. Operating expense magnified by 27 percent year-on-year in 2021 primarily due to exorbitantly higher freight expense and provision for warranty obligations. Other expense intensified by 84 percent year-on-year in 2021 due to higher profit-related provisioning.THALL’s expense were almost offset by 48 percent higher other income earned by the company in 2021. This translated into a 93 percent higher operating profit in 2021 with OP margin climbing up to 17 percent. Finance cost spiked by 106 percent in 2021 on account of increased short-term and long-term borrowings obtained during the year. Net profit improved by 86 percent year-on-year in 2021 to clock in at Rs.3,482.20 with EPS of Rs.42.97 and NP margin of 12.7 percent.

THALL’s topline grew by another 37 percent in 2022. This was backed by 42 percent increase in the revenue from engineering segment due to increased automobile sales in the 1HFY22. However, in the latter half of the year, the country witnessed diminishing foreign exchange reserves due to rising commodity prices in the aftermath of Russia-Ukraine crisis and also because of delay in the IMF program. The other segment of THALL also posted 29 percent rise in its revenue in 2022 on the back of increased demand of Pakistan grain sacks in the export market. Cost of sales hiked by 36 percent year-on-year on the back of high commodity prices, Pak Rupee depreciation as well as hike in electricity tariff and general inflationary trend in the economy. However, the company was able to slightly improve its gross margin to 17.4 percent by passing on the onus of elevated cost to its consumers. Operating expense mounted by 21 percent in 2022 due to higher freight expense, provision for warranty obligations and escalated payroll expense due to increase in the number of employees from 4367 in 2021 to 5194 in 2022. Higher exchange loss pushed other expense up by 87 percent in 2022. Other income grew by 11 percent year-on-year in 2022 due to lofty dividend income and interest income. Operating profit rose by 32 percent year-on-year in 2022, however, OP margin slightly fell to 16.3 percent. Finance cost multiplied by a massive 316 percent in 2022 on account of high discount rate and also because of increased borrowings which radically increased its debt-to-equity ratio from 1.87 percent in 2021 to 10.54 percent in 2022. This significantly diluted the bottomline. In 2022, THALL’s net profit marched up by 22 percent year-on-year to clock in at Rs. 4,257.25 million with EPS of Rs.52.54 and NP margin of 11.4 percent.

Recent Performance (2023)

With a 15 percent year-on-year slide in net sales, 2023 seems to put an end to the financial glory that THALL has been enjoying for the past two years. Import restrictions owing to dwindling foreign exchange reserves put a severe dent on the performance of automobile sector, halting its production activities. Moreover, declining consumer demand due to shrinking purchasing power of consumers also affected the overall sales of the auto industry. This translated into a 40 percent dip in the sales of engineering segment in 2023. Conversely, packing, building materials and allied products segments registered a 26 percent rise in its revenue in 2023 which was the consequence of robust wheat sack demand. Gross profit dwindled by 32 percent year-on-year in 2023 with GP margin slipping to 13.8 percent on account of Pak Rupee depreciation, high commodity prices and steep rise in electricity tariff. Operating expense escalated by 10 percent in 2023 on account of higher salaries due to unparalleled inflation, higher vehicle running and travelling expense due to elevated prices of POL products. While the company suffered hefty exchange loss in 2023, lower provisioning for WWF and WPPF diluted the hike in other expense to 10 percent. Other income magnified by 36 percent in 2023 on the back of higher dividend and interest income earned. Operating profit eroded by 27 percent in 2023 with OP margin clocking in at 13.8 percent. Finance cost soared by 180 percent in 2023 due to successive monetary tightening coupled with hefty borrowings which drove the debt-to-equity ratio up to 14.25 percent. Net profit nosedived by 35 percent year-on-year in 2023 to clock in at Rs.2,750.76 million with NP margin of 8.6 percent – the lowest among all the years under consideration. EPS also dipped to Rs.33.95 in 2023.

Future Outlook

The ease of import restrictions and a recent rebound in the value of Pak Rupee may prove to be a good omen for THALL and result in sales recovery by buttressing sacking export. A slight uptick in passenger cars, two and three wheelers, in search of cost effective commute, is also on the cards. This may propel the revenue of engineering segment of the company. Nevertheless, high indigenous inflation and energy tariff will continue to pose downside risks. The company is undertaking several measures such as embracing automation, adoption of solar energy as well as optimization of workflows to curb its cost. Whether or not these measures will cut back the freefall of THALL’s bottomline and margins is yet to be seen.