Sana Industries Limited

Sana Industries Limited (PSX: SNAI) was incorporated as a public limited company in 1985. The principal activity of the company is the manufacturing and sale of man-made blended yarn. The company is an entity of Sanaullah Group of Companies.

Pattern of Shareholding

As of June 30, 2023, SNAI has a total of 19.965 million shares outstanding which are held by 578 shareholders. Directors, their spouse and minor children have the majority stake of 64.82 percent in the company followed by local general public holding 29.14 percent shares of SNAI. Modarabas and Mutual funds account for 3.62 percent of the company’s shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a year-on-year decline in 2020, SNAI’s topline has been riding an upward trajectory during the period under consideration. Its bottomline slid in 2020 and 2023 to translate into net loss. The company’s margins which registered significant growth in 2019 declined in 2020. The margins considerably recovered in 2021. In 2022, while the company’s gross margin took a plunge, its operating and net margins continued to tick up. SNAI drew curtains to 2023 with its margins touching the lowest level. The detailed performance review of each of the years under consideration is given below.

In 2019, SNAI’s net sales grew by 17.4 percent year-on-year. Better pricing along with increased volume enabled the company to attain 71.4 percent bigger gross profit in 2019 with GP margin moving up from 6.78 percent in 2018 to 9.90 percent in 2019. Selling and administrative expenses hiked by 37.3 percent and 25.5 percent respectively in 2019 mainly on account of higher payroll expenses in both the categories. Directors’ remuneration also played a pivotal role in driving up the administrative expense in 2019. During the year, SNAI expanded its workforce from 183 employees in 2018 to 217 employees in 2019. The company registered 40.1 percent higher operating profit in 2019 with OP margin rising up from 5.98 percent in 2018 to 7.14 percent in 2019. Finance cost mounted by 37.4 percent in 2019 on account of higher discount rate and increased working capital related borrowings. Net profit improved by 249.3 percent in 2019 to clock in at Rs.65.22 million with EPS of Rs.7.59 versus EPS of Rs.2.17 in 2018. NP margin also spiraled from 1.09 percent in 2018 to 3.26 percent in 2019.

With 29 percent year-on-year plunge in its topline in 2020, SNAI also succumbed to economic standstill induced by COVID-19. Owing to country-wide lockdowns imposed on account of global pandemic, the company’s production fell by 22 percent in 2020 with capacity utilization of 74 percent versus 93 percent in 2019 (see the graph of total capacity versus actual production). The company wasn’t able to squeeze its cost with the same magnitude as its topline, however due to low absorption of fixed cost, its gross profit slipped by 55.7 percent in 2020 with GP margin sliding down to 6.19 percent. Selling and administrative expenses surged by 6.7 percent and 15.5 percent respectively in 2020 due to higher salaries and wages as well as increased directors’ remuneration. Packing and forwarding charges also raised its head up in 2020. Operating profit registered 78 percent downtick in 2020 with OP margin deteriorating to 2.22 percent. 18 percent higher financial charges recorded by SNAI in 2020 was the consequence of higher discount rate until 3QFY20. SNAI posted net loss of Rs.31.46 million in 2020 with loss per share of Rs.3.59.

SNAI made up for the sluggish sales it made in the previous year by achieving 50 percent superior net sales. With the resumption in operational activities, the company’s production volume grew by 28 percent. This culminated into a capacity utilization of 94 percent. The stimulus packages for trade and industry offered by the government in 2021 along with monetary easing instilled life in the stagnant local economy, Global economy also started to regain its lost momentum, resulting in the revival in demand and yarn prices. This enabled SNAI to drive up its gross profit by 192.6 percent in 2021 with GP margin reaching its optimum level of 12.07 percent. Selling and distribution expense diminished by 23 percent in 2021 due to significantly lower payroll expenses incurred during the year. Administrative expense multiplied by 17.5 percent in 2021 due to higher payroll expense as the company expanded its workforce to include 215 employees versus 129 employees in 2020. Higher rental income, operating and maintenance charges, gain on sale of operating fixed assets and amortization of deferred government grant were the main contributors behind 57.7 percent higher other income earned by SNAI in 2021. Increased profit related provisioning also pushed up other expense by manifold in 2021. Operating profit recorded 527.4 percent rise in 2021 with OP margin clocking in at 9.28 percent. Lower discount rate during the year enabled SNAI to cut down its finance cost by 19.2 percent in 2021, enabling it to post net profit of Rs.94.78 million with EPS of Rs.9.10 and NP margin of 4.45 percent.

In 2022, SNAI’s topline registered a healthy 23.6 percent year-on-year rise. This was on account of an augmentation in yarn prices coupled with rise in sales volume. During the year, the company added 2400 spindles to meet the rising demand. The production volume grew by 3 percent year-on-year in 2023 and capacity utilization stood at 89 percent. Cost of sales hiked by 24.2 percent in 2022 on account of hike in global commodity prices particularly POL products, Pak Rupee depreciation, spike in energy tariff and high indigenous inflation. This resulted in a downtick in SNAI’s GP margin which stood at 11.62 percent in 2022 despite 18.9 percent in the company’s gross profit. Selling and administrative expenses were largely contained and grew marginally by 1 percent and 8.2 percent respectively in 2022. Other income enlarged by 79.9 percent in 2022 due to higher gain earned on the sale of fixed assets as well as gain on re-measurement of GIDC. This translated into 34 percent higher operating profit posted by the company in 2022 with OP margin climbing up to 10.06 percent. Finance cost soared by 50.3 percent in 2022 on account of higher discount rate as well as higher outstanding borrowings during year. SNAI registered 35.3 percent rise in its net profit in 2022 which clocked in at Rs.128.29 million with EPS of Rs.6.43 and a higher NP margin of 4.88 percent when compared to last year.

SNAI’s topline posted a paltry 9.7 percent year-on-year growth which was merely the result of increase in yarn price and depreciation in the value of local currency. Production volume slid by 6 percent in 2023 with capacity utilization clocking in at 79 percent. Extreme inflationary pressures, supply chain disruptions due to dwindling foreign exchange reserves, global commodity super cycle and Pak Rupee depreciation didn’t allow the company’s gross profit to post any improvement in 2023. SNAI’s gross profit slippedby 73.3 percent in 2023 with GP margin marching down to 2.83 percent. Selling and administrative expenses enlarged by 66 percent and 42 percent respectively in 2023. Besides unprecedented level of inflation the other main factors behind higher operating expenses were hiking payroll expense, directors’ remuneration and packing and forwarding charges incurred during the year. Other income receded by 57.3 percent in 2023 due to lower rental income and lower gain on sale of operating fixed assets during the year. SNAI didn’t book any profit related provisioning during the year, resulting in 96.6 percent lower other expense incurred during the year. The company made operating loss of Rs.23.74 million. To make the bottomline even worse, the company’s finance cost escalated by 120.6 percent in 2023 which was the consequence of higher discount rate and considerably high borrowings particularly working capital related borrowings. This resulted in net loss of Rs.133.97 million posted by SNAI in 2023 with loss per share of Rs.6.71.

Recent Performance (1QFY24)

46 percent year-on-year rise in SNAI’s net sales in 1QFY24 didn’t warranty a healthy bottomline which registered net loss of Rs.19.365 million, down 65 percent year-on-year. The company was able to improve its gross profit by 345 percent during the quarter by increasing the prices. This culminated into GP margin of 4.55 percent in 1QFY24 versus 1.5 percent during the same period last year. Selling and administrative expenses hiked by 95 percent and 14 percent respectively in 1QFY24 on account of higher inflation. Yet, the company was able to post operating profit of Rs.14.567 million in 1QFY24 vis-à-vis operating loss of Rs.9.16 million in 1QFY23. Eventually, 41 percent higher finance cost dragged the company in net loss with loss per share of Rs.0.97 versus loss per share of Rs.2.75 during the same period last year.

Future Outlook

Recovery in the global market will stimulate demand of textile in the coming quarters. This coupled with relatively stable value of local currency will ease the pressure on the cost of inputs. Better local cotton crop can also result in localization of raw materials. The main Achilles for the company is its rising finance cost. With its debt-to-equity ratio amplifying from 18 percent in 2018 to 51 percent in 2023, the company needs to reassess its capital structure to improve its bottomline.