Frontier Ceramics Limited

Frontier Ceramics Limited (PSX: FRCL) was incorporated in Pakistan as a public limited company in 1982. The company is engaged in the manufacturing and sale of wall and floor ceramic tiles, sanitary wares and other related products.

Pattern of Shareholding

As of June 30, 2023, FRCL has 37.874 million shares outstanding which are held by 878 shareholders. Directors, their spouse and minor children have a majority stake of around 94.95 percent in FRCL followed by local general public holding 4.21 percent shares of the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

FRCL’s topline has been ascending over the period under consideration. Conversely, its bottomline has shown an uphill movement only in 2020 and 2021. In 2019 and 2023, FRCL made net losses. FRCL’s margins which drastically fell in 2019 improved for the next two years followed by a plunge in 2022 and 2023. The detailed performance review of the period under consideration is given below.

In 2019, the year-on-year topline growth of 17.57 percent was led by higher volumes. However, cost of sales grew by 37 percent year-on-year on the back of heavy consumption of LPG to cater to the issue gas load shedding. Increase in gas tariff and Pak Rupee depreciation also played their due role to push up the cost of sales and squeeze the gross profit by 84 percent year-on-year in 2019. GP margin radically plummeted to 2.2 percent in 2019 versus 15.9 percent in 2020. To top it off, operating expenses also grew on account of higher payroll expense and depreciation. FRCL enhanced its workforce from 203 employees in 2018 to 242 employees in 2019. This resulted in FRCL making an operating loss of Rs. 22.18 million in 2019 as against operating profit of Rs.54.65 million in 2018. Other expense dropped by 92 percent in 2019 as FRCL didn’t make any provisioning for WWF and WPPF during the year. Moreover, there were no inventory write-offs during the year as against the previous year. Other income didn’t provide any respite either and plunged by 90.4 percent year-on-year in 2019 due to high-base effect as the company wrote back liabilities of Rs.19.47 million in 2018. Finance costs gave another major blow to the bottomline by expanding by over 240 percent year-on-year in 2019. Not only did the company’s short-term and long-term borrowings grow during the year, but high discount rate also did the trick. Consequently, FRCL posted a net loss of Rs. 88.47 million in 2019 as against net profit of Rs.39.43 million in 2018. Loss per share clocked in at Rs.2.34 in 2019 versus EPS of Rs.1.04 in 2018.

The next two years were characterized by staggering topline and bottomline growth and improved margins. Sales growth was led by both improved volumes and upward revision in the sales prices. 2021 saw uproar in construction activity post COVID-19 and resulted in the highest topline growth of 153.67 percent. In 2020, before the outbreak of COVID-19, the company performed exceptionally well and recorded net sales growth of 42.64 percent despite sluggish business in the 2HFY20.Cost of sales was kept in check during both the years which resulted in phenomenal growth of gross profit to the tune of 566.40 percent and 162.81 percent respectively in 2020 and 2021. This led FRCL to record GP margin in the range of 10 percent in both 2020 and 2021. Operating expenses were higher in both the years on the back of improved sales coupled with inflationary effect. FRCL expanded its workforce to 546 employees in 2020 and 764 in 2021. This led to higher payroll expense. Higher freight charges and depreciation also led to elevated operating expenses in both the years. Other expense also posted hefty growth of 116.83 percent and 336.59 percent respectively in 2020 and 2021 owing to higher provisioning for WWF and WPPF coupled with higher legal & professional charges. FRCL recorded operating profit of Rs.67.89 million in 2020 as against operating loss of Rs.22.18 million in 2019. This translated in OP margin of 6.1 percent in 2020. Operating profit further strengthened by 243.81 percent in 2021 with OP margin registering its optimum level of 8.3 percent. Other income built up by 43.24 percent and 33.06 percent respectively in 2020 and 2021. Finance cost also buttressed the bottomline in both the years. In 2020, when discount rate was high for most part of the year, the company considerably squeezed its long-term borrowings resulting in 13.6 percent lower finance cost. In 2021, finance cost further shrank by 12.4 percent due to monetary easing to bring the economic activity back on the track post COVID-19. In 2020, FRCL’s bottomline recovered from net loss and posted net profit of Rs.43.85 million with EPS of Rs. 1.16. In 2021, net profit mounted by 266.5 percent to clock in at Rs. 160.71 million with EPS of Rs.4.24. FRCL posted NP margin of 3.93 percent and 5.68 percent respectively in 2020 and 2021.

The merry time enjoyed by FRCL for the two consecutive years seems to be over in 2022 as the company once again faced a bottomline dip and constricted margins despite topline growth of 32.85 percent in 2022. During the year, both public and private construction activities were arrested owing to low purchasing power of consumers and a meteoric rise in the prices of construction materials. FRCL altered its sales portfolio to focus more on the high margin products, which resulted in the growth of net sales. Cost of sales continued to surge as the company shifted its plant operations to RLNG which is much more expensive than natural gas. This coupled with the Pak Rupee depreciation and elevated prices of other basic raw materials took a toll on FRCL’s gross profit which eroded by 18.52 percent in 2022. GP margin also dipped to 6.4 percent in 2022. Operating expense succumbed to inflationary pressure. During the year, the company hired 22 additional workers to take the tally to 786 employees. This is due to the fact production and capacity utilization grew during the year as there were restrictions on imports due to current account crisis. The company made lower provisioning for WWF and WPPF during the year, resulting in 29.5 percent lower other expense. Operating profit slumped by 26.68 percent in 2022 with OP margin slipping to 4.6 percent as against 8.3 percent in the previous year. Finance cost grew on the back of high discount rate and also because the company secured fresh long-term financing of Rs.73.26 million during the year for the purchase of generator. Net profit dwindled by 76 percent year-on-year in 2022 to clock in at Rs.38.51 million with EPS of Rs.1.02 and NP margin of 1 percent.

The bottomline slide and margins contraction which began in 2022 persisted in 2023 as economic and political malfunctioning continued. The topline grew by 9.51 percent year-on-year in 2023 which was the result of alterations in product portfolio and sales channel mix which enabled FRCL to sustain its volumes at last year’s level. Cost of sales spiked by 14 percent due to global commodity super cycle owing to Russia-Ukraine crisis. This was further exacerbated by Pak Rupee depreciation, high indigenous inflation, hike in energy tariff, jagged supply of gas as well as import restrictions which led to supply chain impediments. This marred gross profit which plunged by 57.18 percent year-on-year in 2023 with GP margin sliding to 2.5 percent. Distribution and administrative expenses escalated by 33.58 percent and 29.13 percent respectively on account of higher payroll expense, depreciation as well as provision for ECL. The number of employees increased to 813 employees in 2023. Other expense gave a major hit to the bottomline as it grew by over 459.58 percent in 2023 to reach Rs. 70.35 million on account of the hefty exchange loss incurred during the year. FRCL made operating loss of Rs.41.99 million in 2023. Other income magnified by 344 percent in 2023 on account of higher markup income. Finance cost continued to increase on the back of high discount rates. This resulted in net loss of Rs.153.47 million recorded by FRCL in 2023 with loss per share of Rs.4.05.

Recent Performance (1HFY24)

Shrunken volumes on the back of halted construction and infrastructure related activities in the country took their toll on FRCL’s net sales which contracted by 13.93 percent in 1HFY24. However, cost of sales gave no respite on account of Pak Rupee depreciation, high raw material costs, freight and energy cost. This resulted in 55.41 percent erosion in gross profit in 1HFY24 with GP margin clocking in at 5.7 percent versus 11.1 percent during the same period last year. Distribution expense inched up by 2.3 percent in 1HFY24 on account of inflation while administrative expense fell by 30 percent maybe on account of lower payroll expense. Lower profit related provisioning resulted in 88.62 percent thinner other expense incurred by FRCL in 1HFY24. Conversely, other income grew by 180.56 percent supposedly on account of higher markup income. Operating profit plunged by 38.33 percent in 1HFY24 with OP margin clocking in at 3.4 percent versus 4.8 percent during the same period last year. Finance cost increased by 135 percent during the period under consideration, which resulted in a net loss of Rs.14.95 million in 1HFY24 versus net profit of Rs.53.64 million in 1HFY23. Loss per share stood at Rs.0.39 in 1HFY24 versus EPS of Rs.1.42 in 1HFY23.

Outlook

With no demand upsurge in sight in the near future, the volumes are to stay in pressure. An elevated discount rate and prices of construction materials will keep the customers at bay who are already suffering from shrunken pockets due to the sky-rocketed level of inflation. PSDP disbursement also gives no hope amid gloomy fiscal backdrop. Amidst all the off-putting factors, the future seems excruciating for FRCL.