Service Industries Limited

Service Industries Limited (PSX: SRVI) was incorporated in Pakistan as a private limited company in 1957 and later turned into a public limited company. The company is engaged in the purchase, manufacturing and sale of footwear, tyres and tubes as well as technical rubber products. A huge portion of SRVI’s sales revenue comes from export markets particularly European market. The company has also started expanding in the US, Australia and Middle East.

Pattern of shareholding

As of December 31, 2023, SRVI has a total of 46.987 million shares outstanding which are held by 1926 shareholders. 40.37 percent of the company’s shares are held by Directors, CEO, and their spouse and minor children followed by local general public holding 31.62 percent shares of SRVI. NIT and ICP account for 12.61 percent shares of the company while associated companies, undertakings and related parties have a stake of 9,2 percent in SRVI. Modarbas and Mutual funds account for 2.35 percent shares while pension funds hold 1.29 percent shares of SRVI. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for a marginal downtick in 2020, the topline of SRVI had been riding an upward trajectory since 2018. Conversely, the bottomline had been constantly ticking down until 2022 followed by a staggering rebound in 2023. SRVI’sgross and operating margins which had been ascending until 2020 significantly plunged in 2021. In the subsequent years, GP and OP margins considerably recovered to reach their highest level in 2023. However, the net profit margin followed a descending trend over the years to bottom out in 2022 followed by a significant rise in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SRVI’s topline grew by 8.62 percent year-on-year. This came on the back of local sales which grew by 20 percent during the year. Conversely, export sales shrank by 13 percent during 2019. Across the product categories, sales of tyres posted a momentous growth both in local and export markets and continued to be the mightiest source of revenue for SRVI to clock in at Rs.15,960 million in 2019 (61 percent of total revenue). 2019 was the year when the company began agricultural tyre production which received an overwhelming response from the market. Sales revenue from technical rubber products also inched up during the year, however, only in the local market, while no sales of this product category was made in the export market. Technical rubber products contributed only Rs.231.18 million to the topline of SRVI which was less than 1 percent of the total sales revenue of 2019. Sales of footwear weakened in 2019 mainly on the back of lower export sales while local footwear sales also posted a marginal growth. Overall, the footwear category contributed Rs.9,964 million to the topline in 2019 which was roughly 38 percent of SRVI’s total sales revenue of 2019. Despite high cost of sales on account of high inflation, gross profit grew by 12.73 percent year-on-year in 2019 with GP margin climbing up to 18.7 from 18 percent in 2018. Operating expense grew by 7.83 percent year-on-year mainly on account of market-induced rise in salaries, high freight and insurance charges, tremendous growth in advertising and publicity budget as well as sample charges. Other expense grew by 39 percent year-on-year in 2019 mainly on the back of higher provisioning against expected credit losses. However, other expense was counterbalanced by other income which posted a stunning 57.29 percent year-on-year growth on account of robust exchange gain. Operating profit grew by 26 percent year-on-year in 2019 with OP margin rising from 7.2 percent in 2018 to 8.3 percent in 2019. Finance cost drastically grew by 90.78 percent year-on-year in 2019 on the back of high discount rate. Debt-to-equity ratio stayed at 38 percent for the third consecutive year in 2019. The growth in finance cost pushed the net profit down by 16.48 percent year-on-year in 2019 to clock in at Rs.886.36 million with NP margin of 3.4 percent down from 4.4 percent in 2018. EPS also descended from Rs.56.47 in 2018 to Rs.37.73 in 2019.

In 2020, SRVI’s net revenue slumped by 6.55 percent year-on-year. The company had to suspend its operations owing to the lockdown imposed due to outbreak of COVID-19 and hence the capacity remained underutilized. The major hit to the topline came from export sales which were almost halved in 2020 to clock in at Rs.3001.45 million due to restrictions on the movement of people and goods on account of COVID-19. Local sales grew marginally by 8 percent year-on-year to clock in at Rs.21,394 million in 2020. A sneak into the categories shows that footwear sales posted major slump of 40 percent year-on-year due to massive drop in export sales. Sales of tyres grew by 12.7 percent year-on-year and it contributed around 74 percent to the topline. The export sales of technical rubber products were discontinued in 2019, while local sales in this category almost doubled in 2020, yet failed to produce any significant impact on the topline as its share in the overall revenue hovered around 1.9 percent in 2020. Reduced operational activity resulted in year-on-year drop of 8.23 percent in cost of sales. This drove the GP margin up to 20.1 percent in 2020. Operating expense also slid by 8.57 percent year-on-year in 2020 due to curtailed expenditure on freight and insurance, advertising and publicity as well as a significant drop in sample expenses. Other expenses grew by 30 percent year-on-year in 2020 on the back of additional allowance booked for expected credit losses as well as higher provisioning done for WWF and WPPF. Other income dwindled by 57 percent year-on-year due to massive drop in exchange gain on the back of lesser export sales. Operating profit grew by 5.4 percent year-on-year in 2020 with OP margin rising up to 9.4 percent. Finance cost dropped by 3 percent year-on-year due to monetary easing to spur business activity amidst COVID-19. The dip in finance cost was registered even after an increase in the long-term and short-term borrowings of the company during the year. The debt-to-equity ratio of SRVI surged to 40 percent in 2020. The bottomline dropped by 22.15 percent year-on-year in 2020 to clock in at Rs.690.02 million with NP margin of 2.8 percent. EPS also dropped to Rs.14.69 in 2020. While profit before tax for 2020 was up by 8.22 percent year-on-year, the payment of deferred taxes in 2020 increased the tax expense by 152.41 percent during the year and pushed the net profit down.

In 2021, SRVI’s topline boasted the highest-ever growth of 33.89 percent year-on-year. Tyre division continued to be the main growth contributor. The revenue from tyre division grew by 37.5 percent year-on-year to clock in at Rs.24,747 million in 2021 with a share of 76 percent in the overall sales mix. Sale of footwear and technical rubber products grew by 21 percent and 59 percent respectively in 2021. Footwear division had a contribution of 22 percent in the sales mix of SRVI. The remaining 2 percent is contributed by the technical rubber products. High inflation, energy and fuel prices as well as Pak Rupee depreciation pushed the cost of sales up by 41 percent year-on-year in 2021. Consequently, GP margin dropped to 16.1 percent in 2021. High ocean freight charges, increased salaries and benefits as well as higher advertising and promotion budget resulted in 34 percent year-on-year hike in operating expenses. Other expense dropped by 58 percent year-on-year on account of lesser allowance for expected credit losses as well as lesser provisioning for WWF and WPPF. Conversely, other income magnified by 110 percent year-on-year in 2021 primarily on the back of scrap sales and amortization of government grant. Operating profit shrank by 19.33 percent year-on-year in 2021 with OP margin drastically falling to 5.7 percent. Despite monetary easing, finance cost grew by 21.19 percent year-on-year in 2021 due to considerable rise in borrowings during the year. SRVI’s debt-to-equity ratio further climbed up to 52 percent in 2021. The bottomline nosedived by 48.29 percent year-on-year in 2021 to clock in at Rs.356.83 million with NP margin of 1.1 percent. EPS also dropped to Rs.7.59 in 2021.

SRVI’s topline further grew by 30.17 percent year-on-year in 2022. The growth came on the back of tyre and footwear division which grew by 27 percent and 50 percent respectively during 2022 while sales of technical rubber products contracted during the year. Cost of sales grew by 26.10 percent year-on-year; however, robust sales volume as well as upward price revision pushed the gross profit up by 51.4 percent year-on-year in 2022. GP margin regained its lost momentum and clocked it at 18.7 percent in 2022. Increase in export sales during the year resulted in high freight charges. Besides, higher salaries and wages as well as advertisement and publicity expense culminated into 35.85 percent year-on-year increase in operating expense in 2022. Write off of assets as well as higher allowance for expected credit losses and WPPF as well as generous donations pushed the other expense up by 168 percent in 2022. However, it is counterbalanced by 280 percent rise in other income on account of sky-rocketed dividend income earned during 2022. Operating profit surged by 117.38 percent year-on-year in 2022 with OP margin of 9.4 percent. Excessive monetary tightening and increased borrowings produced 133.97 percent growth in finance cost. Debt-to-equity ratio further climbed up to 58 percent in 2022. SRVI’s profit before tax in 2022 was by 70.98 percent year-on-year. However, higher provision for taxation shoved the net profit down by 0.67 percent year-on-year to clock in at Rs.354.43 million in 2022. NP margin dropped to 0.8 percent while EPS clocked in at Rs.7.54 in 2022.

2023 brought lucky streak for SRVI with year-on-year topline growth of 30.86 percent. This was backed by increase in the prices and volumes of both tyre and footwear division. Tyre division’s sales posted a year-on-year growth of 25 percent in 2023 with its exports strengthening by 87 percent during the year on account of increased off-take and Pak Rupee depreciation. The revenue of footwear division grew by 45 percent year-on-year in 2023 which was primarily driven by growth in retail business. 83 new outlets were opened during the year which took the tally to 232 as of December 31, 2023.Gross profit grew by 71.7 percent year-on-year with GP margin climbing up to its optimum high level of 24.6 percent in 2023. Operating expense grew by 39.28 percent year-on-year in 2023 on the back of elevated payroll expense, freight & insurance charges as well as publicity & advertising expense incurred during the year. Other expense dipped by 12.25 percent in 2023 as lesser assets were written off during the year. Other income plunged by 42 percent in 2023 due to thin dividend income which eclipsed the effect of higher exchange gain and lofty scrap sales recorded during the year. SRVI’s operating profit multiplied by 81.84 percent in 2023 with OP margin climbing up to 13.1 percent. Finance cost escalated by 63.26 percent in 2023 due to high discount rate. Debt-to-Equity ratio stayed at 58 percent in 2023. SRVI registered 278.68 percent growth in its net profit in 2023 which clocked in at Rs.1342.136 million with EPS of Rs.28.56 and NP margin of 2.4 percent.

Recent Performance (1QCY24)

SRVI’s net sales multiplied by 32.94 percent in 1QCY24. The growth was primarily driven by superior performance of tyre and retail division during the period. Sales of tyres and tubes grew by 36 percent year-on-year during the period while sale of automobile spare parts registered 14 percent year-on-year growth during 1QCY24. With the addition of 16 new retail stores during the first quarter of 2024, the total number of retail stores reached to 248. This resulted in 70 percent year-on-year growth in the sale of footwear division in 1QCY24. With operational efficiency, customer retention and upward price revision, SRVI was able to record 43.74 percent year-on-year growth in its gross profit in 1QCY24 with GP margin clocking in at 25.7 percent versus 23.8 percent in 1QCY23. Operating expense grew by 41.96 percent in 1QCY24 apparently on account of increased payroll expense, advertising & promotion and freight charges. Other income posted a tremendous 235.52 percent year-on-year rise in 1QCY24. The major components of other income are dividend income and exchange gain. SRVI’s operating profit multiplied by 69.86 percent in 1QCY24 with OP margin clocking in at 16.2 percent versus 12.7 percent during the same period last year. 39.96 percent higher finance cost recorded by SRVI in 1QCY24 was the effect of high discount rate and increased working capital-related borrowings obtained during the year. Net profit enhanced by 147.76 percent in 1QCY24 to clock in at Rs.733.363 million with EPS of Rs.15.61 versus EPS of Rs.6.3 recorded in 1QCY23. NP margin also improved from 2.6 percent in 1QCY23 to 4.9 percent in 1QCY24.

Future Outlook

With SRVI constantly strengthening its foothold in the export market amidst Pak Rupee depreciation, topline is highly anticipated to reach new heights in the coming times. The company also plans to acquire additional market share in agricultural tyre segment by enhancing its production capacity. The retail segment also appears to be highly promising with SRVI planning to take its retail store tally to 300 by the end of 2024. Besides enhancing its sales volume, SRVI is also working to attain operational efficiency by focusing on energy conservation. It transformed 51 of its retail outlets to solar energy in 2023 to evade high energy cost.