Leiner Pak Gelatine Limited

Leiner Pak Gelatine Limited (PSX: LPGL) was incorporated in Pakistan as a public limited company in 1983. The company is engaged in the manufacturing and sale of gelatin and di-calcium phosphate produced from animal bones. The company takes pride in producing and exporting Halal Gelatine derived from Halal animals slaughtered in an Islamic way. Leiner & Sons Great Britain Limited is the parent company of LPGL.

Pattern of Shareholding

As of June 30, 2023, LPGL has a total of 7.5 million shares outstanding which are held by 590 shareholders. The local General Public is the largest shareholder category of LPGL with a stake of 48.99 percent in the company followed by Directors, the CEO, their spouse, and minor children holding 45.14 percent shares. Associated companies, undertakings, and related parties account for 5.41 percent of the outstanding shares of LPGL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for a downtick in 2020, the top line as well as the bottom line of LPGL has been growing convincingly in all the years under consideration. The gross and operating margins of LPGL followed an upward trajectory until 2020 followed by a downtick in 2021. However, its net margin slightly slid in 2020 followed by an uptick in 2021. In the subsequent years, the company’s margins considerably rebounded and attained their highest level in 2023. The detailed performance review of the period under consideration is given below:

LPGL’s topline grew by 3.64 percent year-on-year in 2019 on the back of some modifications in the sales mix. While local sales constituted the major portion of LPGL’s revenue pie, in 2019, the growth came on the back of tremendous growth in the export sales of the company which surged from Rs.48 million in 2018 to Rs.156 million in 2019 while local sales plunged from Rs.704 million in 2018 to Rs.624 million in 2019. Pak Rupee depreciation resulted in an increase in the cost of LPGL’s basic raw material (crushed bones), however, the same factor scaled up the export sales of the company. Consequently, gross profit grew by 27.56 percent year-on-year in 2019 with GP margin clocking at 12.2 percent versus 9.9 percent in 2018. Distribution expense augmented by around 110.21 percent mainly because of shipping charges, however, distribution expense stood at a meager 0.6 percent of the topline, hence didn’t affect the bottom line much. Administrative expenses magnified by 5 percent year-on-year in 2019 on account of a rise in salaries and wages. LPGL’s operating profit boasted a stunning 91.31 percent year-on-year rise in 2019 with an OP margin of 4.1 percent versus 2.2 percent in the previous year. Finance costs mounted by 58.51 percent year-on-year due to a high discount rate coupled with increased short-term borrowings primarily to meet working capital requirements. LPGL’s gearing ratio stood at 39.85 percent in 2019 versus 39.10 percent in 2018. The company registered a net profit of Rs.2.54 million in 2019 versus a net loss of Rs.3.96 million in 2018. LPGL posted EPS of Rs.0.34 in 2019 as against loss per share of Rs.0.53 in 2018.

2020 was marked by the outbreak of COVID-19 which dampened the economic activity across various sectors of the economy, both locally and globally. During the initial quarters of FY20, LPGL had finalized huge sales orders with Malaysian clients which were expected to drive up the share of export sales to up to 50 percent of the total revenue. However, the lockdowns imposed across the world resulted in the revision in the delivery schedules of LPGL’s export orders and resulted in a 15.23 percent year-on-year decline in the overall revenue of the company in 2020. Local sales also posted a slump during the year due to tamed demand. While the cost of raw materials kept rising on the back of Pak Rupee depreciation, curtailed operations during the year resulted in an 18.38 percent year-on-year dip in the cost of sales, resulting in GP margin climbing up to 15.4 percent in 2020. Distribution expense rose by 19 percent during the year mainly on account of commission on exports. Yet, distribution expense stood at 0.9 percent of the topline. Administrative expenses shrank by 4.45 percent year-on-year during 2020 due to lower payroll expenses. Operating profit magnified by 25.23 percent year-on-year in 2020 with OP margin clocking in at 6.1 percent. Finance costs surged by 40.14 percent year-on-year in 2020 as the discount rate was high during the major part of the year. Furthermore, the borrowings portfolio also expanded as the company availed the Refinance Scheme of the SBP for the payment of salaries and wages. Conversely, the rise in short-term borrowings was mainly on account of loans from directors and relatives which were non-interest bearing. The gearing ratio surged to 44.32 percent in 2020. High finance costs had a profound negative impact on the bottom line which contracted by 24 percent year-on-year in 2020 to clock in at Rs.1.93 million with an NP margin of 0.3 percent. EPS nosedived to Rs.0.26 in 2020.

LPGL’s topline posted a striking turnaround in 2021 with year-on-year growth of 42.46 percent. The export orders to Malaysia which were held back due to COVID-19 restrictions were resumed during the year. Export orders rose to a massive 39 percent of the total sales mix of LPGL as against 23 percent during the previous year. It is to be noted the Pak Rupee strongly appreciated during the year which restricted the export proceeds of the company. Moreover, the inflation spree in the local economy drove up the prices of raw materials, resulting in a 49.65 percent surge in the cost of sales. As a result, gross profit could only grow by 2.98 percent during the year while GP margin shrank to 11.1 percent in 2021. Distribution expense posted a drastic rise of 71.4 percent in 2021 and stood at 1.1 percent of sales. This was because the shipping companies made steep upward revisions in the freight charges. Conversely, administrative expenses took a 5.58 percent year-on-year nosedive in 2021 on account of lower payroll expenses. While other income stood at less than 1 percent of the sales in all the years under consideration, in 2021, it posted a 459.57 percent year-on-year jump on the back of the amortization of government grants. Operating profit posted an 11.21 percent year-on-year uptick in 2021 while OP margin slumped to 4.7 percent. Downward revisions in discount rates drove the finance cost down by 8.67 percent during the year. LPGLs also obtained lesser short-term borrowings during 2020 while long-term financing grew on the back of SBP’s Refinance scheme. The gearing ratio inched down to 43.19 percent in 2021. The bottom line tremendously grew by 168 percent year-on-year in 2021 to clock in at Rs.5 million in 2021 with an NP margin of 0.5 percent. EPS clocked in at Rs.0.67 in 2021.

The upward trajectory of LPGL’s topline continued in 2022 with a reasonable 7.53 percent year-on-year growth. On the back of unstable indigenous economic and political backdrop, the company aggressively increased its export sales which not only boasted a year-on-year rise of 23.5 percent in 2022 but also stood at 45 percent of the total revenue mix. Unprecedented level of inflation which pushed up the prices of essential raw materials coupled with a hike in energy and gas tariffs drove the cost of sales up by 3.69 percent during the year. However, Pak Rupee depreciation and robust export sales enabled LPGL to attain 38.18 percent year-on-year growth in its gross profit with GP margin climbing up to 14.3 percent in 2022. On account of increased export sales, freight charges increased radically, pushing the distribution cost up by 196.27 percent in 2022. Distribution cost stood at 3 percent of the topline in 2022. Administrative expense also magnified by 29.42 percent year-on-year in 2022 in line with inflationary pressure although LPGL streamlined its workforce from 222 employees in 2021 to 184 employees in 2022. Operating profit rose by 12.83 percent year-on-year in 2022 and OP margin improved to 5 percent. Finance costs grew by 10.82 percent year-on-year in 2022 due to upward revisions in discount rates. The company significantly reduced its borrowings during the year. The gearing ratio fell to 28.47 percent in 2022. LPGL’s bottom line grew by 65.37 percent in 2022 to clock in at Rs.8.28 million with an NP margin of 0.8 percent. EPS stood at Rs.1.1 in 2022.

LPGL’s topline posted a handsome 130.64 percent year-on-year growth in 2023 to clock in at Rs.2335.02 million which was the highest ever revenue achieved by the company. The robust revenue proceeds came on the back of a revision in the sales price of its products to account for cost-push inflation coupled with vigorous export sales realized at favorable exchange rates. LPGL’s export sales registered staggering year-on-year growth of 226.44 percent in 2023 to grab 63.64 percent of the total sales mix. It was not long ago when export sales stood at a meager 6.42 percent of LPGL’s sales mix in 2018. Local sales grew by 52.38 percent in 2023. Sky-rocketed inflation pushed the cost of sales up by 126.58 percent year-on-year in 2023, yet LPGL was able to post a 155 percent year-on-year rise in its gross profit with GP margin flying up to 15.8 percent. Robust export sales volume resulted in higher freight charges which resulted in a 116.75 percent year-on-year surge in distribution cost. It is to be noted that the distribution expense which stood at 0.3 percent of LPGL’s sales in 2018, climbed to 2.8 percent of sales in 2023 on account of higher export sales. Administrative expense ticked up by 33.15 percent year-on-year in 2023 due to unsurpassed inflation level and workforce enhancement which pushed up the payroll expense. LGPL’s workforce stood at 191 employees in 2023. Other expenses multiplied by over 2523.71 percent during 2023 which may be due to sales tax written off during the year as well as exchange loss incurred during the year. Other income tumbled by 89.51 percent in 2023 as the company didn’t record any exchange gain during the year and also because of lower gain recorded on the disposal of fixed assets in 2023. Operating profit posted an incredible 216.45 percent year-on-year rise in 2023 with OP margin standing at its highest level of 6.8 percent. Finance cost didn’t show any mercy and posted a sharp 94.83 percent year-on-year growth in 2023 on the back of a high discount rate and an uptick in short-term borrowings. The gearing ratio climbed to 31.54 percent in 2023. Net profit grew by an astounding 705.72 percent year-on-year in 2023 to clock in at 66.67 million with an NP margin of 2.9 percent and EPS of Rs.8.89.

Recent Performance (9MFY24)

LPGL’s success story continued in 2024 with an 82.26 percent year-on-year rise in its topline during 9MFY24. This was the result of the company’s growing focus on the export market. The relative stability in the value of local currency coupled with record inflation level and an upsurge in energy prices as well as the cost of raw materials yielded a GP margin of 11.5 percent during 9MFY24 versus a GP margin of 13.9 percent recorded during the same period last year. Gross profit recorded a 50.8 percent year-on-year improvement during 9MFY24. Distribution expenses largely stayed intact during the period, however administrative expenses escalated by 45.75 percent. The main components of administrative expenses were payroll expenses as well as vehicle running & maintenance charges. Other expenses dropped by 23.32 percent during 9MFY24 supposedly due to a high-base effect as the company wrote off sales tax and incurred massive foreign exchange loss during 2023. LPGL’s operating profit multiplied by 106.32 percent during 9MFY24 with an OP margin of 5.9 percent versus an OP margin of 5.2 percent recorded during 9MFY23. Finance costs surged by 83.65 percent during the period owing to a higher discount rate although the company squeezed its debt profile during the period. Net profit strengthened by 308.31 percent year-on-year to clock in at Rs.64.69 million in 9MFY24 with EPS of Rs.8.63 versus EPS of Rs.2.11 recorded during 9MFY23. NP margin also improved from 1.1 percent in 9MFY23 to 2.4 percent in 9MFY24.

Future Outlook

The international market of gelatin products is growing exponentially. With LPGL’s increased focus on export markets and a downward correction expected in the value of the local currency, the top line is expected to attain new heights in the coming times. For the bottom line, the major growth obstacles could be the mounting cost of chemicals and other allied industry inputs on account of inflation, elevated energy charges, high distribution costs on the back of high freight charges, and hefty finance costs due to the high cost of borrowing. Until 2022, LPGL’s current liabilities stayed above its current assets which cast doubt over its ability to service its debt. However, since 2023, the company started registering a current ratio in excess of 1 by streamlining its debt profile, better inventory management, and efficient procurement policy of raw materials.