Hala Enterprises Limited (PSX: HAEL) was incorporated in Pakistan as a private limited company and was subsequently converted into a public limited company. The company began its operations in 1974. The principal activity of the company is the manufacturing and sale of terry towels, kitchen towels, and terry cloth.
Pattern of Shareholding
As of June 30, 2024, HAEL has a total of 12.996 million shares outstanding, which are held by 871 shareholders. Directors, CEO, their spouses, and minor children have the majority stake of 53.88 percent in the company, followed by its parent company, M/S Teejay Corporation Limited, holding 30.62 percent shares. Local general public accounts for 14.88 percent shares of HAEL. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-24)
Barring a decline in 2020 and 2024, HAEL’s topline has been posting decent growth since 2019. On the contrary, its bottom line plunged in 2021 and 2024, with operating and net losses recorded in the latter year. HAEL’s margins depict a fluctuating pattern. Gross margin, which was on the rise since 2019, tumbled in 2021 and 2022. This was followed by a recovery in 2023. Operating margin had remained range-bound until 2022; however, it reached its optimum level in 2023. Conversely, net margin followed an upward trajectory until 2020, fell in 2021, and then took the route to recovery in the next two years. In 2024, all the margins drastically fell (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, HAEL’s net sales grew by 22.8 percent year-on-year. This was on the back of the diversified product portfolio of the company as well as the sale of specialized towels. In 2019, HAEL made 98.62 percent of its revenue from the export market. Pak rupee depreciation in 2019 proved to be a good omen for the company and buttressed its gross margin, which clocked in at 18.24 percent in 2019 versus the GP margin of 17.6 percent recorded in 2018. In absolute terms, gross profit picked up by 27.2 percent in 2019. HAEL’s operating expense escalated by 32.8 percent year-on-year in 2019, which was mainly on account of elevated sales commission, freight, octroi, cartage, and clearing charges. Communication, utility, and vehicle running expenses also significantly surged during the year. A considerable boost in exchange income also buttressed the company’s other income in 2019. Operating profit picked up by 30.39 percent year-on-year in 2019, with OP margin rising from 5.1 percent in 2018 to 5.4 percent in 2019. Finance costs mounted by 19.23 percent year-on-year in 2019 on account of a higher discount rate as well as increased borrowings. The drop in HAEL’s gearing ratio from 44.6 percent in 2018 to 38.8 percent in 2019 was due to the issuance of shares during the year, which took the authorized share capital from Rs. 80 million in 2018 to Rs. 160 million in 2019. Net income rose by 44.58 percent year-on-year in 2019 to clock in at Rs. 7.839 million. This translated into EPS of Rs. 0.60 in 2019, up from EPS of Rs. 0.42 posted in 2018. NP margin also grew from 1.73 percent in 2018 to 2 percent in 2019.
In 2020, the outbreak of COVID-19 and the associated lockdowns and restrictions on the movement of people and goods took their toll on the net sales of HAEL, which plunged by 10.19 percent year-on-year. As shipments were restricted, the company tapered its operations in 2020. This resulted in production of 365,065 kg in 2020, down 10 percent year-on-year. As institutional sales suffered due to the shutdown of the hospitality industry during the lockdown period, the company focused on the retail sector and tapped the high-value-added market. As a result, its gross profit remained static while GP margin jumped up to 20.3 percent in 2020. HAEL was able to cut down its operating expense by 3.12 percent year-on-year in 2020 on account of lower sales commission, air freight charges, as well as octroi, cartage, and clearing charges. Lower other income due to thinner lease rentals, dividend income, and interest charged to related parties squeezed other income by 58.27 percent year-on-year in 2020. As a consequence, operating profit slid by 18.36 percent year-on-year in 2020, with OP margin slipping to 4.91 percent. HAEL maintained its finance cost at Rs. 8.8 million in 2020 despite increased borrowings. This was on account of lower bank commission, lesser interest charged by related parties, and no interest payments due to Comfort Textile (Private) Limited. HAEL’s gearing ratio hiked to 43.8 percent in 2020. The company’s profit after tax in 2020 was 44 percent lower than the previous year; however, the gain on disposal of land held for sales drove the net profit of the year to Rs. 12.885 million, which translated into EPS of Rs. 0.99 and NP margin of 3.7 percent—the highest among all the years under consideration.
HAEL’s topline showed signs of recovery as it built up by 12.53 percent in 2021. Owing to demand recovery and resumption of shipments that were stuck due to COVID-19, HAEL increased its production by 7 percent year-on-year to clock in at 390,286 kg in 2020. Cost of sales spiked by 10.83 percent in 2021 on account of higher prices of cotton in the international market and Pak Rupee depreciation. However, as the company derives more than 98 percent of its revenue from the export market, the higher cost was largely offset by lofty translation gain. This pushed the gross profit up by 19.21 percent year-on-year in 2021, with the GP margin rising to 21.5 percent. HAEL’s ever-increasing focus on higher value-added products also gave a boost to its GP margin in 2021. Operating expenses elevated by 11.28 percent year-on-year in 2021 due to higher selling and distribution charges on account of improved sales volume. Operating profit enlarged by 22.68 percent year-on-year in 2021, with OP margin moving up to 5.35 percent. Finance costs escalated by 16.53 percent year-on-year in 2021 despite monetary easing due to increased short-term and long-term borrowings and higher bank commissions. HAEL’s gearing ratio surged to 45.8 percent in 2021. Net profit slumped by 45.36 percent in 2021 to clock in at Rs. 7.04 million with EPS of Rs. 0.54 and NP margin of 1.8 percent.
Among all the years under consideration, HAEL boasted the highest topline growth of 41 percent in 2022. The company produced 445,615 kg of product, up 14 percent year-on-year in 2022, in order to meet rising demand. The growth in net sales was also the result of upward price revisions to account for high inflation, increased commodity prices, Pak rupee depreciation, and a sharp spike in energy tariffs during the year. Due to the aforementioned factors, HAEL’s cost of sales rose by 46.83 percent year-on-year in 2022. While gross profit picked up by 19.72 percent year-on-year in 2022, GP margin slipped to 18.26 percent. Operating expenses mounted by 23.36 percent year-on-year in 2022 due to exorbitant sea freight charges. The company also realized an exchange income of Rs. 2.690 million in 2022, unlike the realized exchange loss of Rs. 2.56 million recorded in 2021. As a consequence, operating profit in 2022 turned out to be 37.42 percent bigger when compared to that of 2021. OP margin slightly tumbled to 5.2 percent in 2022. Finance costs ticked up marginally by 7.28 percent year-on-year in 2022, despite multiple rounds of monetary tightening undertaken by the central bank during the year. This was on account of a plunge in external borrowings, which squeezed HAEL’s gearing ratio to 29.1 percent in 2022. Net profit jumped up by 67.38 percent year-on-year in 2022 to clock in at Rs. 11.78 million in 2022 with EPS of Rs. 0.91 and NP margin of 2.14 percent.
HAEL’s topline improved by 17.93 percent in 2023. Diminished demand in the global market due to recessionary pressure and stiff competition from regional counterparts pushed the company to reduce its production to 381,154 kg in 2023. This shows that change in the pricing strategy was the major contributor to enhanced net sales in 2023. Cost of sales hiked by 13.31 percent year-on-year in 2023, yet HAEL was able to drive its gross profit up by 38.6 percent in 2023, resulting in a GP margin of 21.46 percent. Operating expenses grew by 18.34 percent year-on-year in 2023 on account of higher commissions on sales, freight, and clearing charges. HAEL incurred an exchange loss of Rs. 3.565 million in 2023, which drove up its other expenses by 219.4 percent. Finance costs enlarged by 94.77 percent year-on-year in 2023, despite a drop in borrowings. This was the consequence of the high discount rate during the year. HAEL’s gearing ratio ticked up to 29.5 percent in 2023. Net profit rose by 60.66 percent year-on-year in 2023 to clock in at Rs. 18.93 million with EPS of Rs. 1.46 and NP margin of 2.92 percent.
In 2024, HAEL recorded a 19.53 percent year-on-year decline in its topline. This was on account of subdued demand of home textile products in the international market due to global recessionary pressure and the Suez Canal crisis, which has delayed the transit time to Europe besides driving up the freight charges by manifold. Moreover, Pakistan is also at a competitive disadvantage as it has the highest energy cost in the South and South East region. Cost of sales tamed by a much lesser magnitude of 11.96 percent in 2024 due to high inflation, towering energy costs, and falling indigenous cotton crop output, leading to the import of expensive cotton. This squeezed HAEL’s gross profit by 47.23 percent in 2024, with GP margin falling down to its lowest level of 14.1 percent. While the impediments at Suez Canal drove the freight charges up by 3 to 4 times during the year, reduced sales volume resulted in a 10.28 percent year-on-year plunge in operating expenses in 2024. HAEL recorded an operating loss of Rs. 7.296 million in 2024. Finance costs surged by 62.33 percent in 2024 due to an elevated discount rate and increased short-term borrowings to sustain cash flow constraints owing to additional freight costs, heightened raw material charges, delayed government refunds, and high energy costs. Gearing ratio mounted to 40.1 percent in 2024. The company recorded a net loss of Rs. 47.356 million in 2024 with a loss per share of Rs. 3.64.
Future Outlook
HAEL is facing acute demand shrinkage in the global market and local market on account of the recession and a hike in the cost of living of its consumers. While the company plans to pass on the impact of mounted freight charges to its customers, improved value of local currency and rigorous competition from other countries in the face of petite demand may not allow the company to increase its prices drastically. In order to stay viable, HAEL should focus on new export markets, diversify its product line, and add more value-added products to its portfolio.
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