Pak Leather Crafts Limited (PSX: PAKL) is incorporated in Pakistan as a public limited company. It was established in 1971. The company is engaged in leather tanning, manufacturing of leather garments as well as export of leather and leather garments.
Pattern of Shareholding
As of June 30, 2024, PAKL has a total of 3.4 million shares outstanding which are held by 504 shareholders. Sponsors’ associates & friends have the majority stake of 48.04 percent in the company followed by directors, their spouses, and minor children holding 24.63 percent shares of PAKL. Banks, DFIs, and NBFIs account for 18.11 percent of shares of the company while other individuals hold 9.06 percent of shares. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-24)
PAKL’s topline grew in 2019 and 2020 followed by a slump in 2021. It then recovered in the subsequent year followed by a dip in 2023 and 2024. Conversely, its bottom line shows positive figures only in 2019, 2020, and 2024. In all the years under consideration, PAKL has negative equity because of hefty accumulated losses as the company has consistently been making losses since 2014. PAKL’s liabilities are quite high compared to its total assets. An exorbitant level of current liabilities also translates into negative working capital in all the years under consideration. PAKL’s margins registered a strong rebound in 2019. In 2020, gross margin slid; however, operating and net margins posted a staggering rise. 2021 witnessed a freefall of margins with operating and net margins striking the negative zone. In the subsequent years, gross margin improved while operating and net margins continued to stay in the negative territory until 2023. The detailed performance review of the period under consideration is given below.
In 2019, PAKL’s net sales grew by 48.16 percent year-on-year. Despite a depressed macroeconomic backdrop characterized by high inflation, Pak Rupee depreciation, monetary tightening, and regulatory measures, the company was able to push its bottom line into net profit after five uninterrupted years of net losses. While export sales slightly shrank in 2018, the topline growth was mainly the consequence of local income derived from leather processing. Cost of sales grew by 23.81 percent year-on-year in 2019 as the company achieved economies of scale because of higher volumes. Gross profit magnified by 695 percent year-on-year in 2019 with GP margin jumping up from 3.6 percent in 2018 to 19.5 percent in 2019. Operating expenses grew by 25.81 percent year-on-year in 2019 on account of higher payroll expenses as the number of employees grew from 21 in 2018 to 40 in 2019. Fee and subscription charges and balances written off also escalated in 2019. PAKL registered an operating profit of Rs.5.86 million in 2019 versus an operating loss of Rs.4.13 million recorded in 2018. OP margin was recorded at 7.7 percent in 2019. The company had a total debt of around Rs.250 million as of 2019 out of which Rs.12.99 million was long-term and interest-free, acquired from directors’ associates. The remaining short-term loan had a mark-up overdue for which the banks had filed suit for recovery. PAKL only paid bank commissions which grew by 24.72 percent in 2019. PAKL posted a net profit of Rs.4.146 million in 2019 as against the net loss of Rs.5.29 million recorded in 2018. EPS clocked in at Rs.1.22 in 2019 versus a loss per share of Rs.1.56 in 2018. NP margin stood at 5.4 percent in 2019.
PAKL’s topline boasted a tremendous 182.88 percent year-on-year rise in 2020 because of a splendid 5 times growth in export sales. PAKL achieved huge orders from Hong Kong, Cambodia, China, Indonesia, and South Korea which gave a significant boost to its export sales in 2020. Conversely, local sales slid by 64 percent in 2020. The substantial rise in material cost on account of COVID-19 pushed the cost of sales up by 217 percent in 2020. Gross profit grew by 41.52 percent in 2020, however, GP margin drastically fell to 9.7 percent. Operating expenses surged by a massive 724.66 percent in 2020 which was the consequence of high provisioning booked for doubtful debts as well as elevated freight charges incurred on account of COVID-19. A number of employees also rose to 48 in 2020 which pushed up the payroll expense during 2020. Other income grew by 13273.64 percent in 2020 as the company received a waiver of Rs.79.89 million and Rs.34.83 million on loan liability and mark-up on loan respectively. This drove the operating profit up by 830.30 percent in 2020 with OP margin registering an overwhelming rise to clock in at 25.2 percent. Bank charges grew by 330.22 percent in 2020. Net profit surged by 1076.62 percent in 2020 to clock in at Rs.48.79 million with EPS of Rs.14.35 and NP margin of 22.5 percent.
The splendid topline growth recorded in 2020 was followed by a 49.98 percent decline in net sales in 2021. While local sales showed some improvement during the year, the drastic fall of around 61 percent in export sales squeezed the topline in 2021. Thin export sales were on account of the lockdown imposed in various export destinations of PAKL. Cost of sales plunged by 46.51 percent year-on-year in 2021. Gross profit slipped by 82.11 percent year-on-year in 2021 with GP margin marching down to 3.5 percent. Operating expenses also nosedived by 79.55 percent year-on-year in 2021 as the company didn’t book any provisioning against doubtful debts and also because of lower freight charges because of lower export sales. Other income slumped by 94.35 percent year-on-year in 2021 due to the high base effect as the company got waivers on loans and mark-ups in 2020. PAKL recorded an operating loss of Rs.6.43 million in 2021. Bank charges tumbled by 55.89 percent year-on-year in 2021. As a consequence, PAKL posted a net loss of Rs.8.7 million in 2021 with a loss per share of Rs.2.56.
PAKL’s topline registered a 22.68 percent year-on-year improvement in 2022 due to a rise in both export and local sales during the year. Pak Rupee depreciation proved to be a blessing in disguise for the company and drove its gross profit up by 255.25 percent in 2022. GP margin also rose to 10.1 percent in 2022. Operating expenses stood at almost the same level as of previous year as the company reduced its workforce to 40 employees and also because of lower freight charges. Other income nosedived by 58.8 percent year-on-year in 2022 due to lower balances written back during the year. PAKL’s operating loss slipped by 89.54 percent in 2022. Bank charges also narrowed down by 57.16 percent year-on-year in 2022, translating into a 66.68 percent lower net loss incurred during the year. Net loss stood at Rs.2.90 million in 2022 with a loss per share of Rs.0.85.
In 2023, PAKL’s topline sustained 31.78 percent erosion. This was the result of the plunge in both local and export sales during the year. The company couldn’t maintain its growth momentum due to an exorbitant increase in the prices of materials which dejected the customers both locally and globally. Wet blue and chemical prices hiked by 25 percent and 50 percent respectively. Electricity prices also spiked during the year. Moreover, only 50 percent of the company’s gas requirement was met by the gas pipeline. The thin liquidity of the company and its inability to meet its financial obligations didn’t allow it to obtain more loans from external parties. Hence, it couldn’t afford to switch to LPG and purchase costlier raw materials to continue its operations. Due to lower sales volume, the cost of sales also slid by 32.16 percent in 2023. Gross profit shrank by 28.40 percent year-on-year in 2023, however, GP margin slightly improved to clock in at 10.6 percent. Operating expense surged by 13.89 percent year-on-year in 2023 which was the consequence of higher freight charges on account of escalated prices of POL products. Legal & professional charges also spiked during the year. Operating loss magnified by 1294.79 percent in 2023 to clock in at Rs.9.37 million. Bank charges grew by 28.20 percent year-on-year in 2023 resulting in 286.45 percent higher net loss incurred during the year. Net loss stood at Rs.11.21 million in 2023 with loss per share of Rs.3.30 – the highest among all the years under consideration.
In 2024, PAKL recorded a year-on-year topline slide of 1.43 percent. This was on account of a decline in export sales due to the global recession. Thinner export sales were partially substituted by an uptick in local revenue from leather processing. The cost of sales plummeted by 5.74 percent in 2024 due to lesser raw materials consumed owing to low export volumes. This resulted in a 34.95 percent progress in the company’s gross profit in 2024. GP margin also jumped up to 14.5 percent in 2024. Operating expenses tumbled by 24.53 percent in 2024 predominantly because of lower freight & forwarding charges as well as traveling & conveyance charges incurred during the year. What gave significant support to the company’s bottom line was a staggering 11457 percent growth in other income. This was on account of the waiver of loan liability and mark-up on the loan on settlement. PAKL recorded an operating profit of Rs.11.73 million in 2024 with an OP margin of 13.1 percent. This was against the operating loss of Rs.9.37 million recorded in 2023. Bank charges & commission slipped by 5.58 percent in 2024 owing to fewer bank transactions on account of weak export sales volume. After three years of posting net losses, PAKL was able to record a net profit of Rs.8.126 million in 2024 with EPS of Rs.2.39 and NP margin of 9.1 percent.
Recent Performance (1QFY25)
During 1QFY25, PAKL’s topline inched up by 9.55 percent. Out of the total turnover of Rs.18.610 million recorded by the company during the quarter, 93 percent comprised of export sales. Tweaking its sales mix in favor of export resulted in a gross profit of Rs.2.26 million in 1QFY25 versus a gross loss of Rs.3.19 million recorded during the same period last year. Operating expenses dipped by 8.6 percent in 1QFY25 due to cost control measures. PAKL recorded an operating loss of Rs. 1 million in 1QFY25, down 85.26 percent year-on-year. Finance costs (bank charges) mounted by 179.49 percent during the period. The company recorded a net loss of Rs.1.51 million in 1QFY25, down 78.68 percent from a net loss of Rs.7.078 million recorded in 1QFY24. Loss per share stood at Rs.0.44 in 1QFY25 versus a loss per share of Rs.2.08 posted in 1QFY24.
Future Outlook
As of September 30, 2024, PAKL has negative equity of Rs. 329.886 million. Its current liabilities exceed its current assets by Rs.338.327 million. These conditions cast significant doubts on the ability of the company to continue as a going concern. Banks and financial institutions are hesitant to lend to PAKL due to its history of non-payments. In such a precarious situation, continuing its operations seems a far-fetched dream for PAKL in the absence of substantial equity injection or loans from directors/sponsors.
Besides internal concerns, the company is also facing demand destruction owing to shrunken pockets of local customers and the company’s inability to compete in the global market due to the high cost of production particularly elevated energy costs in the home market.
Recently, the company’s export sales have posted resilience, however, in the wake of the ongoing Russia-Ukraine crisis and war imposed on the Gaza Strip and the Middle Eastern region, the sustainability of the company’s exports can’t be guaranteed.
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