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 861 shareholders. Directors, their spouses, and minor children have the majority stake of around 94.96 percent in FRCL followed by the local general public holding 4.21 percent shares of the company. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-24)
FRCL’s topline has been ascending over the period under consideration except for a dip in 2024. Conversely, its bottom line posted net profit in 2020, 2021, and 2022 and net loss in the remaining years under consideration. FRCL’s margins drastically fell in 2019 and then improved for the next two years. This was followed by a plunge in 2022 and 2023. In 2024, GP margin continued to slide while OP and NP margin registered slight improvement (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, the year-on-year topline growth of 17.57 percent posted by FRCL was led by higher volumes. However, the cost of sales grew by 36.76 percent year-on-year in 2019 on the back of heavy consumption of LPG to cater to the issue of gas load shedding. The increase in gas tariff and Pak Rupee depreciation also played their due role in pushing up the cost of sales and squeezing the gross profit by 84 percent year-on-year in 2019. GP margin radically plummeted to 2.16 percent in 2019 versus the GP margin of 15.9 percent recorded in 2020. To top it off, operating expenses also grew on account of higher payroll expenses and depreciation. FRCL enhanced its workforce from 203 employees in 2018 to 242 employees in 2019. This resulted in FRCL recording an operating loss of Rs. 22.18 million in 2019 as against an operating profit of Rs.54.65 million posted in 2018. Other expenses 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 the high-base effect as the company wrote back liabilities of Rs.19.47 million in 2018. Finance costs gave another major blow to the bottom line 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, high discount rate also did the trick. FRCL posted a net loss of Rs. 88.47 million in 2019 as against a net profit of Rs.39.43 million recorded in 2018. Loss per share clocked in at Rs.2.34 in 2019 versus EPS of Rs.1.04 registered in 2018.
The next two years were characterized by staggering topline and bottom-line growth and improved margins. Sales growth was led by both improved volumes and upward revisions in 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 years which resulted in the 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 margins of 10.11 percent and 10.47 percent in 2020 and 2021 respectively. Operating expenses were higher in both years on the back of improved sales volume coupled with inflationary pressure. FRCL expanded its workforce to 546 employees in 2020 and 764 in 2021. This led to higher payroll expenses. Higher freight charges and depreciation also led to elevated operating expenses in both years. Other expenses 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 an operating profit of Rs.67.89 million in 2020 as against an operating loss of Rs.22.18 million in 2019. This translated into an 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 costs also buttressed the bottom line in both years. In 2020, when the discount rate was high for most part of the year, the company considerably squeezed its long-term borrowings resulting in a 13.6 percent lower finance cost. In 2021, finance costs further shrank by 12.4 percent due to monetary. In 2020, FRCL’s bottom line recovered from a net loss and posted a 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 margins of 3.93 percent and 5.68 percent respectively in 2020 and 2021.
The merry time enjoyed by FRCL for two consecutive years seems to have ended in 2022 as the company once again faced a bottom line 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 the 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 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 6.42 percent in 2022. Operating expenses also succumbed to inflationary pressure. During the year, the company hired 22 additional workers to take the tally to 786 employees. The company made lower provisioning for WWF and WPPF during the year, resulting in 29.5 percent lower other expenses. Operating profit slumped by 26.68 percent in 2022 with OP margin slipping to 4.55 percent as against OP margin of 8.3 percent recorded in the previous year. Finance cost grew by 20.79 percent in 2022 on the back of a 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 a 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 bottom line 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. These changes enabled FRCL to sustain its volumes at last year’s level. The cost of sales spiked by 14 percent in 2023 due to the global commodity super cycle owing to the 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 the GP margin sliding to 2.51 percent. Distribution and administrative expenses escalated by 33.58 percent and 29.13 percent respectively in 2022 on account of higher payroll expense, depreciation as well as provision for ECL. The number of employees increased to 813 employees in 2023. Other expenses gave a major hit to the bottom line as it grew by over 459.58 percent in 2023 to reach Rs. 70.35 million on account of hefty exchange loss incurred during the year. FRCL made an operating loss of Rs.41.99 million in 2023. Other income magnified by 344 percent in 2023 on account of higher markup income. Finance costs continued to increase on the back of the high discount rate. This resulted in a net loss of Rs.153.47 million recorded by FRCL in 2023 with a loss per share of Rs.4.05.
In 2024, FRCL’s topline posted a year-on-year decline of 16.91 percent. This was due to a slowdown in construction activities which led to demand destruction in the tiles & ceramics industry. On the supply front, limitations on the opening of the Letter of Credit led to an interrupted supply chain, impeding the company from operating at its optimum capacity during the year. Gross profit declined by 29.76 percent in 2024 on the back of low capacity utilization, elevated rates of gas & electricity, heightened wage rates, and soaring prices of raw materials. GP margin also inched down to 2.12 percent in 2024 – the lowest over the period under consideration. Distribution expense ticked up by 2.69 percent in 2024 due to higher freight charges and increased salaries paid within the distribution chain. Conversely, administrative expense tumbled by 21.64 percent in 2024 as the company booked no provision against doubtful debts in 2024 and also because of reduced payroll expense as the company squeezed its workforce from 813 employees in 2023 to 765 employees in 2024. Other expenses shrank by 91.41 percent in 2024 primarily due to no exchange loss incurred during the year. FRCL recorded an operating profit of Rs.6.19 million in 2024 as against an operating loss of Rs.41.99 million recorded in the previous year. Other income strengthened by 77.77 percent in 2024 due to higher markup income. Finance costs grew by 29 percent in 2024 due to a higher discount rate on account of the markup incurred on the provident fund. Conversely, the gearing ratio nosedived to 24 percent in 2024 from 32 percent in 2023. FRCL recorded a net loss of Rs.109.913 million in 2024, down 28.38 percent year-on-year. This translated into a loss per share of Rs.2.9 in 2024.
Recent Performance (1QFY25)
During 1QFY25, FRCL’s net sales rebounded by 27.66 percent. This was due to an increase in sales volume on account of a better sales mix. Upward price revision also drove up FRCL’s topline during the period. Higher prices of raw materials, electricity, and gas resulted in a 24.51 percent surge in the cost of sales in 1QFY25. However, as the company passed on the impact of the cost hike to its consumers, it was able to record 158.22 percent higher gross profit in 1QFY25 with GP margin clocking in at 4.77 percent versus GP margin of 2.36 percent recorded in 1QFY24. Distribution and administrative expenses slumped by 10 percent and 3.1 percent respectively during 1QFY25 due to reduced fuel prices and operational efficiency achieved during the period. Other expenses surged by 122.93 percent in 1QFY25 probably on account of profit-related provisioning done during the period. FRCL recorded an operating profit of Rs.25.86 million in 1QFY25 versus an operating loss of Rs.0.507 million recorded in 1QFY24. Other income dipped by 94.19 percent in 1QFY25 may be on account of lower markup income on account of the onset of the monetary easing cycle. Finance cost also slid by 72.14 percent in 1QFY25 due to lower discount rates and lower outstanding borrowings. FRCL recorded a net profit of Rs.5.510 million in 1QFY25 with EPS of Rs.0.15 and NP margin of 0.542 percent. This was against the net loss of Rs.34.96 million recorded in 1QFY24 with a loss per share of Rs.0.92.
Future Outlook
The market size of tiles has significantly shrunk of late due to diminished construction activity. This is on account of economic and political instability, heightened excise duty, property taxes, reduced purchasing power of consumers, and shattered investor confidence. While token improvement has been witnessed in the economic indicators, it will take quite some time to undo the damages done to investor morale in general and construction activity in specific. Currently, the construction activity is largely concentrated in renovation and government projects with slow disbursements. Hence, for now, the company is focusing on attaining operational efficiency.
Comments