Leather Up Limited (PSX: LEUL) was incorporated as a private limited company in 1990 and was converted into a public limited company in 1993. The principal activity of the company is the manufacturing and export of leather bags and leather garment products.
Pattern of Shareholding
As of June 30, 2024, LEUL has a total of 6 million shares outstanding which are held by 1269 shareholders. Directors, CEO, their spouses, and minor children have a major stake of around 50 percent in the company followed by the local general public holding 49.92 percent shares of LEUL. The remaining shares are held by the Investment Corporation of Pakistan and joint companies.
Performance Trail (2019-24)
LEUL’s topline which had been shrinking until 2021 posted a staggering rebound in 2022. In the next two years, the topline registered paltry growth. The company posted net profit in 2018 followed by five years of sustained net losses. In 2024, LEUL posted a net profit. Gross margin rode an upward trajectory until 2020 followed by a drastic drop in 2021. In 2022, the company’s GP margin attained significant growth followed by a slump in 2023. In 2024, LEUL’s gross margin attained its optimum level. The operating and net margins of LEUL stayed in the negative zone over the period under consideration. The detailed performance review of the period under consideration is given below.
In 2019, LEUL’s topline slid by 7.12 percent year-on-year due to the cyclical nature of the fashion industry as well as the loss of priority of leather garments in the international market. The company curtailed its production to match the demand level which resulted in a 9.47 percent year-on-year fall in the cost of sales. This culminated in a 71.8 percent year-on-year jump in gross profit. GP margin also improved from 2.89 percent in 2018 to 5.35 percent in 2019. Low export sales translated into low freight and handling charges which pushed the distribution expense down by 13.3 percent year-on-year in 2019. Administrative expenses increased by around 1.41 percent year-on-year due to higher fees & subscription charges incurred during the year. The company posted an operating loss of Rs.5.10 million in 2019, down 22 percent year-on-year. The company’s capital structure is equity-oriented with a debt-to-equity ratio of 13.2 percent in 2019. While finance costs increased by 118.76 percent in 2019, they were mainly comprised of bank charges and commissions. Other income also posted a 99.61 percent drop in 2019 as the company realized a gain on the sale of land in 2018. LEUL posted a net loss of Rs.8.2 million in 2019 with a loss per share of Rs.1.37 as against net profit of Rs.45.23 million and EPS of Rs.7.54 recorded in 2018.
In 2020, LEUL’s topline drastically fell by 42.88 percent year-on-year on the back of low demand. The associated reduction in capacity utilization from 19 percent in 2019 to 10 percent in 2020 pushed the cost of sales down by 43.5 percent year-on-year. While gross profit also slipped by 31.98 percent in 2020, GP margin ticked up to 6.37 percent. Significant reduction in advertising and sales promotion as well as lower freight and handling charges resulted in a 74.78 percent year-on-year dip in distribution expenses. Administrative expenses also nosedived by 33.95 percent year-on-year on account of lesser fee and subscription charges, lesser utility expenses as well as lesser salaries expenses due to a reduction in the human resource count from 38 people in 2019 to 26 people in 2020. The operating loss further shrank by 57.6 percent to clock in at Rs.2.16 million in 2020.
Finance costs fell by 92.78 percent year-on-year in 2020 due to a reduction in bank charges and commissions. The company had no outstanding long-term and short-term loans in 2020, hence, no markup/interest charges. Other income considerably improved during the year due to the reimbursement of penalties as well as the PM package for the business community. LEUL’s net loss shrank by 89.5 percent year-on-year in 2020 to clock in at Rs.0.86 million with a loss per share of Rs.0.14.
LEUL posted a further 38.15 percent year-on-year plunge in its revenue in 2021. The company reduced the number of industrial sewing machines installed from 195 to 57 and utilized 21 percent of the installed capacity. Cost of sales also declined by 33.97 percent year-on-year in 2021 resulting in a 99.55 percent drop in gross profit. GP margin fell to its lowest level of 0.05 percent in 2021. Administrative expenses surged by 129.33 percent in 2021 due to hefty growth in fees and subscription charges, auditor’s remuneration as well as entertainment and utilities expenses during the year. Distribution expenses also grew by 34.10 percent year-on-year on the back of elevated freight, handling, and insurance charges incurred in 2021. The result was 282.86 percent year-on-year growth in operating loss which stood at Rs.8.28 million in 2021. The company also incurred other expenses of Rs.50.22 million in 2021 as against the other income of Rs.1.79 million in the previous year. Other expenses were mainly on account of raw materials written off during the year as the company’s inventory was completely destroyed due to flooding of the mill area because of heavy rainfall. Consequently, the net loss magnified by 6721.33 percent in 2021 to clock in at Rs.58.68 million. Loss per share amounted to Rs.9.78 in 2021.
After constant shrinkage in the topline since 2017, LEUL posted a 58.9 percent year-on-year rise in its topline in 2022 as the company was able to increase its export sales. The cost of sales grew by 23.66 percent during the year. Gross profit boasted a staggering growth of around 755 times in 2022 with GP margin jumping up to 22.2 percent. Distribution expenses almost remained intact in 2022 while administrative expenses inched up by 5.14 percent due to rising inflation. The company wasn’t able to post operating profit even in 2022, however, the magnitude of operating loss greatly reduced by 67.63 percent to clock in at Rs.2.68 million. The reduction in other expenses by 76.95 percent during 2022 was due to the fact that the company sold the remaining spoiled inventory to one of its suppliers at the cost price. Net loss dwindled by 75.32 percent year-on-year to clock in at Rs.14.48 million in 2022 with a loss per share of Rs.2.41.
LEUL’s topline could muster a paltry 0.76 percent year-on-year growth in 2023. As the main export market of LEUL is Central Europe which was suffering from recession, the company suffered from tamed demand in 2023. Cost of sales hiked by 22.36 percent as the company disposed of some of its inventory as scrap in 2022 which provided low base for 2023. Gross profit slid by 74.85 percent year-on-year in 2023 with GP margin falling down to 5.55 percent. Administrative expenses dropped by 12.19 percent in 2023 due to the high-base effect as the company wrote off advances to employees and also booked provisions for ECL in 2022. Distribution expenses mounted by 25.08 percent in 2023 due to elevated freight, handling, and distribution charges incurred during the year despite low demand. LEUL registered an operating loss of Rs.6.46 million in 2023, up 141 percent year-on-year. The company registered another income of Rs.3.54 million in 2023 versus other expenses of Rs.11.58 million in 2022. This was on account of the fact that LEUL wrote off raw materials and also booked provisions for finished goods in the previous year. Conversely, in 2023, the company reversed the provision for finished goods and also wrote back advances from customers. LEUL posted a net loss of Rs.3.287 million in 2023, down 77.3 percent year-on-year with a loss per share of Rs.0.55.
In 2024, LEUL posted a 1.36 percent uptick in its net sales. Demand from Europe remained weak on account of high inflation. The cost of sales declined by 17.16 percent in 2024 due to a massive drop in cutting & stitching charges. This resulted in a 316.77 percent improvement in gross profit with the GP margin climbing up to 22.8 percent. Administrative expenses slid by 25.23 percent in 2024 due to lower payroll expenses and considerably lesser trade & other receivables written off during the year. Distribution expenses surged by 8.81 percent in 2024 due to higher freight, handling, and insurance charges incurred during the year. LEUL recorded an operating loss of Rs.0.0908 million (Rs.90,822) in 2024, down 98.59 percent year-on-year. Other income contracted by 81.43 percent in 2024 due to thinner exchange gain, fewer advances from customers written back, and lesser reversal of provision on finished goods recorded during the year. LEUL was able to post a net profit of Rs.0.3217 million in 2024 with EPS of Rs.0.05 and NP margin of 1.17 percent.
Recent Performance (1QFY25)
LEUL recorded 78.62 percent year-on-year shrinkage in its net sales in 1QFY25 due to weaker demand from international markets. Resultantly, the cost of sales tumbled by 80.76 percent during the period. The company recorded a gross profit of Rs.0.810 million in 1QFY25, down 61.8 percent year-on-year. However, with price optimization and operational efficiency, it was able to deliver a GP margin of 20.17 percent in 1QFY25 versus a GP margin of 11.29 percent recorded during the same period last year. Lower sales volume led to a 95.72 percent dip in distribution expenses in 1QFY25. Administrative expenses also plunged by 53.11 percent during the period. LEUL recorded an operating loss of Rs.0.391 million in 1QFY25, down 56.29 percent year-on-year. Other income plummeted by 74.38 percent during the period probably due to thinner exchange gain.
This resulted in a net loss of Rs.0.127 million in 1QFY25 versus a net profit of Rs.0.0986 million recorded in 1QFY24. Loss per share stood at Rs.0.02 in 1QFY25 versus EPS of Rs.0.02 recorded in 1QFY24.
Future Outlook
Operational efficiency, cost optimization, and exploration of new markets can boost LEUL’s financial performance in the coming times. Joint ventures between Pakistani and Chinese leather manufacturers may enable the local companies to modernize and upgrade their production processes which will render them competitive in the international market. The recently released Uraan Pakistan program also aims to elevate leather exports to $2 billion by 2029. Thus, the industry is pinning hopes for favorable reforms including a rated tax regime.
Comments