Karam Ceramics Limited

Karam Ceramics Limited (PSX: KCL) was established in 1979 as a public limited company. It provides tiles of various sizes for indoor and outdoor as well as bathroom flooring. Some of the company's well-known clientele include Dolmen Mall, Kidney Center, Saima Mall, Bahria Town Karachi, and Model Town Lahore.

Shareholding pattern

Overwhelming shareholding is held with the sponsor directors, and their spouses and minor children - at nearly 93 percent of the company. The remainder seven percent is distributed between banks, DFIs, NBFIs, insurance companies and local and foreign public shareholders. Second largest shareholding is by held with general public at four percent of total.

Historical performance

Revenue and margins for the company has fluctuated for the better part of last decade. FY13 saw a decline in revenue by almost three percent due to lower sales. In addition, production for the year was also hampered due to gas shortage and cut downs while the plant was also shut down for a month for maintenance purposes. Moreover, selling price was affected as a result of intense competition faced from both local tile manufacturers as well as cheaper imported tiles from China in the market.

FY14 saw some recovery when the top-line increased by nearly 11 percent year-on-year. This was largely achieved through higher sales volume. Expenses on the other hand increased due to increase in energy prices and higher cost of raw material, whereas imported purchases saw a major hike in its cost. Cost of sales made up almost 93 percent of the revenue which led to fourteen percent year-on-year decline in gross margin.

FY15 experienced better economic conditions which were reflected in better sales, although it continued to face stiff competition from cheaper imports from China and Iran. This had a negative impact on volume. Nevertheless, the company also managed to curtail costs with costs making 89 percent of top-line as compared to previous year's almost 93 percent. It also commenced installation of a new plant to increase capacity in expectation of rising demand for tiles.

The recovery gained in FY15 was lost in FY16 where top-line saw reduction by 8 percent year-on-year, despite introduction of new sizes of tiles. Although construction activities increased; however, the company failed to capitalize on the opportunity to the fullest due to severe competition from imported tiles from China in addition to smuggled products.

That year, local tile manufacturers collectively approached the National Tariff Commission (NTC) to impose anti-dumping duties as well as demanded an upward revision of Import Trade Price (ITP) on import of tiles. Moreover, cost of production was also quite elevated, making up a significant 95 percent of net revenue, squeezing profit margins, and eventually incurring loss for the period. The company earned approximately Rs36 million in other income but that could also not salvage the situation.

Cheaper imports of tiles from China continued to result in depressed sales for the company in FY17; top-line experienced a major 28 percent drop - not only in volumetric terms but also affecting ability to command a higher selling price. Higher cost of production worsened profitability, as cost of production stood at 97 percent of the sales. Finance costs also followed an upward trend for the third time in a row while selling, distribution and administrative costs also increased as a percentage of sales.

Karam Ceramics regained momentum in FY18 - top-line increased by almost 41 percent owing to both better volumes and selling price. Costs were also curtailed standing at 88 percent of sales as compared to last year's 97 percent. More emphasis was laid on selling and distribution as is evidenced by the higher figures for the period. Thus, the company managed to claim better profit margins for FY18.

FY19 saw continued profitability whereby top-line increased by almost 19 percent year-on-year. This was achieved due to higher volumes and better sales price. Cost of production saw a marginal increase as a percentage of sales standing at 87 percent for the year - primarily due to a significant increase in energy cost. Moreover, administrative costs also increased largely due to insurance claim write-off. Overall, the period ended with better profit margins.

Capacity utilization

Karam Ceramics was operating at an above 80 percent capacity on an average, until FY16, after which it installed new machines which allowed it to manufacture tiles of various sizes. It again expanded its capacity in FY17. However, due to challenges faced by the company, it could not be used to full extent as is depicted in the severe decline in utilisation level in FY17. The company regained sales volumes in FY18 which is also reflected in improved capacity utilization figures FY18 onwards.

Quarterly performance

FY19 saw better profitability for the company. The current year experienced economic slowdown and correction at a macro level which adversely affected majority of the sectors. This can be seen in lower sales for 1QFY20. However, the top-line was more than offset by cost of production resulting in negative gross profits and bottom-line reducing from a profit of Rs11 million in 1QFY19 to a loss of Rs43 million in 1QFY20.

Future outlook

It seems the economy has seen the worst and may improve from here on. The company expects an increase in demand considering the gradually improving business environment and increase in construction activities. However, Karam Ceramics continues to face challenges from imported products in the market and believes that in the long-term ITP rationalization combined with energy costs reduction may help to improve profitability.

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Karam Ceramics Limited
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Categories of shareholders                                 %
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Directors, their spouses and minor children             93.3
Banks, DFIs, NBFIs                                      2.15
Insurance companies                                     0.01
General public- local                                    4.2
General public- foreign                                 0.03
Others                                                  0.28
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Total                                                    100
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Source: Company accounts; Shareholding pattern as at June 30, 2019

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Karam Ceramics Limited
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Rs (mn)                             1QFY20   1QFY19         YoY
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Revenue                                224      282     -20.60%
Cost of sales                         -248     -242       2.50%
Gross profit                           -24       40    -160.00%
Selling and distribution expenses       -3       -9     -66.70%
Administrative expenses                 -7       -6      16.70%
Other expenses                           0       -4
Operating profit                       -34       21    -261.90%
Other income                             4        0
Finance cost                           -12      -10      20.00%
Profit/(loss) before taxation          -42       11    -475.00%
Taxation                                -1       -1      66.70%
Profit/(loss) after taxation           -43       10    -505.70%
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