Biafo Industries Limited

Biafo Industries Limited (PSX: BIFO) was established as a public limited company in 1988 under the Companies Ordinance 1984 (currently Companies Act, 2017). It commenced its commercial production in 1994.

Its core business is to manufacture commercial explosives and blasting accessories. Because of the nature of its product offering, the company is required to renew its license every year for manufacturing and sale of explosives. Its plant is located at Hattar, KPK and has a rated capacity of producing 6 million kgs of Tovex water gel and powder explosives 9 million numbers of detonator, plain and electric combined, 0.5 million meters of safety fuse and 2.5 million meters of detonating cord.

Shareholding pattern

About 49 percent of the company is held by the directors, CEO their spouse and children. Of this 25 percent is held by Ayesha Humayun Khan, a non-executive director, and 20 percent is held by Zafar Khan, also a non-executive director at the company. Other individuals own nearly 22 percent of BIFO whereas rest is distributed between individuals owning more than 5 percent shares, banks, DFIs, NBFIs, mutual funds, modarabas and insurance companies.

Historical operational performance

Over the years, Biafo Industries Limited has maintained a positive growth rate for its topline with the exception of a few years. Its net profit, in absolute terms has also been consistently increasing for a large part of the decade; it peaked in FY18 whereby its costs of sales as a percentage of net revenue were also at its lowest ever.

Looking at FY15, BIFO recorded a growth rate in topline of nearly 11 percent year on year as a result of increased business in the oil and gas exploration sector by almost 67 percent and the construction and mining sector by almost 49 percent. Profit margins also improved year on year on the basis of reducing the cost of raw materials by sourcing them from cheaper alternatives. An increase in income from financial assets also allowed profits to perk up.

In FY16, the rate of growth in topline was subdued from nearly 11 percent in FY15 to a little over 3 percent in FY16 due to no new projects undertaken. While most of the other elements remained similar, a significant change was seen in administrative costs of which a major contribution was made by directors’ travelling and conveyance, staff traveling, electricity and gas. Significant costs were also incurred for legal and professional purposes, repair and maintenance.

Topline declined by 17 percent year on year in FY17 due to a reduction in sales to the oil and gas exploration sector. This in turn was a result of reduced seismic exploration programs as per the company’s annual report for the period. The reduction in exploration programs was affected by lower oil price internationally. During the end of the financial year under review, the company undertook a new project of which the revenue stream would be visible in the oncoming years.

In FY18, BIFO’s revenue regained momentum, growing by nearly 41 percent on the back of sales made for major new road construction projects along with large scale mining projects. While cost of sales in absolute terms showed a rise, its share in net revenue has rather declined year on year. The company’s effort to curtail costs despite a growing topline allowed its margins to reach the highest ever recorded in a decade.

In FY19, a weakened economy and slow business growth resulted in a year on year decline in topline by around 17 percent. Moreover, the government also did not initiate new infrastructure projects which affected BIFO’s profitability. Currency devaluation hit the company’s profitability as it caused its cost of raw materials and hence the cost of production to increase considerably. In addition, rising interest costs more than doubled BIFO’s finance costs increasing from Rs23 million in the preceding year to Rs63 million in FY19. Some relief was brought in by income from net exchange gain and dividends, doubling from Rs47 million in FY18 to Rs103 million in FY19.

Quarterly results and future outlook

Comparing the six months ended FY20 and FY19, the company’s topline grew by almost 25 percent as a result of an increase in seismic exploration programs. However the increase in revenue was offset by a decline in income generated from other sources along with an escalation of finance costs due to increased interest rates. In addition, as expected, rupee devaluation also contributed to an increase in share of costs in net revenue year on year.

The company’s revenue stream is dependent on infrastructure development. With the government attempting to rectify current account deficits and realigning its expenditure, the availability of funds for infrastructure is uncertain. The company is pinning its hopes on CPEC projects, which can bring profitability to the company; however, review of the same would result in extension of time lines.