Service Industries Limited

Service Industries Limited (PSX: SRVI) was established in 1957 under the Companies Act, 1913 (now Companies Act, 2017) as a private limited company. Two years later in 1959 it was converted into a public limited company.

Service Industries Limited is engaged in the purchasing, manufacturing and sale of a number of products including footwear, tyres and tubes, and technical rubber products.

The company not only caters to the domestic market, but is also a significant exporter, primarily to the European market however, it is also expanding its export markets to the US, Australia and the Middle East.

Shareholding pattern

Service Industries Limited for the most part is in the ownership of its directors, CEO, their spouses and minor children, holding 41 percent of the shares of the company. This is followed by the local general public which owns nearly 28 percent while 14 percent is in the ownership of NIT and ICP. The remaining 17 percent is distributed between the rest of the categories as depicted in the table.

Historical operational performance

The company’s topline has more or less recorded a double digit growth rate, with the exception of a few years. Profit margins have also largely remained in the positive region.

During CY14, topline grew by a little over 12 percent year-on-year on the back of footwear segment which increased by 13.5 percent. The improvement in the footwear segment came about as a result of better productivity, better pricing in addition to good supply chain management. Service Industries Limited’s tyres and tubes segment also registered positive growth of close to 11 percent, thus further contributing to the topline. The latter was possible due to continuous marketing, evident from a higher distribution expense. With costs remaining unchanged as a percentage of revenue, profit margins improved slightly. A near doubling of other income was seen during the year; this was coming from sales of shares and profit from associated company.

While the overall topline growth for Service Industries was recorded at 6 percent in CY15, footwear division grew only marginally by a little beyond 1 percent. The subdued incline in revenue from this segment was a result of weakness of the Euro. Note that Europe is the company’s primary export market. The tyres and tubes segment brought in the larger part of the revenue due to continued marketing efforts. Other income again contributed a considerable Rs246 million to the bottomline coming from term deposits with banks in addition to onetime scrap sales. Thus profit margins continued to increase.

Service Industries Limited remained on the upward trajectory during CY16, increasing its topline by 8 percent year on year. All the business segments performed well. Revenue was mostly generated due to higher sales volumes since a weak Euro did not allow for much of a price change. Thus export sales were impacted. On the costs side, the company continued to spend on advertisement to sustain sales. So while gross margins improved, operating margins reduced very slightly, due to a significant drop in other income; this was because profit from the associated company was halved while scrap sales were also limited in comparison to the preceding year. There was an unprecedented fall in income from term deposits with bank as well. The reduction in finance and tax expense allowed net margins to improve.

Although topline continued to grow during CY17- at 10 percent, but the higher revenue generated could not be translated into the bottomline due to cost implications. Cost of manufacturing rose by 14 percent year-on-year during the year owing to incline in raw material cost as a result of currency devaluation and inflation. Raw material took up 65 percent of the total cost of manufacturing. The revenue brought in by more exports due to currency devaluation was offset by the increase in cost of imported raw material- particularly rubber. Moreover, costs were also associated with the opening of their retail outlets and brand recognition of the same, thus bringing down margins.

The year 2018 saw Service Industries growing its topline by a little over 14 percent. The rupee devaluation allowed export sales to take off with footwear division boasting a 45 percent growth in revenue while the tyre division experienced a 21 percent increase in revenue. Although costs did rise for the company as a result of the devaluation, however it was offset by the revenue earned from exports allowing profit margins to improve- even if only marginally.

Quarterly results and future outlook

The nine months ended of CY19 saw topline growth of close to 29 percent year on year. This primarily came from export sales triggered by currency devaluation. Inflation in the domestic economy hampered revenue generated from domestic sales, as the consumer’s purchasing power was adversely affected. This also presented a problem in the take off of the retail segment and will continue to remain. However, with production efficiencies and brand awareness, the company was able to pass on the impact of high costs to the consumers, allowing margins to improve year on year

Given the currency situation, the company expects export sales to continue to contribute a large part of the revenue. While the last three months of CY19 will reflect a similar situation of financials, the effect of the Covid-19 pandemic and the consequent halt in trade will be revealed in the first quarter of CY20.