Thal Limited (PSX: THALL) was established as a public limited company in 1966 under the Companies Act, 1913 (now Companies Ordinance, 1984). It operates under the House of Habib. The company manufactures jute goods, engineering goods, papersack, and laminate sheets.

Shareholding pattern

As at June 30, 2021, nearly 40 percent shares are held under the category of foreign investors followed by over 24 percent held under “individuals”. Banks, DFIs, NBFIs, insurance companies, takaful, modarabas and pension funds collectively own almost 15 percent shares, while the directors, CEO, their spouses and minor children own 6.3 shares. Within this, a nonexecutive director, Mr. Mohamed Ali R. Habib is a major shareholder. The remaining roughly 14 percent shares are with the rest of the shareholder categories.

Historical operational performance

Since FY14, the company has seen a growing topline with the exception of three years when it contracted. Profit margins, on the other hand, were stable between FY18 and FY21.

In FY18, topline posted a growth of close to 13 percent to cross Rs 19 billion in value terms. This was predominantly a result of the 11 percent growth in the engineering segment. Additionally, revenue got a boost from the 21 percent rise in volumes for cars and light commercial vehicles in the local auto industry. But with an increase in cost of production to 81 percent of revenue, from almost 79 percent in FY17, gross margin in FY18 was recorded at a lower almost 19 percent. Net margin reduced to almost 14 percent compared to last year’s 23 percent. Last year saw unprecedented levels of other income that reduced in FY18. In value terms as well, bottomline was significantly lower at Rs 2.7 billion versus almost Rs 4 billion in FY17.

Topline in FY19 increased by almost 18.6 percents to cross Rs 22 billion in value terms. It was the highest topline recorded thus far. The most prominent contributor to the revenue, the engineering segment, witnessed a more than 18 percent growth. With cost of production hovering around 81 percent of revenue, gross margin remained close to 19 percent.Net margin, however, improved albeit marginally, to 14 percent as administrative expense reduced due to lower salary expense. The latter may have been a result of reduction in number of employees’ figure.

Revenue in FY20 witnessed the biggest contraction as it fell by almost 26 percent. This is attributed to a number of reasons, the outbreak of Covid-19 being a major one. In addition, demand was contained due to an incline in car prices. The latter was due to a combination of currency devaluation and imposition of additional taxes. Thus, gross margin fell to an all-time low of 15.4 percent. This also reflected in the net margin which was also recorded at an all-time low of 11.25 percent.

Topline growth in FY21 accelerated to over 64 percent to reach over Rs 27 billion in value terms. Engineering segment continued on its growth trajectory as sales from the same doubled year on year to Rs 16.2 billion. The reduced taxes and low interest rates encouraged demand for passenger car sales that resulted in a 56.7 percent growth in the overall auto industry. But gross margin grew marginally to 17 percent as production cost consumed almost 83 percent of revenue. Net margin also followed as it was slightly higher at 12.75 percent for the year.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 50 percent year on year. The engineering segment posted a growth of 64 percent, recording an all-time high sales figure of Rs 5.06 billion. This was largely sourced from growth in demand from the auto industry. While gross margin was only marginally lower at 17.4 percent, net margin was fallen to 12 percent compared to 14 percent in 1QFY21 due to an increase in distribution expense.

The second quarter also followed suit as revenue posted a growth of nearly 50 percent year on year. Engineering segment was again the major contributor to revenue that saw an improvement due to higher prices and better volumes. The former was due to “strengthening of the foreign currency against the Pakistani rupee”. But with production cost increasing, gross margin shrunk to 17.7 percent versus 23.3 percent in 2QFY21. Net margin, however, was only marginally lower at 12 percent versus 13.8 percent in 2QFY21 as the current period saw significant improvement in other income that came from dividends.

In the third quarter, revenue was higher by almost 31 percent year on year as engineering segment posted a growth of 47 percent in the cumulative 9MFY22 period. This was again attributed to an increase in volumes and prices. Production cost as a share in revenue reduced slightly, allowing gross margin to improve for the quarter, at 18.1 percent. However, net margin was nearly flat at 12.9 percent versus 12.6 percent in 3QFY21 due to higher taxation. While demand from the auto industry is expected to continue, the challenges faced are on the supply chain front as freight costs increase alongside shipment delays. Additionally, broadening customer base, localization and diversification have become essential as new players enter the market.