The Searle Company Limited (PSX: SEARL) was incorporated in Pakistan as a private limited company in 1965 and was later converted into a public limited company. The principal activity of the company is the manufacturing and sale of pharmaceutical, consumer health and nutritional products.

Pattern of Shareholding

As of June 30, 2022, SEARL has a total of 312.052 million shares outstanding which are held by 14,515 shareholders. International Brands (Private) Limited is the parent company of SEARL and holds 54.71 percent of its total outstanding shares. This is followed by local general public having a stake of 17.88 percent in the company. Joint stock companies account for 6.5 percent shares of SEARL while foreign companies hold 5.34 percent shares. Modaraba & Mutual Funds constitute 4.44 percent of the total shareholding pie followed by insurance companies having 4.10 percent shares. Banks, DFIs and NBFIs own 3.21 percent shares while foreign public hold a little over 2 percent shares of SEARL. Trust and funds also own 1.38 percent shares of the company. The remaining around 1 percent shares are held by Directors, CEO, their spouse and minor children as well as associated companies.

Historical Performance (2018-22)

SEARL’s topline has been inching up in all the years under consideration, yet its bottomline is riding a downward trajectory since 2018. The margins assumed their peak in 2020 and 2021 during the outbreak of COVID-19 and then subsided in the subsequent year. The GP margin was still in a much better state in 2022 than the pre-COVID period but NP margin bottomed out due to gigantic finance cost. The detailed performance trail of each of the year under consideration is as under.

In 2019, SEARL’s topline touted a 15 percent year-on-year growth which came on the back of strengthened demand, rich product mix and stringent branding efforts. As the local pharmaceutical industry heavily relied on the imports of active pharmaceutical ingredient (API), local currency depreciation resulted in a 17 percent year-on-year surge in the cost of production which pushed the GP margin down from 35 percent in 2018 to 34 percent in 2019. Distribution expense went up by 25 percent year-on-year in 2019 on the back of market induced rise in salaries and wages coupled with extensive advertising and promotion, samples expense etc. Administrative expense largely remained in check during 2019. SEARL booked lesser provisioning for WWF and WPPF which pushed the other expense down by 13 percent year-on-year while other income slightly dwindled due to lesser dividend income from subsidiary companies. All these factors contributed to a 5 percent year-on-year slide in operating profit during 2019 which culminated into an OP margin of 22 percent as against 27 percent in the previous year. To further weaken the bottomline, finance cost amplified by a massive 109 percent year-on-year in 2019 which was the result of rate hike coupled with increased short-term borrowings during the year. Exchange loss also contributed a great deal in driving the finance cost up. Consequently, bottomline slumped by 13 percent year-on-year to clock in at Rs.2641.95 million in 2019 with an NP margin of 18 percent as against 24 percent in 2018. EPS also dropped from Rs.14.35 in 2018 to Rs.12.44 in 2019.

In 2020, SEARL’s revenue grew by 14 percent year-on-year. While many other businesses suffered due to COVID-19 which resulted in unprecedented measures and restrictions imposed by the government to contain the disease, the novel virus proved to be a bane for the pharmaceutical sector and harnessed its integration among the masses. Pakistan’s pharmaceutical sector’s sales grew by 13.23 percent during the year. Besides, volumetric growth, Drug Regulatory Authority of Pakistan (DRAP) pricing policy which was linked to CPI also produced a positive impact on the revenue of SEARL and its counterparts. SEARL enjoyed a market share of 6.5 percent in 2020 as against 5.3 percent during the last year. The cost of sales went down by 14 percent year-on-year as the company discontinued toll manufacturing services obtained from its subsidiary Searle Pharmaceuticals (Private) limited which reduced its processing charges by manifold. The result was a 68 percent year-on-year surge in gross profit, driving the GP margin up to 50 percent. Distribution expense grew by a marginal 2 percent year-on-year in 2020 as SEARL considerably trimmed its advertising and promotion budget, samples as well as travelling related expense due to restriction on the movement of people and goods on account of COVID-19. Administrative expense ticked up by 19 percent year-on-year during 2020 owing to a hike in salaries and wages, corporate services charged by the holding company as well as generous donations and charities given during the year. Other expense posted a humungous 70 percent year-on-year rise on the back of higher provisioning for WPPF, WWF and Central Research fund (CRF). Other income shrank by a huge 75 percent year-on-year as SEARL received lesser dividend from subsidiary companies. The major impact was created by Searle Pharmaceutical (Private) Limited which had the lion’s share in last year’s other income pie, however, it didn’t pay any dividend in 2020. Operating profit magnified by 21 percent year-on-year in 2020 with OP margin clocking in at 24 percent. Finance cost grew by 50 percent year-on-year as discount rate was higher during the first three quarters of FY20 coupled with increased borrowings during the year. Higher taxation due to the imposition of super tax and finance cost barred the growth in operating profit from cascading down and pushed the net profit down by 7 percent year-on-year in 2020. Net profit clocked in at Rs.2455.08 million in 2020 with an EPS of Rs.11.56. SEARL’s GP, OP and PBT margin were the highest during 2020, however, higher taxation trimmed down the NP margin to 14.8 percent.

In 2021, SEARL’s topline almost stayed at the same level as of 2020 with a negligible year-on-year growth of less than 1 percent. Cost of sales slid by 3 percent year-on-year due to lesser raw and packing materials as well as processing charges. The GP margin touched 52 percent in 2021. Distribution and administrative expense posted a year-on-year rise of 9 percent each in 2021. The main growth drivers were high salaries and wages, carriage and duties, sample expense and travelling expense. Other expense took a 21 percent nosedive due to lesser WWF, WPPF and CRF. Other income ascended by 29 percent year-on-year on the back of handsome dividend from OBS Pakistan (Private) Limited, the subsidiary of SEARL. Operating profit inched up by 3 percent year-on-year with OP margin touching 24.5 percent in 2021. A steep 106 percent rise in finance cost despite monetary easing was the result of a sizeable Rs.9.5 billion worth Musharaka facility (long-term) obtained by the company coupled with higher running finance facility availed during the year. This translated into a 14 percent year-on-year drop in net profit of SEARL which stood at Rs.2122.92 million in 2021 with an NP margin of 12.8 percent. High finance cost diluted the NP margin of SEARL in 2021 while its GP and OP margin during the year were visibly greater than the last year’s margins. The issue of 27.6 million right shares during the year resulted into a 39 percent year-on-year decline in the EPS which stood at Rs.7.01 in 2021.

In 2022, the topline grew by 7 percent year-on-year. High cost of sales on the back of unprecedented level of inflation and rapidly depreciating value of local currency resulted in a 13 percent rise in cost of sales which eclipsed the growth of gross profit. GP margin went down to 49 percent in 2022. Distribution expense multiplied by 19 percent year-on-year in 2022 due to higher advertising budget, traveling charges, carriage and duties and salaries including bonus to salesmen. Administrative expense grew by a mere 3 percent during 2022 which was the result of higher depreciation as well as repair and maintenance. Other expense and other income showed favorable movements during the year whereby the former slid by 28 percent while the latter rose by 86 percent. The staggering growth in other income came on the back of handsome dividend from subsidiary companies particularly Searle Pakistan Limited. Operating profit registered a 5 percent year-on-year hike while OP margin slightly lowered to clock in at 24 percent during 2022. Finance cost surged by 46 percent year-on-year due to excessive monetary tightening which drastically boosted the cost of borrowing during the year. Short-term borrowings also increased during the year, contributing to an increase in finance cost during 2022. The bottomline slipped by 2 percent year-on-year in 2022 to clock in at Rs.2090.72 million with an NP margin of 11.8 percent – the lowest among all the years under consideration. EPS slid to Rs.6.7 in 2022.

Recent Performance (9MFY23)

During 9MFY23, SEARL’s topline boasted a stunning 28 percent year-on-year rise, yet, it couldn’t trickle down to produce a bottomline growth. Significant Pak Rupee depreciation, increase in global commodity prices as well as increased fuel cost resulted in a 40 percent cost increase which pushed the GP margin down to 46 percent from 51 percent during the same period last year. High operating expense due to unsurpassed inflation level coupled with deteriorating other income on the back of low dividend income shoved the operating profit down by 10 percent year-on-year in 9MFY23. OP margin also slumped to 18 percent in 9MFY23 from 26 percent during the same period last year. Significantly high finance cost due to multiple rounds of monetary tightening during the year resulted in net profit shrinking by 65 percent year-on-year during 9MFY23 to clock in at Rs.639.42 million with a thin NP margin of 3.8 percent versus 14 percent during the same period last year. EPS also posted a steep fall from Rs.4.64 in 9MFY22 to Rs.1.64 during 9MFY23.

Future Outlook

While the net revenues of SEARL are expected to go up on the back of higher volumes, DRAP pricing policy linked to CPI and improved sales mix, deteriorating economic scenario which includes high inflation and discount rate, Pak Rupee depreciation, commodity super cycle, import restrctions and high energy cost will impede the robust topline from producing any positive impact on the bottomline and margins of the company.