Leiner Pak Gelatine Limited (PSX: LPGL) was incorporated in Pakistan as a public limited company in 1983. The company is engaged in the manufacturing and sale of gelatin and di-calcium phosphate produced from animal bones. The company takes pride in producing and exporting Halal Gelatine derived from Halal animals slaughtered in an Islamic way. Leiner & Sons Great Britain Limited is the parent company of LPGL.

Pattern of Shareholding

As of June 30, 2022, LPGL has a total of 7.5 million shares outstanding which are held by 596 shareholders. Local General Public is the largest shareholder of LPGL with a stake of 49 percent, followed by Directors, CEO, their spouse and minor children holding 45.14 percent shares. The parent company accounts for 5.38 percent of the outstanding shares of LPGL. The remaining shares are held by other categories of shareholders including joint stock companies, pension funds, Banks, DFIs and NBFIs etc.

Historical Performance (2018-22)

Except for a downtick in 2020, the topline as well as bottomline of LPGL has been growing reasonably in all the years under consideration. However, in 2020, the company reported the highest GP and OP margins while NP margin boasts its highest mark in 2022. The company posted a net loss in 2018. In the subsequent years, the bottomline stayed in the profit zone. The detailed performance review of each of the years under consideration is given below:

LPGL’s topline grew by 4 percent year-on-year in 2019 on the back of some modifications in the sales mix. While local sales constitute the major portion of LPGL’s revenue pie, in 2019, the growth came on the back of a tremendous growth in export sales of the company which surged from Rs.48 million in2018 to Rs.156 million in 2019 while local sales plunged from Rs.704 million in 2018 to Rs.624 million in 2019. Pak Rupee depreciation resulted in an increase in the cost of LPGL’s basic raw material (crushed bones), however, the same factor scaled up the export sales of the company. Consequently, gross profit grew by 28 percent year-on-year in 2019 with GP margin clocking it at 12 percent versus 10 percent in 2018. Distribution expense augmented by around 110 percent mainly because of shipping charges, however, distribution expense stood at a meager 0.6 percent of the topline, hence didn’t affect the bottomline much. Administrative expense magnified by 5 percent year-on-year in 2019 on account of rise in salaries and wages. The operating profit boasted a stunning 91 percent year-on-year rise in 2019 with an OP margin of 4 percent versus 2 percent in the previous year. Finance cost mounted by 59 percent year-on-year due to high discount rate coupled with increased short-term borrowings primarily to meet working capital requirements. The bottomline recovered from net loss and registered a net profit of Rs.2.54 million in 2019 versus a net loss of Rs.3.96 million in 2018. LPGL posted an EPS of Rs.0.34 in 2018 as against the loss per share of Rs.0.53 in 2018.

2020 was marked by the outbreak of COVID-19 which dampened the economic activity across various sectors of the economy, both locally and globally. During the initial quarters of FY20, LPGL had finalized huge sales orders with the Malaysian clients which were expected to drive the share of export sales to up to 50 percent of the total revenue. However, the lockdowns imposed across the world resulted in the revision in the delivery schedules of LPGL’s export orders and resulted in a 15 percent year-on-year decline in the revenue of the company. Local sales also posted a slump during the year due to tamed demand. While the cost of raw materials kept rising on the back of Pak Rupee depreciation, curtailed operations during the year resulted in an 18 percent year-on-year dip in the cost of sales, resulting in GP margin climbing to 15 percent in 2020. Distribution expense rose by 19 percent during the year mainly on account of commission on exports. Yet, distribution expense stood at 0.9 percent of the topline. Administrative expense shrank by 4 percent year-on-year during 2020. Operating profit magnified by 25 percent year-on-year in 2020 with OP margin of 6 percent. Finance cost surged by 40 percent year-on-year in 2020 as discount rate was high during the major part of the year. Furthermore, borrowings portfolio also expanded as the company availed the Refinance Scheme of the SBP for the payment of salaries and wages. The rise in short-term borrowings was mainly on account of loans from directors and relatives which were non-interest bearing. High finance cost had a profound negative impact on the bottomline which contracted by 24 percent year-on-year in 2020 to clock in at Rs.1.93 million with an NP margin of 0.3 percent. EPS nosedived to Rs.0.26 in 2020.

LPGL’s topline posted a striking turnaround in 2021 with a year-on-year growth of 42 percent. The export orders to Malaysia which were held back due to COVID-19 restrictions were resumed during the year. Export orders stood at a massive 39 percent of the total sales mix of LPGL as against 23 percent during the previous year. It is to be noted the Pak Rupee strongly appreciated during the year which restricted the export proceeds of the company. Moreover, inflation spree in the local economy drove up the prices of raw materials, resulting in a 50 percent surge in the cost of sales. As a result, gross profit could only grow by 3 percent during the year while GP margin shrank to 11 percent in 2021. Distribution expense posted a drastic rise of 71 percent in 2021 and stood at 1.1 percent of sales. This was because the shipping companies made steep upward revisions in the freight charges. Conversely, administrative expense took a 6 percent year-on-year nosedive in 2021. While other income stands at less than 1 percent of the sales in all the years under consideration, in 2021, it posted a 460 percent year-on-year jump on the back of amortization of government grant. Operating profit posted an 11 percent year-on-year uptick in 2021 while OP margin slumped to 4.7 percent. Downward revisions in discount rate drove the finance cost down by 9 percent during the year. LPGL’s also obtained lesser short-term borrowings during 2020 while long-term financing grew on the back of SBP’s Refinance scheme. The bottomline tremendously grew by 168 percent year-on-year in 2021 to clock in at Rs.5 million in 2021 with an NP margin of 0.5 percent. EPS clocked in at Rs.0.67 in 2021.

The upward trajectory of LPGL’s topline continued in 2022 with a reasonable 8 percent year-on-year growth. On the back of unstable economic and political backdrop in the local economy, the company aggressively increased its export sales which not only boasted a staggering year-on-year rise of 23.5 percent in 2022 but also stood at 45 percent of the total revenue mix. Unprecedented level of inflation which pushed the prices of essential raw materials coupled with a hike in energy and gas tariff drove the cost of sales up by 4 percent during the year. However, Pak Rupee depreciation and robust export sales enabled LPGL to attain a 38 percent year-on-year growth in its gross profit with GP margin climbing up to 14 percent in 2022. On account of increased export sales, freight charges increased radically, pushing the distribution cost up by 196 percent in 2022. Distribution cost stood at 3 percent of the topline in 2022. Administrative expense also magnified by 29 percent year-on-year in 2022 in line with inflationary pressure. Operating profit rose by 13 percent year-on-year in 2022 and OP margin improved to 5 percent. Finance cost grew by 11 percent year-on-year in 2022 due to upward revisions in discount rate. The company significantly reduced its borrowings during the year. As of June 2022, the company current liabilities exceeded its current assets by Rs.7.299 million which cast significant doubts over company’s abilities to service its debt. The bottomline grew by 65 percent in 2022 to clock in at Rs.8.28 million with an NP margin of 0.8 percent. EPS stood at Rs.1.1 in 2022.

Recent Performance (9MFY23)

LPGL’s topline posted a handsome 100 percent year-on-year growth in 9MFY23 to clock in at Rs.1467 million which is the highest ever revenue achieved by the company. The robust revenue proceeds came on the back of revision in the sales price of the products to account for cost-push inflation coupled with vigorous export sales realized at favorable exchange rates. Sky-rocketed inflation pushed the cost of sales up by 97 percent year-on-year during 9MFY23, yet LPGL was able to post a 122 percent year-on-year rise in its gross profit with a considerable rise in the GP margin from 12.5 percent in 9MFY22 to 13.9 percent in 9MFY23. Higher export sales volume resulted in high freight charges which resulted in a 327 percent year-on-year surge in distribution cost. It is to be noted that the distribution expense which stood at 0.3 percent of LPGL’s sales in 2018, climbed to 3.6 percent of sales in 9MFY23 on account of higher export sales. Administrative expense ticked up by 15 percent year-on-year during 9MFY23 due to unsurpassed inflation level. Other expense multiplied by over 15 times during 9MFY23 which may be due to higher provisioning for WWF and WPPF. Operating profit posted an incredible 147 percent year-on-year rise in 9MFY23 with OP margin standing at 5.2 percent versus 4.2 percent during the same period last year. Finance cost didn’t show any mercy and posted a sharp 92 percent year-on-year growth in 9MFY23 on the back of high discount rate. Yet net profit grew by an astounding 405 percent year-on-year in 9MFY23 to clock in at 15.84 million with an NP margin of 1.1 percent versus 0.4 percent during the same period last year. EPS also grew to Rs.2.11 in 9MFY23 versus Rs.0.42 during 9MFY22.

Future Outlook

With LPGL’s increased focus on export markets and local currency depreciating incessantly, the topline is expected to attain new heights in the coming times. For bottomline, the major growth obstacles could be mounting cost of sales on account of inflation and high energy charges, distribution cost on the back of high freight charges and finance cost due to high cost of borrowing. Moreover, in all the years under consideration including 9MFY23, LPGL’s current liabilities stay above its current assets which cast doubt over its ability to service its debt. The company needs to finance its working capital requirements by raising capital through issuance of ordinary or right shares. This will not only shove down its current liabilities but also result in a downtick in finance cost which will be a good omen for the bottomline and margins.