Service Industries Limited (PSX: SRVI) was incorporated in Pakistan as a private limited company in 1957 and later turned into a public limited company. The company is engaged in the purchase, manufacturing and sale of footwear, tyres and tubes as well as technical rubber products. A huge portion of SRVI’s sales revenue comes from export markets particularly European market. The company has also started expanding in the US, Australia and Middle East.

Pattern of shareholding

As of December 31, 2022, SRVI has a total of 46.987 million shares outstanding which are held by 2,376 shareholders. 44.78 percent of the company’s shares are held by Directors, CEO, and their spouse and minor children which forms the largest shareholder category. This is followed by local general public which holds 28.86 percent shares of SRVI. NIT and ICP account for 13.29 percent shares of the company while associated companies, undertakings and related parties have a stake of 4.82 percent in SRVI. Banks, DFIs and NBFIs hold 2.85 percent shares of the company while Modarbas and Mutual funds account for 1.95 percent shares. Pension funds and Joint stock companies hold 1.32 percent and 1.13 percent shares respectively. The remaining shares are held by other categories of shareholders, each having less than 1 percent stake in SRVI.

Historical Performance (2018-22)

Except for a marginal downtick in 2020, the topline of SRVI had been riding an upward trajectory since 2018. Conversely, the bottomline has been constantly ticking down. The gross margin and operating margin which had been ascending since 2018 maxed out in 2020 and then significantly plunged in the subsequent year. In 2022, GP and OP margin considerably recovered from their lowest point. However, the net profit margin follows a descending trend over the years to bottom out in 2022. The detailed performance review of each of the years under consideration is given below:

In 2019, SRVI’s topline grew by 9 percent year-on-year. This came on the back of local sales which grew by 20 percent during the year while export sales shrank by 13 percent during 2019. Across the product categories, sales of tyres posted a momentous growth both in local and export markets and continued to be the mightiest source of revenue for SRVI to clock in at Rs.15,960 million in 2019 (61 percent of total revenue). 2019 was the year when the company began agricultural tyre production which received an overwhelming response from the market. Sales revenue from technical rubber products also inched up during the year, however, only in local market while no sales of this product category was made in the export market. Technical rubber products contributed only Rs.231.18 million to the topline of SRVI which is less than 1 percent of the total sales revenue of 2019. Sales of footwear weakened in 2019 mainly on the back of lower export sales while local footwear sales posted a marginal growth. Overall, the footwear category contributed Rs.9,964 million to the topline in 2019 which is roughly 38 percent of SRVI’s total sales revenue of 2019. Despite high cost of production on account of high inflation, gross profit grew by 13 percent year-on-year in 2019 with GP margin climbing up to 18.7 from 18 percent in 2018. Operating expenses grew by 8 percent year-on-year mainly on account of market induced rise in salaries, high freight and insurance charges, tremendous growth in advertising and publicity budget as well as sample charges. Other expense grew by 39 percent year-on-year in 2019 mainly on the back of higher provisioning against expected credit losses. However, other expenses were counterbalanced by other income which posted a stunning 58 percent year-on-year growth on account of robust exchange gain. Operating profit grew by 26 percent year-on-year in 2019 with OP margin rising from 7.2 percent in 2018 to 8.3 percent in 2019. Finance cost drastically grew by 90 percent year-on-year in 2019 on the back of high discount rate. Debt-to-equity ratio stayed at 38 percent for the third consecutive year in 2019. The growth in finance cost pushed the net profit down by 16 percent year-on-year in 2019 to clock in at Rs.886.36 million with an NP margin of 3.4 percent down from 4.4 percent in 2018. EPS also descended from Rs.56.47 in 2018 to Rs.37.73 in 2019.

In 2020, SRVI’s net revenue slumped by 7 percent year-on-year. The company had to suspend its operations owing to the lockdown imposed due to outbreak of COVID-19 and hence the capacity remained underutilized. The major hit to the topline came from export sales which were almost halved in 2020 to clock in at Rs.3001.45 million due to restrictions on the movement of people and goods on account of COVID-19. Local sales grew marginally by 8 percent year-on-year to clock in at Rs.21,394 million in 2020. A sneak into the categories shows that footwear sales posted the major slump of 40 percent year-on-year due to massive drop in export sales. Sales of tyres grew by 12.7 percent year-on-year and it contributed around 74 percent to the topline. The export sales of technical rubber products were discontinued in 2019, while local sales in this category almost doubled in 2020, yet failed to produce any significant impact on the topline as its share in the overall revenue hovered around 1.9 percent in 2020. Reduced operational activity resulted in a year-on-year drop of 8 percent in the cost of sales. This drove the GP margin up to 20 percent in 2020. Operating expenses also slid by 9 percent year-on-year in 2020 due to curtailed expenditure on freight and insurance, advertising and publicity as well as a significant drop in samples expense. Other expenses grew by 30 percent year-on-year in 2020 on the back of additional allowance booked for expected credit losses as well as WWF and WPPF. Other income dwindled by 57 percent year-on-year due to massive drop in exchange gain on the back of lesser export sales. Operating profit grew by 5 percent year-on-year in 2020 with OP margin rising up to 9.4 percent. Finance cost dropped by 3 percent year-on-year due to monetary easing to spur business activity amidst COVID-19. The dip in finance cost was registered even after an increase in the long-term and short-term borrowings of the company during the year. The debt-to-equity ratio of SRVI surged to 40 percent in 2020. The bottomline dropped by 22 percent year-on-year in 2020 to clock in at Rs.690.02 million with an NP margin of 2.8 percent. EPS also dropped to Rs.29.37 in 2020. While the profit before tax for 2020 was up by 8 percent year-on-year, the payment of deferred taxes in 2020 increased the tax expense by 152 percent during the year and pushed the net profit down.

In 2021, SRVI’s topline boasted the highest ever growth of 34 percent year-on-year. Tyre division continued to be the main growth contributor. The revenue from tyre division grew by 37.5 percent year-on-year to clock in at Rs.24,747 million in 2021 with a share of 76 percent in the overall sales mix. Sale of footwear and technical rubber products grew by 21 percent and 59 percent respectively. Footwear division has a contribution of 22 percent in the sales mix of SRVI. The remaining 2 percent is contributed by the technical rubber products. High inflation, energy and fuel prices as well as Pak Rupee depreciation pushed the cost up by 41 percent year-on-year in 2021. Consequently, GP margin dropped to 16 percent in 2021. High ocean freight charges, increased salaries and benefits as well as higher advertising and promotion budget resulted in a 34 percent year-on-year hike in operating expenses. Other expenses by 58 percent year-on-year on account of lesser allowance for expected credit losses as well as WWF and WPPF. Conversely, other income magnified by 110 percent year-on-year in 2021 primarily on the back of scrap sales and amortization of government grant. Operating profit shrank by 19 percent year-on-year in 2021 with OP margin drastically falling to 5.7 percent. Despite monetary easing, finance cost grew by 21 percent year-on-year in 2021 due to considerable rise in borrowings during the year. The debt-to-equity ratio further climbed up to 52 percent in 2021. The bottomline nosedived by 48 percent year-on-year in 2021 to clock in at Rs.356.83 million with an NP margin of 1.1 percent. EPS also dropped to Rs.7.59 in 2021.

SRVI’s topline further grew by 30 percent year-on-year in 2022. The growth came on the back of tyre and footwear division which grew by 27 percent and 50 percent respectively during 2022 while sales of technical rubber products contracted during the year. Cost of sales grew by 26 percent year-on-year, however, robust sales volume as well as upward price revision pushed the gross profit up by 51 percent year-on-year in 2022. GP margin regained its lost momentum and clocked it at 18.7 percent in 2022. Increase in export sales resulted in high freight charges. Besides, higher salaries and wages as well as advertisement and publicity expense culminated into a 36 percent year-on-year increase in operating expenses. Write off of assets as well as higher allowance for expected credit losses and WPPF as well as generous donations pushed the other expense up by 168 percent in 2022. However, it is counterbalanced by 280 percent rise in other income on account of sky-rocketed dividend income earned during 2022. Operating profit surged by 117 percent year-on-year in 2022 with an OP margin of 9.4 percent. Excessive monetary tightening and increased borrowings produced a 134 percent growth in finance cost. Debt-to-equity ratio further climbed up to 58 percent in 2022. The profit before tax in 2022 was by 71 percent year-on-year. However, higher provision for taxation shoved the net profit down by 1 percent year-on-year to clock in at Rs.354.43 million in 2022. NP margin dropped to 0.8 percent while EPS clocked in at Rs.7.54 in 2022.

Recent Performance (1QCY23)

SRVI began 2023 on an encouraging note as its topline grew by 31 percent year-on-year in 1QCY23 backed by an increase in the prices and volumes of both tyre and footwear division. Tyre division posted a year-on-year growth of 21 percent in 1QCY23 while footwear division grew by 76 percent year-on-year. Despite unprecedented level of inflation, rise in energy and fuel cost, gross profit grew by 63 percent year-on-year with GP margin growing from 19 percent in 1QCY22 to 24 percent in 1QCY23. Operating expense also grew by 33 percent year-on-year in 1QCY23 while other expense surged by 112 percent. The growth in other expense was eclipsed by a staggering growth in other income which might be due to exchange gain on the back of higher export sales. Operating profit grew by 122 percent in 1QCY23 and OP margin surged from 7.4 percent in 1QCY22 to 12.7 percent in 1QCY23. SRVI’s borrowings kept rising during the quarter which combined with the effect of monetary tightening pushed the finance cost up by 73 percent year-on-year in 1QCY23. Despite that, net profit boasted a handsome year-on-year growth of 492 percent in 1QCY23 to clock in at Rs.295.998 million with an NP margin of 2.6 percent. EPS stood at Rs.6.30 in 1QCY23 versus Rs.1.06 during the same period last year.

Future Outlook

With SRVI constantly strengthening its foothold in the export market amidst Pak Rupee depreciation, topline is highly anticipated to reach new heights in the coming times. However, high inflation, freight charges and discount rate pose downward risk. It is yet to be seen whether SRVI’s revenue will sustain the macroeconomic challenges and trickle down into a vigorous bottomline.