Ismail Industries Limited (PSX: ISIL) was incorporated in Pakistan as a private limited company in 1988 and was converted into a public limited company in 1989. The company is engaged in the manufacturing and trading of sugar, confectionary items, biscuits, potato chips, cast polypropylene (CPP) and Biaxially oriented polyethylene terephthalate (BOPET) film under the brands of Candyland, Bisconni, Snackcity and Astro films respectively.

Pattern of Shareholding

As of June 30, 2022, ISIL has 66.356 million outstanding shares, with ownership divided among diverse shareholders. The most significant shareholders include the CEO, Directors, their spouses, and children with 34.19 percent shares followed by the sponsor Mr. Miftah Ismail Ahmed and his wife collectively holding 32.9 percent shares. Company Directors accounts for 16.07 percent of ISIL’s outstanding share volume while the Chairman, Mr. Muhammad M. Ismail has a stake of 15.68 percent in the company. The remaining shares are held by other shareholders, totaling approximately 1.26 percent of the company’s equity.

Financial Performance (2018-23)

ISIL’s financial performance has exhibited notable trends in recent years. From 2018 onwards, the organization’s topline has shown consistent growth, indicating increasing revenues. In contrast, the bottomline faced challenges in 2019 and 2020, experiencing a decline. However, it demonstrated a remarkable rebound thereafter. ISIL’s profit margins displayed a fluctuating pattern (see graph of profitability ratios). Up until 2020, margins experienced a decline. In 2021, both operating and net margins showed signs of recovery, albeit with a continued decrease in gross margin. In 2022, both gross and net margins declined, while the operating margin witnessed substantial growth. Finally, in 2023, all margin indicators reached their peak levels, signaling improved profitability. A detailed analysis of this performance trend, along with underlying reasons is given below.

In 2019, ISIL’s topline posted a significant year-on-year growth of 26 percent which came on the back of 14 percent year-on-year rise in food sales and 31 percent year-on-year rise in plastic sales during the year. The company witnessed buoyancy in both local and export sales in 2019. ISIL has a plastic film manufacturing capacity of 33,000 MT and it utilized 76.35 percent of its capacity in 2019 versus 80.98 percent capacity utilization in 2018. In 2019, ISIL enhanced its food processing capacity from 115,350 MT to 125,335 MT owing to 13 new brand launches during the year. This resulted in a capacity utilization of 71 percent in 2019. Unparalleled inflation, rise in the cost of raw materials, Pak Rupee depreciation as well as elevated energy cost pushed the cost of sales up by 28 percent year-on-year in 2019. Gross profit grew by 19 percent year-on-year in 2019, however, GP margin inched down from 22.4 percent in 2018 to 21.1 percent in 2019. Selling & distribution expense escalated by 24 percent year-on-year in 2019 which was the product of high payroll, advertising and freight expense. ISIL hired 94 new employees during the year which drove up the HR count to 2336 in 2019, resulting in 42 percent higher administrative cost incurred during the year. ISIL incurred a net other income of Rs.40.34 million in 2019 as against the net other expense of Rs.21.35 million in 2018. This was on account of a steep 32 percent year-on-year fall in other expense in 2019 due to lower provisioning for WWF, WPPF as well as lower exchange loss. Operating profit improved by 10 percent year-on-year in 2019, however, OP margin tapered to 7.5 percent in 2019 from 8.6 percent in 2018. Finance cost surged by 45 percent year-on-year in 2019 due to monetary tightening coupled with increased borrowings obtained during the year (see the graph of gearing ratio and finance cost). The company’s share of profit from associated companies (which comprise of ISIL’s investments in Bank of Khyber and Novelty Enterprises (Private) Limited) also significantly plummeted by 88 percent year-on-year in 2019. This squeezed the net profit by 32 percent year-on-year in 2019 to clock in at Rs.966.60 million. NP margin declined from 5.9 percent in 2018 to 3.2 percent in 2019. EPS also shrank from Rs. 22.13 in 2018 to Rs.15.15 in 2019.

ISIL’s net sales grew in 2020, however, with a lower magnitude of 10 percent year-on-year. While food sales grew by 24 percent year-on-year in 2020, plastic packaging sales ticked up by just 1 percent year-on-year which was on account of COVID-19 and the associated protocols which led to shut-down of many industries resulting in reduced demand for plastic packaging. Food sales constituted 79 percent of ISIL’s net sales in 2020 versus 76 percent in 2019. The robust performance of food business was also driven by new product launches during the year which included Cocomo Strawberry, Rite Vanilla, Chai wala Biskut etc. Region-wise breakup of sales reveal that local sales posted a marginal 2 percent year-on-year growth in 2020 while export sales posted a staggering 148 percent year-on-year growth during the year. As of 2020, local sales accounted for 86 percent of the net sales of the company versus 94 percent during the last two years. During 2020, the company enhanced its food processing capacity by 32,127 MT leading to the annualized capacity of 162,462 MT. Capacity utilization stood at 60.5 percent for the food segment and 75.22 percent for the plastic segment. Cost of sales spiked by 11 percent year-on-year in 2020 due to supply chain disruptions owing to COVID-19, Pak Rupee depreciation, unprecedented food inflation and high energy cost. This further compressed the GP margin to 20.7 percent in 2020 while gross profit grew by 8 percent year-on-year. Selling and administrative expense grew by 24 percent and 10 percent respectively in 2020 ISIL also posted a net other income of Rs.171.84 million in 2020, 326 percent higher than last year. This was the result of exchange gain as well as sale of production scrap made in 2020. Operating profit slid by12 percent year-on-year in 2020 with OP margin measuring down to 6 percent. Finance cost spiraled by 28 percent year-on-year in 2020 on account of higher borrowings particularly long-term loans to finance CAPEX. During 2020, ISIL’s share of profit from associated companies magnified by a massive 984 percent. This was dominated by profit received from Bank of Khyber. Hefty share of profit from associated couldn’t help bottomline which slipped by 4 percent year-on-year to clock in at Rs.931.97 million with an NP margin of 2.8 percent and an EPS of Rs.14.49, the lowest since 2018.

ISIL’s topline grew by another 12 percent year-on-year in 2021 contributed by 10 percent year-on-year growth in food sales and 20 percent year-on-year growth in plastic sales. Topline growth was the consequence of increased off-take, upward price revisions as well as change in product mix. Region-wise breakup of sales show that local sales measured up by 7 percent year-on-year in 2021 while export sales posted a tremendous 49 percent year-on-year, occupying 18 percent of the net sales pie versus 14 percent in 2020. The company added 4100 MT to the annual capacity of food segment in 2021 and utilized 53 percent of the total capacity. The capacity of plastic segment also escalated to 63000 MT out of which 47 percent was utilized in 2021. Cost of sales grew by 14 percent year-on-year in 2021. Gross profit ticked up by 5 percent year-on-year, however, GP margin slid to 19.3 percent in 2021. Selling expense climbed down by 5 percent year-on-year on account of lesser advertisement and sales promotion undertaken during the year. Administrative expense registered a 10 percent year-on-year hike on account of higher payroll expense. In 2021, ISIL posted a net other expense of Rs.0.91 million which was the result of massive exchange loss incurred during the year coupled with higher provisioning for WWF and WPPF. These expenses overshadowed the massive gain that ISIL earned on the disposal of its fixed assets in 2021. Nevertheless, operating profit managed to post a 16 percent year-on-year rebound with a slight recovery in OP margin which stood at 6.2 percent in 2021. Finance cost gave a breather as it measured down by 40 percent year-on-year on account of monetary easing and considerably lesser borrowings obtained during the year. Share of profit from associated companies also contributed to bottomline growth as it grew by 22 percent year-on-year in 2021. Net profit rose by 91 percent year-on-year in 2021 with NP margin jumping up to 4.8 percent. EPS also grew to Rs.26.77 in 2021.

ISIL’s topline registered a 48 percent year-on-year growth in 2022 which was on account of 45 percent higher food sales and 60 percent higher plastic sales. Locally, the net sales posted a 31 percent rebound while export sales grew by 126 percent, constituting 27 percent of the net sales of ISIL in 2022. Food segment capacity grew to 183,288 MT in 2022 out of which 55 percent was utilized. Capacity utilization of plastic segment stood at 63.4 percent in 2022. High inflation, Pak Rupee depreciation, hike in electricity tariff and global commodity super cycle translated into a 51 percent higher cost of sales in 2022. Gross profit grew by 37 percent year-on-year in 2022, however, GP continued to march down, standing at 17.8 percent in 2022. Distribution and administrative expense grew by 13 percent and 25 percent respectively. This was on account of higher sales volume and hike in POL prices which pushed up freight charges. Higher export charges also pushed the distribution expense up. Increase in the number of employees from 2516 in 2021 to 2919 in 2022 drove the administrative expense up in 2022. ISIL posted a net other income of Rs. 340.06 million in 2022 primarily due to massive exchange gain earned on export sales coupled with gain on sale of fixed assets as well as sale of scrap. Operating profit picked up by 99 percent year-on-year in 2022 with OP margin climbing up to 8.3 percent. Finance cost elevated by 104 percent year-on-year in 2022 due to multiple rounds of monetary tightening during the year and increased borrowings. Share of profit from associate companies posted a downtick of 64 percent in 2022. Furthermore, higher effective tax rate also played its role in diluting the bottomline growth in 2022. Net profit grew by 44 percent year-on-year in 2022 to clock in at Rs.2551.02 million with an NP margin of 4.6 percent and an EPS of Rs.38.44.

Recent Performance (2023)

In 2023, the company attained an unsurpassed topline growth of 61 percent year-on-year which came on the back of increased sales off-take, upward price revision to account for cost hike and also enhanced focus on export sales which is rendering tremendous results amid Pak Rupee depreciation. The company successfully passed on the impact of cost spike to its consumers which resulted in 87 percent higher gross profit and GP margin of 20.7 percent in 2023. Selling and administrative expense enlarged by 47 percent and 28 percent respectively on account of higher sales and production volumes, capacity enhancements, addition of flour mill to its business portfolio and also because of higher ocean freight charges due to hike in the prices of POL products. Higher export expense can also be one of the reasons of elevated distribution expense owing to company’s inclination towards export sales. Tremendous net other income of Rs.1172.57 million recorded by ISIL in 2023 may also be the result of hefty exchange gain earned on account of export sales. Operating profit rebounded by 151 percent year-on-year in 2023 with OP margin jumping up to 12.9 percent – the highest since 2018. Finance cost grew by 211 percent year-on-year in 2023 on account of high cost of borrowing and increased amount of external loans to finance CAPEX and working capital requirements. Considerable rise in share of profit from associated companies also buttressed the bottomline which grew by 150 percent year-on-year in 2023 to clock in at Rs.6381.68 million with an NP margin of 7.2 percent and an EPS of Rs.96.17.

Future Outlook

Cognizant of ongoing political and economic challenges in the home market, ISIL will continue to rely on its strategy of cost optimization, product diversification, and a focus on export sales to deliver impressive financial results.