Good Luck Industries Limited (PSX: GIL) was incorporated in Pakistan as a public limited company in 1967. The company is engaged in the milling of wheat and all kinds of grains. The main products of GIL are Maida (all-purpose flour), fine flour, bran and mill flour (chakki atta).

Pattern of Shareholding

As of June 30, 2022, GIL had a total of 300,000 shares outstanding which were held by 80 shareholders. Individuals represent the largest shareholder category of GIL with 61.23 percent shares. This is followed by directors, CEO, their spouse and minor children having a stake of 38.75 percent in GIL. The remaining 0.02 percent shares were held by NIT and ICP.

Financial Performance (2018-23)

Since 2018, GIL’s topline posted a dip only in 2020. However, its bottomline took a slide twice i.e. in 2020 and 2023. The company’s margins show a cyclical trend. Gross margin registered its optimum value of 2.2 percent in 2020 while operating margin peaked twice in 2018 and 2022. Conversely, net margin maxed out in 2019. By and large, the margins have remained range bound, posting no significant movement in either direction (see graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, GIL’s topline posted a marginal 6 percent year-on-year growth. The sales of atta and katta packings were the main growth drivers. Conversely, the sale of Maida slid during the year. The company produced 28.1 million kgs of flour in 2019 which was 15.6 percent higher than the production volume of 2018 and translated into a capacity utilization of 30 percent in 2019 versus 26 percent in the previous year. Despite high demand, the company couldn’t fully utilize its capacity due to ban imposed by the government on the movement of wheat from one province and one district to another occasionally during the year. The fixation of wheat quota by the food department also impeded the production activity of GIL. Moreover, lesser production of wheat in Sindh province also created supply shortage during the year. Cost of sales also grew by 6 percent year-on-year as the wheat support price grew by Rs.50 to clock in at Rs.1350 per 40 kg. The government had last raised the support prices in FY15 from Rs. 1200 to Rs.1300 per 40 kg. Gross profit grew by 5 percent year-on-year in 2019 while GP margin stood at 2 percent, same as 2018. Operating expense inched up by 7 percent year-on-year in 2019 which largely comprised of payroll expense. During 2019, the company added 5 new employees to its team, taking the HR tally to 39. Operating profit slipped by 14 percent year-on-year in 2019 with OP margin slightly dropping to 0.4 percent from 0.5 percent in 2018. GIL’s finance cost only comprised of bank charges which inched up by 4 percent year-on-year in 2019. The effect of prior year current and deferred tax charge culminated into a tax credit of Rs.0.76 million in 2019. This resulted in a 66 percent year-on-year rise in net profit which clocked in at Rs. 4.12 million with an NP margin of 0.5 percent in 2019 versus 0.3 percent in 2018. EPS also grew from Rs.8.25in 2018 to Rs.13.72 in 2019.

In 2020, GIL’s net sales plummeted by 4 percent year-on-year. The company produced 21.38 million kgs of flour in 2020 which was 24 percent lesser than the production volume attained in 2019 and culminated into a capacity utilization of 23 percent. Except for an uptick in the net sales of bran, all other categories registered sales decline in 2020. The demand destruction can be attributed to the closure of HORECA industry during COVID-19. With low production, the cost of sales also shrank by 4 percent. This drove the gross profit up by 8 percent year-on-year which translated into a GP margin of 2.2 percent in 2020. The number of employees grew to 41 in 2020 resulting in a 15 percent year-on-year hike in the operating expense. Operating profit narrowed down by 6 percent year-on-year n 2020, however, OP margin stayed afloat at 0.4 percent. Finance cost dropped by 55 percent year-on-year in 2020 and it comprised of only bank charges. Higher effective tax rate due to tax effect of depreciation allowance further squeezed the bottomline which tapered by 75 percent year-on-year in 2020 to clock in at Rs.1.04 million with an NP margin of 0.1 percent and an EPS of Rs.3.45.

GIL’s net sales revived in 2021, boasting 39 percent year-on-year growth. All the product categories performed well during the year with Maida making the highest contribution to the net sales followed by katta packing. GIL’s production grew by 3.3 percent in 2021 with capacity utilization standing at 24 percent. This translated into an annual production of 22.094 million kgs in 2021. Cost of sales grew by 40 percent year-on-year. Gross profit enhanced by 18 percent year-on-year in 2021, however, GP margin marched down to 1.9 percent due to higher support price of wheat especially in Sindh and Balochistan where it jacked up to Rs.2200 per 40 kg. Operating expense spiked by 7 percent year-on-year due to higher payroll expense on account of inflation while number of employees remained at 41. Operating profit rebounded by 68 percent year-on-year in 2021 with OP margin staying at 0.4 percent. Finance cost or bank charges escalated by 28 percent year-on-year. Tax effect of depreciation allowance resulted in a 28 percent year-on-year plunge in tax charge for the year. Consequently, net profit magnified by 263 percent year-on-year in 2021 to clock in at Rs.3.76 million with an NP margin of 0.3 percent and an EPS of Rs.12.54.

In 2022, GIL net sales grew by a marginal 3 percent year-on-year. The decline in the net sales of atta largely offset the higher turnover of other categories. GIL’s production slid by 6 percent year-on-year to 20.765 million kgs in 2022. This translated into a capacity utilization of 22 percent – the lowest since 2018. Cost of sales also inched up by 3 percent, resulting in 10 percent higher gross profit in 2022. GP margin also slightly grew to 2 percent in 2022. Operating expense elevated by 7 percent year-on-year in 2022 on account of inflation and a rise in employee count to 44. Operating profit burgeoned by 20 percent year-on-year with OP margin slightly ticking up to 0.5 percent in 2022. Finance cost/bank charges hiked by 22 percent year-on-year in 2022. Net profit mushroomed by 22 percent year-on-year in 2022 in clock in at Rs.4.60 million with an NP margin of 0.4 percent and an EPS of Rs.15.32 – the highest among all the years under consideration.

Recent Performance (2023)

The monsoon floods greatly affected the agricultural output of the country in 1HFY23. Floods coupled with wheat shortage, resulted in severe spike in food inflation. The Sindh government raised the minimum support price to an exorbitant level of Rs.4000 per 40 kg to encourage the growers. However, this resulted in unprecedented level of food inflation in the country. GIL’s net sales grew by 43 percent year, however, GP margin fell to 1.5 percent – the lowest since 2018, despite 12 percent rise in gross profit in 2023 High inflation and transportation charges pushed the operating expense up by 19 percent year-on-year in 2023. This squeezed the operating profit by 4 percent year-on-year with OP margin sinking to 0.3 percent in 2023. Finance cost measured up by 4 percent year-on-year in 2023. This resulted in a 6 percent thinner bottomline in 2023. Net profit stood at Rs.4.33 million in 2023 with NP margin of 0.2 percent and an EPS of Rs.14.42.

Future Outlook

Devastating floods in the 1HFY23 delayed the sowing of wheat crop, resulting in lower expected output. This will reportedly result in a shortfall of 3 million tons by 2024. This will not only jeopardize the food security of the country but will also result in exorbitant food inflation. The government has already started importing wheat; however, amid depreciating value of local currency, imported wheat will not only wreak havoc on the diminishing foreign exchange reserves of the country but will also put a severe dent on the margins and profitability of flour mills, let alone deepen the financial woes of the masses.