Karam Ceramics Limited was incorporated in Pakistan as a public limited company in 1979. The company is engaged in the manufacturing and sale of wall and floor tiles

Pattern of Shareholding

As of June 30, 2023, KCL has a total of 14.55 million shares outstanding which are held by 289 shareholders. Company’s Directors, CEO and their children have the major stake of 76.64 percent in the company, followed by local general public holding 20.96 percent shares. Banks, DFIs and NBFIs account for 2.15 percent shares of KCL. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-23)

KCL’s net sales portray a fluctuating pattern since 2018. 2019 posted an uptick in topline followed by a decline and the pattern continues until 2023. Its bottomline and margins followed the suit and depicted similar pattern until 2022, however, in 2023, where KCL’s topline improved, its bottomline illustrated the highest ever net loss with margins touching the rock bottom (see the graph of profitability ratios and EPS). Since 2018, KCL has posted net losses thrice i.e. in 2020, 2022, and 2023. The detailed performance review of each of the years under consideration is given below.

In 2019, KCL’s net sales grew by 19 percent year-on-year on account of improved tile prices as well as higher sales volume. During the year, the company produced 2.668 million sq. meters of tiles, up 21 percent year-on-year. This translated into a capacity utilization of 41 percent in 2019 versus 34 percent in 2018. Due to upward price revision, the company was able to attain 37 percent rise in its gross profit despite high fuel and electricity charges as well as high material cost on account of Pak Rupee depreciation. GP margin picked up from 11.3 percent in 2018 to 13 percent in 2019. Selling expense slid by 5 percent year-on-year in 2019 on account of lower freight charges. Conversely, administrative expense magnified by 47 percent year-on-year on the back of bad debts worth Rs.12.45 million sustained by the company in 2019. Operating profit strengthened by 62 percent in 2019, culminating into OP margin of 7.9 percent in 2019 versus 5.8 percent in 2018. Finance cost multiplied by 15 percent year-on-year in 2019 due to higher discount rate while the company squeezed its borrowings in 2019. Reduced borrowings coupled with higher revaluation gain on fixed assets translated into a lower gearing ratio of 44 percent in 2019 versus 65 percent in 2018. Net profit built up by 109 percent in 2019 to clock in at Rs.28.88 million with an EPS of Rs.1.98 versus Rs.0.95 on 2018. NP margin also progressed from 1.1 percent in 2018 to 2 percent in 2019.

In 2020, the breakout of COVID-19 halted the construction and infrastructure related activities in the country, resulting in a 36 percent year-on-year plunge in KCL’s net sales. Depressed demand as well as the imposition of lockdown resulted in the suspension of the company’s production activities in the 4QFY20. As a consequence, KCL produced 1.8 million sq. meters of products in 2020, down 32 percent year-on-year. This translated into a shrunken capacity utilization of 28 percent in 2020. Cost of sales didn’t fall with the same momentum due to higher fixed cost per unit on account of idle plant capacity.Moreover, the company couldn’t increase its prices on account of dejected demand. This translated into a gross loss of Rs.66.74 million in 2020. Selling and administrative expense declined by 70 percent and 29 percent respectively. This was on account of considerably low freight charges and no bad debts recorded in 2020 respectively. Other income multiplied by 1717 percent in 2020 primarily on the back of present value adjustment on modification of interest-free loan from directors. Exchange gain also buttressed the other income in 2020. Curtailed expenses and robust other income somehow diluted the operating loss which stood at Rs.13.76 million in 2020, much lower than the gross loss incurred during the year. Finance cost escalated by 32 percent in 2020 due to considerably higher borrowings obtained in 2020. This culminated into a gearing ratio of 56 percent in 2020. KCL registered a net loss of Rs.43.77 million in 2020 with a loss per share of Rs.3.01.

2021 proved to be the year of recovery whereby not only did KCL’s net sales improve by 22 percent year-on-year but its bottomline also recover from net loss. Stronger topline was the result of both higher sales volume as well as increase in selling prices. Low-cost housing scheme initiated by the government coupled with the real-estate boom greatly strengthened the allied industries including ceramics. To make the most of demand recovery, KCL produced 2.36 million sq. meters of tiles in 2021, up 31 percent year-on-year, culminating into a capacity utilization of 36 percent. The company was able to pass on the effect of cost hike to its consumers, resulting in a gross profit of Rs.35.74 million in 2021. This translated into a GP margin of 3.2 percent in 2021. Selling and administrative expense continued to slide in 2021 due to lower vehicle running and maintenance charges, travelling expense, fee and subscription charges as well as advertising expense incurred in 2021. The company posted an operating profit of Rs.80.51 million in 2021 which translated into OP margin of 7.1 percent. Despite monetary easing, finance cost surged by 9 percent in 2021 on account of increased borrowings. KCL posted a net profit of Rs.41.63 million in 2021 with an EPS of Rs.2.86 and NP margin of 3.7 percent – the highest among all the years under consideration.

The topline growth of 2021 was followed by 27 percent slump in net sales in 2022. The political and economic headwinds took its toll on the infrastructure and construction activities in the country. Low investor confidence on account of deteriorating macroeconomic indicators as well as high discount rate also resulted in a depressed real-estate sector. KCL’s production ticked down by 41 percent year-on-year in 2022 to clock in at 1.392 million sq. meters. This translated into a thin capacity utilization of 21 percent in 2022. Cost of sales couldn’t shrink proportionately owing to escalated cost of raw material and packaging material, high fuel and power charges as well as sharp depreciation of Pak Rupee. The company incurred a gross loss of Rs. 198.04 million in 2022. Selling and administrative expense surged by 14 and 15 percent respectively due to higher payroll expense, fee and subscription charges as well as legal and professional charges. Operating loss was recorded at Rs.199.89 million in 2022. KCL was able to squeeze its finance cost by 35 percent in 2022 despite higher discount rate due to increased borrowings from related parties for the retirement of external loan. KCL incurred a net loss of Rs.251.76 million with a loss per share of Rs.17.30.

Recent Performance (2023)

KCL’s topline registered a 19 percent year-on-year rise in 2023. KCL’s production plummeted by 13 percent year-on-year in 2023 to clock in at 1.216 million sq. meters, down 13 percent year-on-year, translating into a capacity utilization of 19 percent, the lowest since 2018. This gives a hint that the inclined net sales were primarily the effect of upward revision in prices. The imposition on new taxes on property, dejected macroeconomic indicators, shrunken purchasing power of consumers and high discount rate kept the investors at bay from the real-estate sector. This radically shattered the performance of ceramics industry. Cost of sales mounted by 32 percent year-on-year in 2023 on account of massive depreciation of Pak Rupee, high commodity prices as well as hike in electricity tariff.Another reason for high cost of sales in 2023 was due to increased investment in repair and maintenance in order to boost plant efficiency and reduce cost. Gross loss amplified by 83 percent in 2023 to clock in at Rs.361.65 million. Selling expense rose exorbitantly by 131 percent in 2023 due to exceptionally high freight charges. Conversely, administrative expense marched down by 10 percent as the company replaced its permanent employees with the contractual ones which reduced its payroll expense. Directors’ remuneration also massively plunged in 2023. Other expense surged by 184 percent in 2023 due to massive exchange loss. Conversely, other income slipped by 92 percent in 2023 due to high base effect as the company earned gain on sales of its fixed assets in 2022. KCL’s operating loss magnified by 111 percent in 2023 to clock in at Rs.421.94 million. Finance cost ticked up by 8 percent in 2023 despite high discount rate as the company considerably reduced its external borrowings. KCL’s gearing ratio drastically fell to 3 percent in 2023. The company incurred a net loss of Rs.474.96 million in 2023 which translated into a loss per share of Rs.32.65.

Future Outlook

With deteriorating macroeconomic and political conditions shattering the confidence of local and foreign investors, the demand may not see any considerable recovery in the coming times. Potential investments from Saudi Arabia and UAE as well as resumption of CPEC phase 2 may instill some life into a dreary construction and infrastructure sector. However, escalated international energy prices and inflated construction costs as well as political uncertainty will pose risk to industry’s capacityutilization.