Biafo Industries Limited (PSX: BIFO) was incorporated in Pakistan as a public limited company in 1988 and started its commercial operations in 1994. The principal activity of the company is the manufacturing and sale of commercial explosives and blasting accessories which include detonators and other materials. BIFO also offers Tovex Water gel explosives including blasters, breakers, coal miners, seismic explosives etc. The company is required to annually renew its license for the manufacturing and sale of explosives.

Pattern of Shareholding

As of June 30, 2023, BIFO has a total of 46.383 million shares outstanding which are held by 1885 shareholders. General public holds 35.43 percent of BIFO’s shares followed by directors, CEO, their spouse and minor children holding 26.42 percent shares. Joint stock companies have 1.5 percent stake in the company while insurance companies hold 0.69 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a drop in 2019 and 2021, BIFO’s topline has been riding an upward trajectory over the period under consideration. Conversely, its bottomline posted year-on-year growth only in 2021 and 2023. The company’s margins fell until 2020 followed by an improvement in 2021. The margins slumped again in 2022 and then rebounded in 2023. The detailed performance review of the period under consideration is given below.

In 2019, BIFO’s topline eroded by 16.56 percent on account of sluggish economic activity. Blasting activity of on some of the existing large road construction projects were completed during the year with slow momentum for ongoing and new orders as the government didn’t initiate any new infrastructure project during the period. Increase in the prices of imported raw materials coupled with Pak Rupee depreciation resulted in 28.18 percent decline in gross profit with GP margin sliding down from 50.2 percent in 2018 to 43.2 percent in 2019. Operating expense inched up by 2.7 percent in 2019 on account of slightly higher payroll expense incurred during the year. BIFO curtailed provisioning for WWF and WPPF during the year which trimmed its other expense. Other income registered a drastic 88.41 percent decline in 2019 as the company didn’t record any gain on re-measurement of investments at FVTPL. Consequently, operating profit nosedived by 37.95 percent in 2019 with OP margin falling down from 40.6 percent in 2018 to 30.2 percent in 2019. Finance cost mounted by 175 percent in 2019 on account of higher discount rate. However, it was conveniently counterbalanced by finance income which largely included dividend income and exchange gain. Net profit tumbled by 32.43 percent year-on-year in 2019 to clock in at Rs.359.89 million with EPS of Rs.10.33 versus EPS of Rs.20.17 in 2018. NP margin also slipped from 31.5 percent in 2018 to 25.5 percent in 2019.

In 2020, BIFO’s net sales improved by 12.55 percent. Blasting activities in some of the existing large scale construction projects gained momentum during the year, however, other sectors continued to remain sluggish due to economic slowdown. Hike in the prices of imported raw materials as well as currency depreciation resulted in 7.4 percent drop in gross profit with GP margin shrinking to 35.5 percent. Operating expense spiked by 15.35 percent in 2020 on account of higher sales commission and payroll expense incurred during the year. Other expense dropped by 10.21 percent in 2020 due to lower profit related provisioning made during the year. Other income also dropped by 3.5 percent in 2020 on account of lower rental income earned during the year. BIFO also booked allowance for ECL worth Rs.33.23 million in 2020. As a consequence, operating profit dropped by 23.69 percent in 2020 with OP margin contracting to 20.5 percent. Finance cost ticked up by 13.22 percent in 2020 due to higher discount rate for most part of the year. Conversely, finance income which largely comprised of dividend income and exchange gain dropped by 47.62 percent in 2020. BIFO’s net profit slumped by 31.68 percent year-on-year in 2020 to clock in at Rs.245.87 million with EPS of Rs.6.41 and NP margin of 15.5 percent.

BIFO’s net sales which showed improvement in 2020, inched down by 7.17 percent in 2021. While export sales and supplies to cement sector and Saindak copper and gold mining projects increased while supplies to rest of the sectors decreased due to economic slowdown. The company was able to cut down its cost by 11.15 percent in 2021 owing to cost control measures. This resulted in a slight improvement in gross profit with GP margin rising up to 38.3 percent in 2021. Operating expense declined by 0.91 percent in 2021 owing to significantly lower sales commission which was partially offset by higher payroll expense incurred during the year. Provision for WWF and WPPF collectively slumped by 2.2 percent in 2021. During the year, the company booked reversal of Rs.6.08 million on ECL versus allowance recorded in the previous year. Operating profit rebounded by 13.52 percent in 2021 with OP margin mounting to 25 percent. Finance cost ticked down by 24.86 percent in 2021 due to monetary easing despite the fact that BIFO’s outstanding borrowings significantly multiplied during the year. Finance income also shrank by 73.65 percent in 2021 due to lower dividend income, lesser gain recorded on re-measurement of investment through FVTPL and no exchange gain earned during the year. Net profit picked up by 3.32 percent in 2021 to clock in at Rs.254.04 million with EPS of Rs.5.48 and NP margin of 17.2 percent.

BIFO’s net sales registered decent 13.26 percent year-on-year growth in 2022 on account of increased supplies to Oil & Gas and construction sectors. Surge in the prices of imported raw materials as well as deteriorating local currency drove cost of sales up by 19.5 percent in 2022. This resulted in paltry 3.2 percent uptick in gross profit while GP margin leveled down to 35 percent in 2022. Operating expense multiplied by 13.63 percent in 2022 due to higher payroll expense, sales commission. BIFO increased its workforce from 219 employees in 2021 to 232 employees in 2022. Profit related provisioning also grew by 17 percent in 2022. Other income inched up by 2.67 percent in 2022 due to higher rental income. Operating profit dwindled by 5.92 percent in 2022 with OP margin dropping to 20.8 percent. Finance cost mounted by 32 percent in 2022 due to monetary tightening as well as increased external borrowings obtained during the year. However, it was offset by 463.91 percent higher finance income which was the result of hefty exchange gain on export sales amid Pak Rupee depreciation. Higher effective tax rate due to deferred tax impact and imposition of super tax pushed the bottomline down by 2.48 percent in 2022 to clock in at Rs.247.73 million with EPS of Rs.5.34 and NP margin of 14.9 percent.

2023 stands out during the period under consideration as BIFO posted the highest ever growth in its net sales to the tune of 62.65 percent. During the year, the company targeted export sales and entered Africa as a niche market. Robust sales were made to north Sudan during the year. Rebound in sales volume as well as increased prices resulted in 103.44 percent improvement in gross profit in 2023 with GP margin rising up to 43.6 percent. Operating expense escalated by 18.85 percent in 2023 due to higher payroll expense as well travelling & conveyance charges incurred during the year. Provisioning for WWF and WPPF registered 140.85 percent growth in 2023. 58.4 percent surge in other income was due to reversal of WWF and miscellaneous income earned during the year. Net impairment loss on financial assets multiplied by over 13 times in 2023 to clock in at Rs.68.12 million. BIFO was able to register 134.4 percent year-on-year rise in its operating profit in 2023 with OP margin mounting to 30 percent. Finance cost built up by 7.6 percent in 2023 due to high discount rate despite the fact that BIFO curtailed its outstanding borrowings during the year. Sizeable exchange gain due to increased export sales resulted in 35.17 percent higher finance income in 2023. Imposition of super tax drove up tax expense for the year by 122.64 percent in 2023. Net profit magnified by 145.30 percent in 2023 to clock in at Rs.607.68 million with EPS of Rs.13.1 and NP margin of 22.4 percent.

Recent Performance (1HFY24)

BIFO posted reasonable 19 percent escalations in its net sales in 1HFY24. While detailed financial statements have not been published to comment on the underlying reason behind topline growth, the company’s growing focus on export sales amid sluggish economic activity in the home market can be safely assumed to be the growth propeller. Increased margins on export sales amid Pak Rupee depreciation resulted in 42.56 percent rise in gross profit in 1HFY24 with GP margin clocking in at 45.6 percent up from 38 percent during the same period last year. Operating expense mounted by 22.12 percent in 1HFY24 due to higher payroll expense as well as inflationary pressure. BIFO also booked 15.47 percent higher provisioning for WWF and WPPF during 1HFY24. Other income swelled up by 22.82 percent during the period under consideration owing to sizeable exchange gain. During 1HFY24, BIFO also booked 499.54 percent higher net impairment loss on financial assets maybe because outbreak of war and disturbance in the banking system delayed export proceeds. Operating profit built up by 28.83 percent in 1HFY24 with OP margin standing at 27.2 percent versus 25 percent during the same period last year. Unprecedented level of discount rate resulted in 36.92 percent hike in finance cost during 1HFY24, however, finance income eroded by 61.59 percent during the period. BIFO was able to boast 44.91 percent rise in its net profit in 1HFY24 which clocked in at Rs.308.79 million with EPS of Rs.6.66 versus EPS of Rs.4.59 during the same period last year. NP margin spiraled from 18.4 percent in 1HFY23 to 22.4 percent in 1HFY24.

Future Outlook

Going forward, BIFO’s enhanced focus on export market particularly African countries coupled with significant improvement in supplies to oil & gas and mining sectors will continue to add to its sales volume. Export sales will also considerably improve its margins and allow it to post healthy bottomline despite high commodity prices and elevated discount rates.