Aruj Industries Limited (PSX: ARUJ) is a public limited company established in 1992. The principal activity of the company is the manufacturing and sale of fusible interlining as well as dying, bleaching and stitching of fabric.

Pattern of Shareholding

As of June 30, 2023, ARUJ has a total of 10.458 million shares outstanding which are held by 618 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 66.25 percent in the company followed by local general public holding 31.87 percent shares of ARUJ. Aruj Enterprises (Private) Limited, the parent company, accounts for 1.8 percent shares of ARUJ. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

ARUJ’s topline and bottomline registered growth twice during the period under consideration i.e. in 2019 and 2021. Its bottomline not only slid in the remaining years but went into net losses in 2022 and 2023. ARUJ’s margins portray an asymmetrical pattern over the period under consideration. In 2019, its gross margin slid while operating and net margins slightly inched up. In 2020, gross and operating margins rebounded while net margin shrank. This was followed by contraction in gross and operating margins and a paltry upward movement in net margin in 2021. In the subsequent two years, the margins drastically fell. The detailed performance review of the period under consideration is given below.

In 2019, ARUJ’s net sales rose by 23.28 percent year-on-year. This was on account of robust growth in both local and export sales volume. Furthermore, owing to Pak Rupee depreciation, export sales became dearer and resulted in tremendous translation gain for ARUJ. However, the same factor made import of raw materials costlier and resulted in 25.22 percent hike in cost of sales in 2019. Gross profit ticked up by 4.58 percent year-on-year in 2019; however, GP margin slid from 9.4 percent in 2018 to 7.98 percent in 2019. Distribution and administrative expenses dropped by 8 percent and 6.8 percent respectively in 2019. This was due to lower export expenses as well as lower communication and vehicle running and maintenance charges incurred during the year respectively. Higher profit related provisioning drove up other expense by 33.5 percent in 2019. However, it was conveniently offset by other income of Rs.5.01 million due to gain on sale of fixed assets in 2019. Operating profit multiplied by 31.46 percent year-on-year in 2019 with OP margin moving up to 4.17 percent from 3.91 percent in 2018. Finance cost mounted by 30.78 percent year-on-year in 2019 on the back of high discount rate coupled with increased external borrowings obtained during the year. Prior year tax adjustments as well as deferred tax pushed down tax charge for the year by 58.96 percent. This translated into 99.77 percent year-on-year growth in net profit which clocked in at Rs.13.13 million in 2019 with EPS of Rs.1.26 versus EPS of Rs.0.63 in 2018. NP margin also improved from 0.57 percent in 2018 to 0.92 percent in 2019.

ARUJ’s net sales diminished by 18.26 percent year-on-year in 2020. The outbreak of COVID-19 not only halted the economic activity and squeezed the demand; ARUJ also faced supply chain impediments as it sourced its raw materials from China. This led to cancellation of orders. Amidst plant shutdown due to lockdown imposed during the year as well as shortage of raw materials, the company was able to cut down its cost of sales by 22.54 percent resulting in 31.11 percent higher gross profit recorded in 2020 with GP margin hitting its optimum high level of 12.69 percent in 2020. Distribution expense mounted by 67.82 percent year-on-year in 2020 on account of higher export expense incurred in 2020. Administrative expense escalated by 5.9 percent in 2020 due to higher vehicle running & maintenance charges as well as depreciation charge for the year. Higher profit related provisioning pushed up other expense by 53.14 percent in 2020. During the year, ARUJ also recorded exchange gain of Rs.3.157 million; however, lower gain on disposal of fixed assets in 2020, resulted in 16.7 percent lower other income. Operating profit strengthened by 31.2 percent in 2020 with OP margin climbing up to 6.69 percent. Finance cost surged by 23.8 percent in 2020 on the back of higher discount rate for most part of the year coupled with increased borrowings which pushed up ARUJ’s gearing ratio from 55.3 percent in 2019 to 58.09 percent in 2020. Net profit slumped by 19.94 percent year-on-year in 2020 to clock in at Rs.10.51 million with EPS of Rs.1 and NP margin of 0.9 percent.

In 2021, ARUJ posted 18.8 percent rise in its topline. This was because the company regained its orders which were cancelled in 2020 due to lockdown and shortage of raw materials. Pak Rupee depreciation also increased the value of the company’s export sales, however, high inflation, hike in the cost of imported chemical and dyes as well as heightened energy tariff pushed down gross profit by 5.82 percent in 2021 with GP margin plunging to 10.14 percent. Distribution expense shrank by 16.69 percent in 2021 due to lower export expenses incurred during the year. Conversely, administrative expense swelled by 2.87 percent year-on-year in 2021 on the back of higher payroll expense as well as vehicle running & maintenance charges incurred during the year. 50 percent higher other expense incurred during the year was the consequence of increased profit related provisioning. Conversely, lower exchange gain as well as no gain recorded on the disposal of fixed assets during the year drove down other income by 77.14 percent in 2021. This resulted in 10.9 percent lower operating profit recorded by ARUJ in 2021 with OP margin sliding down to 5.02 percent. 36 percent lower finance cost due to monetary easing rescued ARUJ’s bottomline from contraction. ARUJ’s bottomline grew by 26.85 percent year-on-year in 2021 to clock in at Rs.13.33 million with EPS of Rs.1.27 and NP margin of 0.96 percent.

ARUJ witnessed 6.68 percent thinner net sales in 2022. While processing and coating sales tremendously grew during the year, it was offset by lower local and export sales owing to dampened demand. Pak Rupee depreciation, elevated prices of gas and coal as well as imported chemical and dyes together with high indigenous inflation took its toll on ARUJ’s gross profit which declined by 39 percent in 2022. Considerably lower export expenses due to lackluster export volumes pushed down distribution expense by 52.31 percent in 2022. Administrative expense also plunged by 8.5 percent in 2022 due to lower vehicle running & maintenance charges as well as postage & telegram charges. ARUJ also squeezed its workforce from 304 employees in 2021 to 269 employees in 2022; however, adjustment of minimum wage rate didn’t allow payroll expense to lower. ARUJ didn’t book any profit related provisioning during the year, resulting in 82.53 percent lower other expense. However, it booked exchange loss worth Rs.0.448 million in 2022. The company also registered 750.41 percent higher other income in 2022 by recording a gain on sale of its fixed assets. Operating profit eroded by 40 percent in 2022 with OP margin slipping to 3.22 percent. Finance cost surged by 31.62 percent in 2022 owing to heightened discount rate and increased short-term borrowings owing to tighter liquidity position amid elevated cost of sales. Gearing ratio magnified from 56.88 percent in 2021 to 63.89 percent in 2022. ARUJ posted net loss of Rs.20.79 million in 2022 with loss per share of Rs.1.99.

ARUJ recorded even drastic drop of 33.94 percent in its topline in 2023. This was due to sluggish demand in both local and export markets owing to high inflation which squeezed the purchasing power of customers. High cost of sales owing to Pak Rupee depreciation, global commodity super cycle, elevated energy tariff and high inflation resulted in gross loss of Rs.60.87 million in 2023. Distribution expense contracted by 91.38 percent in 2023 owing to shrunken export expense as export sales volume considerably declined during the year. Administrative expense inched up by 6.59 percent in 2023 due to increased depreciation charge and other miscellaneous expenses incurred during the year. Exchange loss of Rs.1.972 million resulted in 340 percent spike in other expense. ARUJ didn’t record any other income during the year. This resulted in operating loss of Rs.105.42 million in 2023. Finance cost diminished by 40.91 percent in 2023. During the year, ARUJ’s current liabilities exceed its current assets by Rs.101.056 million with majority of its loans not being rescheduled. This cast doubts over the company’s ability to continue as a going concern. In 2023, the company’s gearing ratio surged to its highest level of 72.35 percent due to increased borrowings as well as lower equity on account of accumulated losses. ARUJ recorded net loss of Rs.139.545 million in 2023 with loss per share of Rs.13.34.

Recent Performance (1HFY24)

With further contraction in demand, ARUJ’s topline withered by 53.93 percent in 1HFY24. Elevated fuel and energy prices, however, didn’t allow the cost of sales to plunge proportionately resulting in gross loss of Rs.45.998 million in 1HFY24 versus gross loss of Rs.0.037 million in 1HFY23. Distribution and administrative plunged by 84.68 percent and 6.67 percent respectively during the period due to curtailed operations in line with inferior demand. Operating loss clocked in at Rs.61.096 million in 1HFY24, up from Rs.18.03 million during the same period last year. Finance cost was trimmed down by 21.93 percent during the period under consideration by restricting external borrowings and relying more on directors’ loan. Net loss clocked in at Rs.84.38 million in 1HFY24 with loss per share of Rs.8.07. This was against the net loss of Rs.46.67 million and loss per share of Rs.4.46 during the similar period last year.

Future Outlook

With its current liabilities exceeding its current assets by 164.946 million as of December 31, 2023 and accumulated loss clocking in at Rs.124.004 million, there are significant doubts over the company’s ability to continue as a going concern. The company needs to reschedule its loans to avoid the risk of default. Furthermore, it has to actively seek new avenues of export and local sales to avoid further losses.