Leather Up Limited (PSX: LEUL) was incorporated as a private limited company in 1990 and was converted into a public limited company in 1993. The principal activity of the company is the manufacturing and export of leather bags and leather garment products.
Pattern of Shareholding
As of June 30, 2023, LEUL has a total of 6 million shares outstanding which are held by 1272 shareholders. Directors, CEOs, their spouses, and minor children have a major stake of around 50 percent in the company followed by the local general public holding 49.33 percent shares of LEUL. Investment corporation of Pakistan and other investment companies hold the remainder 0.66 percent shares of LEUL.
Performance Trail (2018-22)
LEUL’s topline which had been shrinking until 2021 posted an uptick thereafter. The company’s net profit was only in 2018. In 2018 too, the net profit boasted by the company came on the back of hefty other income, the absence of which would’ve resulted in a negative bottom line as the company posted operating loss in 2018 too. Hence, we can say without a second thought that in any of the years under consideration, LEUL’s topline is not robust enough to produce a positive bottom line. LEUL’s gross margin rode an upward trajectory until 2020 followed by a drastic drop in 2021. In 2022, the company’s GP margin attained its highest level which considerably slumped in 2023. The operating and net margins of LEUL stayed in the negative zone over the period under consideration. The detailed performance review of the period under consideration is given below.
In 2019, LEUL’s topline slid by 7.12 percent year-on-year due to the cyclical nature of the fashion industry as well as the loss of priority of leather garments in the international market. The company curtailed its production to match the demand level which resulted in a 9.47 percent year-on-year fall in the cost of sales, resulting in a 71.8 percent year-on-year jump in gross profit. GP margin also improved from 2.9 percent in 2018 to 5.35 percent in 2019. Low export sales meant low freight and handling charges which pushed the distribution expense down by 13.3 percent year-on-year in 2019, however, administrative expense slightly increased by around 1.41 percent year-on-year due to higher fee & subscription charges incurred during the year. The company posted an operating loss of Rs.5.10 million in 2019, down 22 percent year-on-year. The company’s capital structure is equity-oriented with a debt-to-equity ratio of 13.2 percent in 2019. While finance costs increased by 118.76 percent in 2019, they were mainly comprised of bank charges and commissions. Other income also posted a 99.61 percent drop in 2019 as the company realized a gain on the sale of land in 2018. LEUL posted a net loss of Rs.8.2 million in 2019 with a loss per share of Rs.1.37 as against net profit of Rs.45.23 million and EPS of Rs.7.54 in 2018.
In 2020, LEUL’s topline drastically fell by 42.88 percent year-on-year on the back of low demand. The associated reduction in capacity utilization from 19 percent in 2019 to 10 percent in 2020 pushed the cost of sales down by 43.5 percent year-on-year. While gross profit also slipped by 31.98 percent in 2020, GP margin ticked up to 6.37 percent. Significant reduction in advertising and sales promotion as well as lower freight and handling charges resulted in a 74.78 percent year-on-year dip in distribution expense. The administrative expense also nosedived by 33.95 percent year-on-year on account of lesser fee and subscription charges, lesser utility expenses as well as lesser salaries expenses due to a reduction in the human resource count from 38 people in 2019 to 26 people in 2020. The operating loss further shrank by 57.6 percent to clock in at Rs.2.16 million in 2020. Finance costs fell by 92.78 percent year-on-year in 2020 due to a reduction in bank charges and commissions. The company had no outstanding long-term and short-term loans in 2020, hence, no markup/interest charges. Other income considerably improved during the year due to the reimbursement of penalties as well as the PM package for the business community. LEUL’s net loss shrank by 89.5 percent year-on-year in 2020 to clock in at Rs.0.86 million in 2020 with a loss per share of Rs.0.14.
LEUL posted a further 38.15 percent year-on-year plunge in its revenue in 2021. The company reduced the industrial sewing machines installed from 195 to 57 and utilized 21 percent of the installed capacity. The cost of sales also declined by 33.97 percent year-on-year in 2021 resulting in a 99.55 percent drop in gross profit. GP margin fell to 0.05 percent in 2021. Administrative expenses surged by 129.33 percent in 2021 due to hefty growth in fees and subscription charges, auditor’s remuneration as well as entertainment and utility expense during the year. Distribution expense also grew by 34.10 percent year-on-year on the back of elevated freight, handling, and insurance charges incurred in 2021. The result was 282.86 percent year-on-year growth in operating loss which stood at Rs.8.28 million in 2021. The company also incurred other expenses of Rs.50.22 million in 2021 as against the other income of Rs.1.79 million in the previous year. The other expense was mainly on account of the raw material written off during the year as the company’s inventory was completely destroyed due to flooding of the mill area because of heavy rainfall. Consequently, the net loss magnified by 6721.33 percent in 2021 to clock in at Rs.58.68 million. Loss per share amounted to Rs.9.78 in 2021.
After an uninterrupted decline in topline since 2017, LEUL’s topline posted a 58.9 percent year-on-year rise in 2022 as the company was able to increase its export sales. The cost of sales grew by 23.66 percent during the year. The gross profit boasted a staggering growth of around 755 times in 2022 with a GP margin of 22.2 percent – the highest among all the years under consideration. Distribution expenses almost remained intact in 2022 while administrative expenses inched up by 5 percent due to rising inflation. The company wasn’t able to post operating profit even in 2022, however, the magnitude of operating loss greatly reduced by 67.63 percent to clock in at Rs.2.68 million. The reduction in other expenses by 76.95 percent during 2022 was due to the fact that the company sold the remaining spoiled inventory to one of its suppliers at than cost price. The net loss dwindled by 75.32 percent year-on-year to clock in at Rs.14.48 million in 2022 with a loss per share of Rs.2.41.
LEUL’s topline could muster a paltry 0.76 percent year-on-year growth in 2023. As the main export market of LEUL is Central Europe which is suffering from recession, the company suffered from tamed demand in 2023. Cost of sales hiked by 22.36 percent as the company disposed of some of its inventory as scrap in 2022 which provided the low base for 2023. Gross profit slid by 74.85 percent year-on-year in 2023 with GP margin falling down to 5.55 percent. Administrative expense multiplied by 12.19 percent in 2023 due to a high base effect as the company wrote off advances to employees and also booked provisions for ECL in 2022. Distribution expense mounted by 25.08 percent in 2023 due to elevated freight, handling, and distribution charges incurred during the year despite low demand. LEUL registered an operating loss of Rs.6.46 million in 2023, up 141 percent year-on-year. The company registered another income of Rs.3.54 million in 2023 versus another expense of Rs.11.58 million in 2022. This was on account of the fact that LEUL wrote off raw materials and also booked provisions for finished goods in the previous year. Conversely, in 2023, the company reversed the provision for finished goods and also wrote back advances from customers. LEUL posted a net loss of Rs.3.287 million in 2023, down 77.3 percent year-on-year with a loss per share of Rs.0.55.
Recent Performance (9MFY24)
During 9MFY24, LEUL’s sales grew by 75.74 percent year-on-year as the company was able to fetch significant orders from its existing clientele besides exploring new export markets and customers. The company also increased its prices to make up for cost escalation. Besides, the weaker Pak Rupee also lent a hand, resulting in a 106.81 percent higher gross profit posted by the company in 9MFY24 with a GP margin of 17.23 percent versus a GP margin of 14.64 percent in 9MFY23. Administrative and distribution expenses nosedived by 34 percent and 20.54 percent respectively during 9MFY24 by undertaking operational efficiency measures. This resulted in an operating profit of Rs.0.373 million in 9MFY24 versus an operating loss of Rs.3.654 million during the same period last year. OP margin stood at 1.49 percent in 9MFY24. Other income grew by 3.56 percent during 9MFY24 which further buttressed the bottomline. LEUL recorded a net profit of Rs.2.214 million in 9MFY24 versus a net loss of Rs.1.837 million in 9MFY23. NP margin stood at 8.84 percent in 9MFY24.
Future Outlook
Operational efficiency, cost optimization, and exploration of new markets may boost LEUL’s financial performance in the coming months. If circumstances remain the way they are, LEUL might be able to close FY24 with a positive bottom line which was last recorded in 2018.