Highnoon Laboratories Limited (PSX: HINOON) was incorporated in Pakistan as a private limited company in 1984 and was converted into a public limited company in 1995. The principal activity of the company is the manufacturing, import, sale and marketing of pharmaceutical and allied consumer products.
Pattern of Shareholding
As of December 31, 2023, HINOON has a total of 52.983 million shares outstanding which are held by 3866 shareholders. Local general public is the largest shareholding category of HINOON with 41.47 percent shares. This is followed by Directors, CEO, their spouse and minor children accounting for 22.53 percent shares of the company. Around 12.078 percent of HINOON’s shares are held by foreign companies and 5.2 percent by Banks, DFIs and NBFIs. Insurance companies hold 5.05 percent shares of HINOON while Modarabas and Mutual funds have a stake of 3.69 percent in the company while joint stock companies hold 2.14 percent shares. Associated companies, undertakings and related parties have 2.043 percent shareholding of HINOON while foreign general public have 1.89 percent shares. NIT and ICP account for 1.29 percent shares of HINOON. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-23)
HINOON’s topline and bottomline have posted a steady growth over the period under consideration except for a marginal downtick in its bottomline in 2023. The margins have also progressed over the years to reach their optimum level in 2022 only to slide back in 2023. The detailed performance review of the period under consideration is given below.
In 2019, HINOON’s topline posted 20.6 percent year-on-year growth which mainly came on the back of growth in local sales. Export sales which constituted 5.1 percent of HINOON’s net revenue in 2018 slid to 4.2 percent of its net revenue in 2019 due to insignificant growth posted by the export sales. Export sales were led by sales to Afghanistan which dropped in 2019 while sales to other destination posted an uptick. Higher local sales volume coupled with better sales mix on account of successful innovative product launches during the year kept the GP margin almost intact at 46 percent despite high cost of raw materials and Pak Rupee depreciation. Distribution expense and administrative expense inched up by 16.3 percent and 14.1 percent respectively primarily due to higher payroll expense, advertising and promotion budget as well as trainings, seminars and symposia charges. Other expense also grew by 35.6 percent on the back of higher provisioning against WWF and WPPF as well as central research fund (CRF). Other expense was largely offset by 158 percent rise in other income which was the result of higher returns on deposits coupled with gain on disposal of operating fixed assets in 2019. Operating profit registered 28.2 percent spike in 2019 with OP margin jumping up to 15.1 percent from 14.2 percent in 2018. Finance cost rose by 185 percent year-on-year in 2019 on account of higher discount rate and higher lease liabilities. Net profit posted 33.8 percent year-on-year rise in 2019 to clock in at Rs.971.01 million with NP margin of 10.73 percent versus 9.67 percent in 2018. EPS also climbed up from Rs.23.07 in 2018 to Rs.28.05 in 2019.
In 2020, HINOON’s topline grew by 18.2 percent year-on-year which was mainly backed by the growth of the company’s respiratory portfolio during the year on account of COVID-19. Both local and export sales revenue posted growth in 2020 with export sales constituting to 5 percent of HINOON’s topline. Cost control measures put in place by the company are evident by growth of gross profit by 23 percent year- on-year in 2020 despite increase in the prices of imported raw materials due to Pak Rupee depreciation. GP margin swelled up to 47.87 percent in 2020. Distribution and administrative expense registered year- on-year growth of 10.8 percent and 21.2 percent respectively during the period with main growth propellers being payroll expense, advertising and publicity expense, traveling expense as well as trainings, seminars and symposia charges incurred during the year. Higher provisioning against WWF, WPPF and CRF coupled with a significant hike in exchange loss drove other expense up by 49 percent in 2020. Other income registered a decent 21.7 percent growth on the back of dividend income from short- term investment and gain on sale of operating fixed assets in 2020. Operating profit attained 42.6 percent growth in 2020 with OP margin further improving to 18.2 percent. Finance cost grew by 1 percent due to the ongoing monetary easing cycle. This was despite the fact that the lease liabilities grew during the year. Moreover, the company also availed SBP refinance scheme for the payment of salaries and wages in 2020. Net profit grew by 46.3 percent to clock in at Rs,1420.74 million with NP margin of 13.28 percent and EPS of Rs.37.31 in 2020.
In 2021, HINOON’s topline posted 21.5 percent year-on-year rise driven by both local and export sales growth. During the year, the company launched eight new products that further enriched its product portfolio and contributed a great deal to the sales growth. With efficient sourcing and supply chain management, well organized working capital management and robust sales, the company was able to drive its gross profit up by 25.3 percent year-on-year in 2021 with GP margin growing up to 49.35 percent. Distribution expense posted a steep 29 percent spike in 2021 which was primarily the effect of a hefty payroll expense coupled with higher promotion and advertising expense which was in line with new product launches. Administrative expense grew by 18.5 percent year-on-year in 2021 as the number of employees grew from 1825 in 2020 to 2315 in 2021 which pushed up the payroll expense. Higher provisioning against WWF, WPPF, CRF and ECL also culminated into 19.6 percent hike in other expense in 2021. This was largely offset by a 57 percent year-on-year rise in other income which was the result of dividend income on short-term investments earned in 2021. Operating profit grew by 23.8 percent year- on-year in 2021 with OP margin setting a new benchmark of 18.52 percent. Despite monetary easing scenario prevailing in the country in 2021, HINOON’s finance cost jumped up by 49 percent year-on-year in 2021. This was due to increased liabilities. However, since HINOON had a very low gearing ratio of 7 percent in 2021 which grew from 2 percent in 2020, its finance cost stayed at less than 1 percent of its sales in all the years under consideration. Net profit grew by 27.3 percent year-on-year in 2021 to clock in at Rs.1808.03 million with NP margin of 13.9 percent and EPS of Rs.43.17.
The upward trajectory of HINOON’s topline continued with further 21.7 percent growth recorded in 2022. The company made 6 new product launches in the primary care and specialized segments. Furthermore, its export sales posted tremendous 42 percent rise in 2022 which was the result of an increased foothold in the African region. Increased sales to Afghanistan and Iraq also played a pivotal role in attaining a robust growth momentum in the overall sales of HINOON during the year. Despite high raw material prices due to Russia Ukraine crisis which was further exacerbated by steep depreciation of Pak Rupee, the company, with its effective cost planning and control, was able to attain a 25 percent growth in gross profit with GP margin attaining the highest ever mark of 50.77 percent in 2022. Distribution and administrative expense grew by 16.7 percent and 15.8 percent year-on-year respectively which were in line with higher sales volume which resulted in increased workforce requirements and hence higher payroll expense. Moreover, higher advertisement and promotion budget for market penetration of new and existing products also contributed a great deal to higher operating expenses in 2022. Other expense grew by 50 percent year-on-year in 2022 on account of higher provisioning while other income grew by 87.5 percent year-on-year in 2022 due to sizeable increase in dividend income. Operating profit multiplied by 41.2 percent year-on-year in 2022 with OP margin jumping up to 21.5 percent. HINOON’s gearing ratio significantly grew from 7 percent in 2021 to 13 percent in 2022. This was due to high amount of working capital related borrowing obtained by the company in 2022. Higher borrowings coupled with higher discount rate translated into 51.4 percent hike in finance cost in 2022. The imposition of super tax during the year also diluted the bottomline which managed to grow by 33.7 percent year-on-year in 2022 to clock in at Rs.2417.17 million with NP margin of 15.3 percent and EPS of Rs.45.62.
Recent Performance (1HCY23)
Until 2022, HINOON was able to record significant growth in its margins despite the disastrous effect of inflation, Pak Rupee depreciation, cost of borrowing and taxation through innovative product launches, increased product penetration and growing foothold in the export market. However, it appears that the company gave in to external vulnerabilities in 2023. This is evident by the fact that its margins diluted during the year despite sales growth of 22.8 percent year-on-year in 2023. Topline growth is attributable to right product mix and upward revision in the prices in line with CPI as allowed by Drug Regulatory Authority of Pakistan. However, high commodity prices coupled with Pak Rupee depreciation resulted in 30.6 percent higher cost of sales in 2023. Gross profit grew by 15.2 percent in 2023, however, GP margin tumbled to 47.64 percent from its peak of 50.77 percent in 2022.Distribution expense grew by 24 percent in 2023 due to higher payroll expense as well as elevated advertising & promotion budget. Administrative expense grew by 16.1 percent year-on-year in 2023 due to inflation induced revision in salaries which drove up the payroll expense. This was despite the fact that HINOON’s workforce shrank from 2382 employees in 2022 to 2295 employees in 2023. Other expense ticked up by 4.5 percent in 2023. The company incurred hefty exchange loss in 2023. However, it was largely offset by no provisioning done for ECL in 2023. Other income plummeted by 36.1 percent in 2023 due to drastic fall in dividend income and lesser liabilities written back during the year. HINOON’s operating profit posted a marginal 1.2 percent uptick in 2023 with OP margin falling down to 17.7 percent. Finance cost multiplied by 150.9 percent in 2023 due to unprecedented level of discount rate as well as increased lease liabilities and long-term loans. HINOON’s gearing ratio surged to 25 percent in 2023 from 20 percent in 2022. Net profit slumped by 0.6 percent in 2023 to clock in at Rs.2403..014 million with EPS of Rs.45.35 and NP margin of 12.37 percent.
Recent Performance (1QCY24)
HINOON’s net sales posted year-on-year growth of 15.22 percent in 1QCY24 on the back of continued focus on key brands and efficient sales mix. Cost optimization put in place by the government and the company’s ability to revise the prices of non-essential drugs resulted in 23.34 percent higher gross profit in 1QCY24 with GP margin of 48.61 percent versus 45.41 percent recorded in 1QCY23. Distribution and administrative expenses multiplied by 23 percent and 12.97 percent respectively. The main components of HINOON’s operating expenses are its payroll expense as well as advertising and promotion expenses. Other expense mounted by 57.62 percent in 1QCY24 which was partially offset by 45.61 percent higher other income recorded by HINOON in 1QCY24. While detailed financial statements are not yet available to comment on the reason behind the movement in other expense and other income, historical trend shows that high profit related provisioning and provisioning for ECL and CRF form the major chunk of other expense while other income is mainly driven by dividend income and profit from debt securities. HINOON’s operating profit improved by 23.7 percent in 1QCY24 with OP margin of 18.57 percent versus 17.3 percent recorded during the same period last year. Despite discount rate standing at its highest level, HINOON was able to cut down its finance cost by 19.84 percent in 1QCY24 by curtailing its borrowings. Net profit grew by 22 percent in 1QCY24 to clock in at Rs.763.12 million with EPS of Rs.14.4 versus EPS of Rs.11.81 recorded during the similar period last year. NP margin also ticked up from 12.84 percent in 1QCY23 to 13.59 percent in 1QCY24.
Future Outlook
HINOON is putting its best foot forward by launching new and innovative products to diversify its sales mix and by undertaking marketing and promotional campaigns to make them recognized and accepted in the market. It is also by embarking on cost optimization and operational efficiencies to strengthen its margins and bottomline. Deregulation of drug prices has also buttressed the margins of pharmaceutical companies across the sector. Expansion in export sales and streamlining of finance cost are other strategies put in place by HINOON to improve its financial performance.