Ferozsons Laboratories Limited was incorporated in Pakistan as a public limited company in 1954. It was converted into a public limited company in 1960. The principal activity of the company is the manufacturing, import, and sale of pharmaceutical products and medical devices.

Pattern of Shareholding

As of June 30, 2023, FEROZ has a total of 43.469 million shares outstanding which are held by 4196 shareholders. Associated companies, undertakings, and related parties have the majority stake of 37.3 percent in FEROZ followed by the local general public holding 25.85 percent shares of its shares. Around 11.86 percent of the company’s shares are held by insurance companies and 10.48 percent by Directors, CEOs, and their spouse and minor children. NIT & ICP account for 4.89 percent shares of FEROZ while Modarabas & Mutual Funds hold 4.67 percent shares. The foreign general public has a 1.24 percent shareholding in the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

FEROZ’s top line rode an upward trajectory over the period under consideration. Its bottom line also strengthened until 2021 and then began to shrink in the subsequent years. The company’s margin registered sound growth until 2020. In 2021, gross margin slightly fell, however, operating and net margins continued to enlarge. This was followed by gross margin attaining its optimum level in 2022 while operating and net margins slid. All the margins posted a drastic decline in 2023. The detailed performance review of the period under consideration is given below.

In 2019, FEROZ’s net sales grew by 17.5 percent year-on-year. The company’s imported line of products as well as branded generic product portfolio did exceptionally well during the year while institutional sales dwindled due to lower public sector health procurement. In 2018, institutional sales pertaining to Hepatitis C boosted institutional sales. Lesser contribution of institutional sales in the overall sales mix coupled with lesser diminution in the net realizable value of the stock of Sovaldi resulted in an improved GP margin of 39.49 percent in 2019 versus a GP margin of 34 percent recorded in the previous year. In absolute terms, gross profit strengthened by 36.37 percent in 2019. Distribution expense multiplied by 23.91 percent in 2019 on account of field force and branding expenses incurred during the year to expand the company’s market base. The administrative expense also surged by 16.52 percent in 2019 particularly on the back of higher payroll expenses as the workforce was enlarged from 945 employees in 2018 to 1056 employees in 2019. 141.76 percent higher other expenses incurred during the year were the consequence of hefty exchange loss, higher profit-related provisioning, and unrealized loss incurred on the re-measurement of short-term investments in 2019. Other expense was conveniently offset by 41.29 percent higher other income recorded in 2019. Stronger other income was the result of commission income, dividend income as well as gain on the sale of operating fixed assets during the year. Operating profit grew by 102.53 percent in 2019 with OP margin clocking in at 8.53 percent versus OP margin of 4.95 percent recorded in 2018. Finance costs surged by 112 percent in 2019 due to higher discount rates. Net profit enhanced by 163.13 percent in 2019 to clock in at Rs.251.046 million with EPS of Rs.8.32 versus EPS of Rs.3.16 recorded in 2018. NP margin also ticked up from 2.16 percent in 2018 to 4.85 percent in 2019.

In 2020, FEROZ recorded a 4.26 percent year-on-year uptick in its net sales. While the company’s generic sales grew by 11 percent during the year, institutional sales recorded 40 percent decline as the provincial governments used their healthcare budgets in COVID-19 relief packages. Lesser institutional sales further improved FEROZ’s GP margin to 41.20 percent in 2020 with gross profit improving by 8.79 percent year-on-year. Distribution expenses tapered off by 1.5 percent in 2020 as the company had to either cancel or postpone its advertising and promotion activities during the year due to COVID-19. Administrative expenses inched down by 0.5 percent in 2020 due to a slight drop in payroll expenses. While the company booked greater provisioning for WWF and WPPF and also booked provisioning for loss allowance during the year, considerably lower exchange loss resulted in 27.2 percent fewer other expenses in 2020. Other income also slumped by 48.94 percent in 2020 mainly because FEROZ didn’t earn any commission income. Operating profit picked up by 32.91 percent in 2020 with OP margin climbing up to 10.88 percent. Finance costs magnified by 15.81 percent in 2020 as the company acquired a long-term loan under the SBP Refinance Scheme for the payment of salaries & wages. The company also obtained short-term borrowings to meet working capital requirements during the year. Net profit recorded a 57.6 percent year-on-year rise in 2020 to clock in at Rs.395.655 million with EPS of Rs.10.92 and NP margin of 7.32 percent.

FEROZ’s top line mounted by 30.21 percent in 2021. In-market generic sales and institutional sales improved by 18 percent and 49 percent respectively in 2021. Export sales also rose by 49 percent during the year. Higher raw material and conversion charges coupled with variation in the sales mix resulted in slight downtick in GP margin to clock in at 41 percent in 2021. In absolute terms, gross profit increased by 29.71 percent in 2021. As traveling restrictions were eased during the year, the company could plan its field promotional activities. This resulted in 18.21 percent higher distribution expense in 2021. FEROZ also expanded its workforce from 1059 employees in 2020 to 1127 employees in 2021 which resulted in higher payroll expense. Consequently, administrative expenses surged by 16 percent in 2021. Net effect of no exchange loss and higher provisioning for WWF, WPPF, and CRF resulted in a 0.93 percent downtick in other expenses in 2021. 47.48 percent higher other income was the result of exchange gain, commission income as well as higher gain recorded on sale of property, plant & equipment in 2021. Operating profit multiplied by 70.61 percent in 2021 with OP margin picking up to 14.25 percent – the highest during the period under consideration. Finance cost tumbled by 19.88 percent in 2021 due to the onset of the monetary easing cycle since 4QFY20. Net profit progressed by 83.3 percent to clock in at Rs.725.235 million in 2021 with EPS of Rs.20.02 and NP margin attaining its highest level of 10.31 percent.

In 2022, FEROZ’s net sales improved by 11 percent. Unlike last year, institutional sales registered a decline of 1 percent in 2022, while in-market generic sales continued to pick up posting 20 percent year-on-year rise. The company’s stock was valued at the historical average exchange rate with no integration of Pak Rupee depreciation during the year. This coupled with a change in sales mix resulted in a 21.85 percent improved gross profit in 2022 with GP margin attaining its highest level of 45 percent. 29.26 percent higher distribution expense incurred in 2022 came on the back of increased promotion and advertising activities to increase market penetration. Workforce expansion undertaken during the year took the headcount to 1366 employees in 2022. This resulted in higher salaries expenses which together with elevated traveling & conveyance charges drove administrative expenses up by 20.65 percent in 2022. Other expense registered a whopping 199.32 percent year-on-year hike in 2022 due to hefty exchange loss incurred during the year. Unlike previous years, other income couldn’t offset other expenses in 2022 despite posting 33.71 percent year-on-year rise. Higher other income was the result of robust dividend income, reversal of loss allowance, and higher share in profit of Farmacia – 98 percent owned partnership firm of FEROZ. Operating profit thinned down by 3 percent in 2022 with OP margin falling down to 12.45 percent. Finance costs escalated by 72 percent in 2022 due to higher discount rates and increased short-term borrowings to meet working capital requirements. FEROZ’s net profit descended by 29.11 percent in 2022 to clock in at Rs.514.149 million with EPS of Rs.11.83 and NP margin of 6.59 percent.

In 2023, FEROZ recorded a 26.73 percent enhancement in its net sales. This was backed by 14 percent growth in in-market generic sales, 43 percent growth in institutional sales as well as 98 percent growth in export sales over the previous year. Change in sales mix in favor of institutional sales coupled with increase in raw material cost, Pak Rupee depreciation, and unprecedented level of inflation translation into a thinner GP margin of 38.63 percent in 2023. Gross profit inched up by 8.66 percent in absolute terms in 2023. Inflationary impact, higher fuel prices, and increased traveling and salaries expenses resulted in a 24.12 percent spike in distribution expenses in 2023. The administrative expense also mounted by 24.36 percent in 2023 due to heightened payroll expenses, traveling expenses, fuel & power, and canteen expenses incurred during the year. The number of employees was increased to 1388 in 2023 from 1366 in 2022. Other expenses magnified by 100.14 percent in 2023 due to a sharp increase in exchange loss due to Pak Rupee depreciation as well as hefty loss allowance against trade debt and earnest money booked during the year. Other income inched up by 10.26 percent in 2023 due to higher dividend income, commission income, and share in the profit of Farmacia recorded during the year. FEROZ’s operating profit dwindled by 55.38 percent in 2023 with OP margin falling to its lowest level of 4.38 percent. Finance costs surged by 323.36 percent in 2023 due to elevated discount rates and increased short-term and long-term borrowings obtained during the year. Net profit declined by 63.23 percent to clock in at Rs.189.043 million in 2023 with EPS of Rs.4.35 and the lowest NP margin of 1.91 percent.

Recent Performance (9MFY24)

FEROZ’s net sales grew by 31 percent in 9MFY24. This was due to a 30 percent increase in in-market generic sales and a 39 percent increase in institutional sales during the period. The cost of sales surged by 40.23 percent due to inflationary pressure as well as Pak Rupee depreciation. Gross profit improved by 18.41 percent in 9MFY24, however, GP margin fell to 38 percent from 42 percent during 9MFY23. Distribution expense surged by 29.52 percent during 9MFY24 due to higher sales volume coupled with inflationary effect. Administrative expenses also escalated by 21.69 percent during 9MFY24 due to higher payroll expenses. Increased selling and production volume might also have resulted in greater employee headcount. Other expenses fell by 71.73 percent during 9MFY24 due to reduction in exchange loss due to the relatively stable value of local currency since 2QFY24. Other income grew by 17.9 percent in 9MFY24. The main components of other income are dividend income, commission income and share in profit of Farmacia – 98 percent owned partnership concern of FEROZ. Operating profit strengthened by 69.85 percent during 9MFY24 with OP margin clocking in at 7.83 percent versus OP margin of 6.04 percent recorded during the same period last year. Finance cost multiplied by 297.64 percent during the period due to high discount rate coupled with increased utilization of working capital lines. Net profit improved by 20.93 percent to clock in at Rs.270.373 million in 9MFY24 with EPS of Rs.6.22 versus EPS of Rs.5.14 recorded in 9MFY23. NP margin fell from 3.06 percent in 9MFY23 to 2.83 percent in 9MFY24.

Future Outlook

An increase in institutional sales may increase the sales volume and add to the topline of FEROZ, however, it is drastically squeezing its margins amid high raw material and conversion costs. Moreover, institutional sales are also driving up the outstanding receivables of the company, resulting in increased booking of loss allowance. As of March 31, 2024, FEROZ has outstanding receivables of Rs.1.8 billion from government institutions, most of which are past due. This is creating a liquidity crunch for the company and resulting in greater external borrowings and higher finance costs. Venturing into new geographical markets and introducing market-relevant products can add diversity to FEROZ’s revenue line and shield its margins from contraction.