Archroma Pakistan Limited – BR Research

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Archroma Pakistan Limited (PSX: ARPL) is a limited liability company and a subsidiary of Archroma Textiles GmbH. The latter is headquartered in Switzerland. The company manufactures, imports and sells chemicals, dyes and coatings, adhesives and sealants.

Shareholding model

As of September 30, 2021, 75% of the shares were held by associates, companies and related parties. This only includes Archroma Textiles GmbH. The local general public holds more than 13 percent of the shares, followed by almost 5 percent of the shares in modarabas and mutual funds. Directors, CEO, their spouses and minor children hold a negligible share, while the remaining 6% belong to the rest of the shareholder categories.

Historical operational performance

Archroma Pakistan has mostly seen revenue growth, while profit margins over the past six years have followed a gradual decline before improving slightly in MY21.

During MY17, turnover increased by almost 8%, in contrast to the double-digit growth observed over the past two years. Topline has crossed 12 billion rupees in terms of value. Export sales grew 49 percent while the textile division remained the main contributor to total turnover. The cost of production, on the other hand, edged up to 68.4 percent, from over 67 percent in MY16. However, the decline in the operating margin, and therefore the net margin, was relatively more pronounced, as administrative costs consumed a larger share of sales. This was due to salary costs and external service charges. Thus, the net margin was recorded at a lower level of 13.2 percent.

The company returned to double-digit revenue growth in MY18 as it was 16.7% higher. Export sales continued to show sky-high growth rates with growth of over 50 percent, while the performance of the brand and the textile division remained the main contributors to revenue. Production costs remained stable at around 68 percent, keeping the gross margin also stable at 31.6 percent. However, due to royalties, distribution costs increased as a percentage of revenue. Coupled with an increase in finance costs due to the foreign exchange loss and high short-term current finances, the net margin fell to 10.7%.

The company maintained its growth momentum during MY19 as revenues grew by 21.4%. Export sales alone reached Rs 4 billion, while branded and performance textile specialties dominated the total turnover. The cost of production rose to 69 percent, slightly reducing the gross margin to 30.8 percent. This also had an impact on the operating margin as operating expenses remained more or less similar as a percentage of sales. However, the net margin decreased to 9.9% due to an increase in financial charges as well as an impairment on trade debts which amounted to Rs 143 million for the year against Rs 60 million l ‘last year.

After witnessing an increase in revenues for five consecutive years, AM20 revenues have contracted by more than 13%. This was due to a decrease in local sales of the “other” category which are not the main business activities of the company. In addition, the export sales of the branded and performance textile specialties division also declined significantly, which could not be offset by the increase in local sales of these. On the other hand, the cost of production rose to a nine-year high of 72 percent, which reduced the gross margin to nearly 28 percent. In addition, administrative costs increased due to salary, legal and professional charges, which further reduced profitability. The net margin was recorded at 7.8% for the year.

Recent results and future prospects

The company experienced the strongest increase in turnover during AM21, with growth of over 32%, approaching Rs 20 billion in value. This was attributed to growth in the specialty branded and performance textiles and adhesives and sealants business of 33% and 41% respectively. This resulted in an improvement in the gross margin for the year which was recorded at 31 percent. With better cash generation and therefore a decrease in financial charges as well as a decrease in operating charges as a percentage of turnover, the improvement in profitability was reflected in net income. It was recorded at a record level of Rs 2.31 billion, and a net margin of 11.6%.

While demand has recovered significantly almost two years after the start of the Covid-19 pandemic, other challenges persist. There are issues with the supply chains that have resulted in delays in the supply of raw materials. This has resulted in increased costs and delays. There is also a shortage of containers and ships.

The country’s textile industry has seen an improvement in its exports, especially in the value-added sector. News suggests this is due to easing lockdowns in North America and European countries which are major export destinations. Demand is expected to continue, not only for home textiles, but also for denim and casual wear.

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