Wah Nobel Chemicals Limited

Wah Nobel Chemicals Limited (PSX: WAHN) was established in 1982 and is part of a larger business group of which Wah Nobel (Pvt) Limited is the parent company.

Wah Nobel Chemicals Limited produces industrial chemicals such as formaldehyde, urea formaldehyde, glue and raisins. These products are used across various industries such as packaging, cement, energy and textile, to name a few.

Shareholding pattern

More than 56 percent of the company is held by associated companies of which the parent company, Wah Nobel (Pvt) Limited holds majority. Domestic general public is another key shareholder, owning about 22 percent share in the company whereas directors, CEO, their spouses and minor children cumulatively hold a mere 4.5 percent. Rest of the shares are distributed between the remaining categories as depicted in the table.

Historical operational performance

Wah Nobel Chemicals Limited’s topline and bottomline have been fluctuating trend; however, a glance at the financials of the last five years reveals that topline has been on a positive trajectory. On the other hand, while bottomline has also improved, at least in absolute terms, its growth has been inconsistent relative to that of net revenue.

The industry in which WAHN operates is quite competitive; therefore, when prices are reduced to maintain market share, it becomes important to focus on and adjust the marketing strategy. In FY15, the company experienced a year on year decline in topline growth, by a little over 7 percent which caused cost of production to consume a greater share of the revenue.

Moreover, finance cost also showed a notable rise both in absolute terms as well as percentage of revenue. The rise in finance cost is attributed to increase in working capital requirement. Margins were also considerably squeezed, lowest recorded thus far, as a result of intense competition, especially in the glue market.

In FY16, the company’s topline once again saw reduction, by around 2 percent, yet it improved margins noticeably by curtailing costs of production, achieving operational efficiency and adopting a better sales mix despite a fall in prices of UFMC. The reduction in costs is explained by it consuming nearly 80 percent of the net revenue as opposed to 89 percent in the previous year.

As per the company’s report for the year, formaldehyde, glue and UFMC constituted 88 percent of the total sales in FY16 as compared to it constituting 95.3 percent in the preceding year. With UFMC prices falling, the greater share of UFMC sales explains the reduced net revenue.

In FY17, WAHN posted a growth in topline, almost of 6 percent, while costs of production changed only marginally, both in value terms and as a contribution to net revenue. Most of the elements exhibited insignificant changes during the year except a decrease in distribution expenses, where a major decline was seen in UFMC sales commission.

During FY18, the topline grew remarkably at a little over 34 percent year on year, accompanied by a corresponding increase in cost of production of which a major component was the purchases of raw materials. This can be linked to higher production volumes of formaldehyde, and formalin solvent, and UFMC. This resulted in reduced margins, despite a higher figure in value terms. a higher tax expense was also recorded; however, it did not impact margins vastly.

In FY19, the company maintained its growth momentum, growing net revenue by almost 35 percent; however, costs consumed 84 percent of it, causing gross margins to further reduce. An increase in cost of production was mostly driven by an increase in cost of raw materials. Moreover, the competitive environment of the industry did not allow it to pass on the costs. Finance costs also escalated during the year because of a rise in policy rate, which doubled from 6.5 percent to 13.25 percent. While operating and net profits remained flat in absolute terms, as a percentage of topline both noted a decline.

Quarterly results and outlook

WAHN recorded a year on year growth of around 3 percent in the first quarter of FY20 along with curtailing costs, allowing gross margins to improve significantly. However, finance costs marred the higher margins, increasing from Rs 5 million in 1QFY19 to Rs 22 million in 1QFY20. The company faces competition from existing players, along with a risk of new players entering the industry; therefore, it is unable to adjust selling price if it must maintain market share. Additionally, it faces risks of uncertainty associated with change in government policies and regulations, fluctuations in exchange rate and interest rates which can impact the future profitability of Wah Nobel Chemicals Limited.