Aruj Industries Limited

Aruj Industries Limited (PSX: ARUJ) was established in 1992 under the Companies Ordinance, 1984. It manufactures Fusible Interlining and dying/bleaching/stitching of fabric. The company’s factory is located in Lahore, Punjab. Aruj Industries Apparel division sells its products (denim and non-denim) to customers in UK, Europe and the US.

Shareholding pattern

An overwhelming majority of the shares of the company are held by the directors, CEO, their spouses and minor children- about 86 percent. Around 11 percent is distributed with the local general public whereas the remaining about 3 percent is with the rest of the categories.

Historical operational performance

The company’s topline has, for the most part been increasing, however, the profit margins, although positive, have gradually been declining over the years.

Aruj Industries saw the highest growth in its revenue at close to 64 percent in FY15. Note that this was also the year when the company added garments manufacturing business to its portfolio. It was able to create a niche for itself as export sales doubled and orders started flowing in, urging the company to expand production. Cost of production saw a marginal increase to take up about 87 percent of the revenue, with raw materials and energy expense being the main drivers. Thus, there was a gradual decline in profit margins.

By FY16, the company’s sales revenue grew by 38 percent and crossed the Rs 1 billion mark. While local sales took a back seat, export sales continued to rise. With the positive response received from the market and inflow of orders, the company was compelled to increase capacity by adding new stitching halls. Cost of production again saw increased to make up 89 percent of the revenue, primarily driven by raw material and fuel expense. Unlike, last year, the energy situation seemed to have improved with industries receiving continuous electricity, however this was done at a high rate, thus driving up costs for the company.

At 10 percent, Aruj Industries saw its lowest growth rate in revenue in FY17. The previous increases seen in exports was absent this year. The company’s primary export market was the UK which saw a referendum to leave the EU. This obviously had economic repercussions which affected the company’s exports to the country. Although the British Pound almost reached it pre-Brexit level, stability was expected two quarters later. On the costs side, distribution expense rose, mostly related to export expenses which lowered net margins for the year.

The company saw a negative growth in revenue of 16 percent during FY18 for the first time since FY13. Local sales remained more or less unchanged, while a significant decline was seen in export sales. Considering that sales revenue is primarily generated from exports and the fact that the company faced intense competition in the global market, the reduced revenue is inevitable. Although the currency depreciated in FY18, the effect of it was offset by the competition that exists regardless. In an attempt to maintain the customer base in this competitive scenario the company decided to take a hit on profits instead. On the costs side, the company faced the menace of high energy costs; the rate was more than double for Punjab when compared to that in Sindh and Khyber Pakhtunkhwa (KPK). In addition, imported coal which is used for fuel saw a 40 percent rise in its price. Thus, further reduced profitability for the year.

Aruj Industries regained its momentum as its revenue increased by 23 percent in FY19. Historically, the company had always focused more on exports. However, in FY19, along with export sales, domestic sales also picked up and contributed Rs 246 million to the topline. While currency depreciation brought with it challenges such as enhanced working capital requirement, at the same time it also allowed the company to widen and diversify its customer base. Cost of production continued to climb on to consume more than 90 percent of the revenue, with raw material expense being the primary cost driver. With a marginal reduction in other costs, profit margins improved slightly. However, due to the new tax policies, an opportunity arose for the company to tap the local market due to the gap left by the unregistered sector.

Quarterly results and future outlook

Topline reduced during 9MFY20 by a marginal 3 percent year on year. However, most of this decrease was witnessed in the first half of FY20, as 3QFY20 shows an improvement in topline. This decline came mostly from local sales, which felt market pressures within the economy. Cost of production was kept in check as it saw a marginal decline, raising margins slightly.

With the ongoing pandemic, the company faced a slow-down in orders from customers outside the country, which was restored by April. This gives the company hope that business may soon return to normal. The dyeing and processing division have continued to cater to its customers. The company foresees that with global economic contraction, efforts would have to be doubled to sustain customers and explore more markets. It also expects inflationary pressures and currency depreciation.