First Imrooz Modaraba (PSX: FIMM) was established in 1993 under the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980; however, it began functioning in 1994. It trades in industrial raw materials, catering to industries like paint, coatings, pharmaceuticals, food, agriculture, personal care, household, textile, etc. AR Management Services (Pvt) Limited manages First Imrooz Modaraba.
The directors, CEO, their spouses and minor children own a little over 44 percent of the certificates, with Mr. Ateed Riaz, the Chief Financial Officer of the company, holding the highest number of certificates in the category. About 20 percent is held under associated companies that include A R Management Services (Pvt) Limited. The details of the remaining close to 35 percent of the certificate holders is not revealed.
Historical operational performance
The company has largely seen positive bottomline although at varying rates, while topline as been declining, particularly over the last few years, with overall gain of a little over 12 percent in the decade. During FY15, the company saw 17 percent growth in its topline. It saw double digit growth for the first time in the last five years. This was attributed to increase in turnover and economic stability. In addition, stability in the foreign currencies also supported growth. Cost of sales, as a percentage of revenue reduced year on year which allowed growth in gross margins, whereas operating expenses also saw a marginal reduction as a share in revenue. Therefore, with a rise in topline and reduction in expenses, the company was able to increase its net margin close to 4 percent.
The company saw an incline of a little over 13 percent during FY16, while cost of sales continued to reduce as a percentage of topline. This allowed gross margins to increase to almost 16 percent during the year. The improvement in revenue and margins was attributed to stable foreign currencies and favourable socio economic conditions, particularly in Karachi where most of the businesses are located. Some support was also brought in by other income while operating expenses remained more or less similar despite higher sales, taking the net margin to 5 percent for the year.
During FY17, revenue for the company reduced by 11 percent. This was due to uncertain political conditions arising because of court cases in addition to market competition. Despite a lower revenue, cost of sales reduced as a percentage of topline, allowing gross margins to increase marginally. However, operating expenses’ share in revenue increased to more than 7 percent. Most of this increase came from salaries and other staff benefits, depreciation expense, and legal and professional expense. Despite the increase in other income, net margin reduced. The unusual increase in other income came from gain on disposal of property and equipment.
The company saw the highest increase in revenue during FY18 at a little over 22 percent. With a lot of sectors seeing positive increase in their topline due to currency depreciation, the effect can also be seen on the topline of the modaraba. For example, textile sector, to which the modaraba caters to, saw improvement in FY18 it their topline; the effect of increased business activity is reflected in the revenue. However, the higher revenue came at a more than corresponding cost causing profit margins to decline. Most of the increase in operating expense came from salaries expense, event participation and lease/ijarah. Thus, net margin, at 3.45 percent, reduced to its lowest seen in the last five years.
Revenue fell again in FY19, after a gap of a year; at a little beyond 21 percent, it was the biggest decline seen in revenue in a decade. This was attributed to the general slow down in the economy as well as due to the depreciation of the currency that adversely affected some sectors of the economy. The currency depreciation prevented the modaraba “to negotiate deals that are volume-based”.
Despite witnessing the biggest decline in revenue, the company managed to post the highest gross margin seen in a decade. This was due to lower purchases accounted for under cost of sales. This allowed gross margins to increase but was offset by a rise in operating expenses that almost nullified the overall effect. This was again primarily driven by salaries expense. Thus, there was only a marginal improvement in net margin for the year.
Quarterly results and future outlook
During 9MFY20, revenue decreased by 22 percent year on year. This was largely attributed to the general slow down in the economy and business. with high inflation rates and discount rates, business activity in the economy was subdued. However, the company was able to reduce costs more than the decline in revenue, the effect of which trickled down to profit margins that improved year on year.
Looking at 3QFY20 specifically, the company had incurred a loss during the quarter as compared to a profit of near Rs 16 million in the corresponding period last year. This loss was due to slow down in the world economy as a result of the outbreak of Covid-19. With a significant adverse effect of the outbreak of the pandemic on the world and domestic economy, the company foresees a difficult year ahead.