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Sardar Chemicals Industries Limited (PSX: SARC) was established as a private company in 1989, but did not commence production until 1993. A year later, in 1994, it was listed on the country’s stock exchange and converted into a public limited company.

The company essentially manufactures different kinds of dyestuffs producing Acid dyes, Direct dyes, Reactive dyes, and Optical Brightener for the textile industry. It also caters to the local tanneries for dyeing of leather material.

Sardar Chemical is also present in the international market, mostly exporting to Bangladesh, but to a limited extent. Majority of the production is sold in the domestic market.

Shareholding pattern

Sardar Chemical Industries is mainly held by its directors, CEO, their spouses and minor children, with 26 percent of the total shares of the company held under this category. Of this, Mr. Sardar Ayaz Sadiq holds the biggest share at 12.5 percent. Some 67 percent shares are distributed with the local general public, and roughly 3 percent each in NIT & ICP and joint stock companies. The remaining 1 percent is distributed with the rest of the categories.

Historical operational performance

Sardar Chemicals has seen a fluctuating topline in the last almost a decade. Profit margins, on the other hand, remained stable till FY17 after which they also saw some fluctuation, but followed a rising trend overall.

In FY16, the company saw its topline reducing by nearly 3 percent. Because the company caters to the textile sector that makes up a significant share in the country’s total exports, a decline in the exports of textiles due to contracting demand, also had an effect on Sardar Chemicals sales revenue. Secondly, prices of raw materials fell during the year, the effect of which was transferred to the customer which meant declining selling price. This also contributed to lower revenue for the year. Cost of production fell very marginally, and with little to no change in other elements of the financials, the company’s net margin increased marginally as well to a little over 2 percent.

Sardar Chemical saw another year of close to a 3 percent decline in its sales revenue in FY17. This was due to the subdued demand from the export-oriented textile sector that has remained uncompetitive in the international market due to a high cost of production, especially compared to its regional peers. However, in order to bring in some sales, the company offered discounts. Moreover, the government announced to reduce per unit rate of electricity consumptions for sectors that contribute to the exports. Thereby a reduction in the manufacturing cost would help them to become internationally competitive, thus generating demand for the company’s products in future. Cost of production for the year, again reduced marginally to near 80 percent of the revenue, allowing a net margin to increase negligibly to 2.09 percent.

After experiencing negative growth rate in topline for three consecutive years, in FY18 the company saw its topline growing by a little more than 7 percent. Most of this increase came from increase in local sales whereas export sales remained stable. The textile sector, that is linked with the chemical sector, performed relatively well during FY18, thereby creating a positive effect on the Sardar Chemical’s financials as well. There was a significant decline in cost of production to 74 percent, down from last year’s close to 80 percent; this helped to raise gross margins. Cost of production was curtailed due to raw material expense remaining largely unchanged despite a rise in revenue. The effect of this was also seen in the bottomline as net margin eventually rose to a little over 5 percent.

During FY19 the company saw the highest rise in sales revenue at almost 31 percent. Most of this increase, again came form local sales. The increase in sales revenue was more price- driven than volume driven as sales in volumetric terms was 386,160 kgs whereas last year it stood at 379,371 kgs, exhibiting a minute 1.8 percent increase. The rationale for the price increase was the currency devaluation. Moreover, on the costs side, cost of production saw an increase, making up 76.5 percent of the revenue, thereby causing gross margin to fall to 23 percent. The same change was not seen in net margin that rather increased to nearly 7 percent- the highest seen thus far. This was brought about by administrative and distribution expense making a smaller part of revenue compared to last year.

Recent results and future outlook

During FY20, Sardar Chemicals saw a nearly 4 percent fall in its sales revenue. This was largely attributed to the outbreak of Covid-19 and the resultant lock down that adversely impacted business activity. This is evident from the drop in sales revenue in the last quarter to Rs 31 million, compared to an average of previous three quarters of Rs 75 million. Despite this, the company managed to increase its profit margins through curtailing costs. Cost of production was down to an all time low of 70 percent, taking gross margins to a high of nearly 30 percent. Administrative expense, however, rose to make up 13 percent of the revenue. This was due to rent expense and loss allowance for the year. Despite this, net margin grew to 8 percent.

The company faces a few challenges operating in the domestic market- competition from the unorganized sector and dumping of imported products, and supplies on credit. With improved raw material purchases and increasing volume, the company hopes to enhance profitability in the future.

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