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Shezan International Limited (PSX: SHEZ) was established in 1964. The company has three production plants in Lahore, Karachi, and Hattar Industrial Estate.

The main business of Shezan International is to manufacture, trade and sell juices, pickles, jams, ketchup, etc. Although the company is present in the international market as well, most of its revenue is generated from the domestic market.

Shareholding pattern

A large part of the company’s shareholding is held under the category of directors, CEO, their spouses, and minor children, at 23 percent. Of this, a major shareholder is Mr. Muneer Nawaz, the chairman of Shezan International. A little over 21 percent is held under modarabas and mutual funds within which close to 19 percent is held by CDC-Trustee National Investment (Unit) Trust. About 48 percent is distributed with the local general public; the remaining around 8 percent is with the rest of the categories.

Historical operational performance

Shezan International has mostly seen positive growth in its topline throughout the past decade with the exception of FY16 and recently in FY20. However, in the last five years, its revenue growth rate has reduced to single digits. After remaining relatively stable for the initial years of the decade, profit margins are on a decline, particularly after FY18.

The topline in FY16 for the company reduced marginally by less than 1 percent. Note that the company is also present in the international market. While domestic sales performed comparatively better, international sales was deeply impacted because sales reduced to a major export destination- Angola, a Southern African nation. The latter faced immense devaluation of their currency due to the financial turmoil. With a fall in global oil prices, the country’s currency devalued since it is an oil dependent country. Cost of production, on the other hand, increased only marginally due to increase in raw material prices and salaries expense, causing gross margin to reduce slightly. The effect of this was also seen in net margin that reduced to nearly 3 percent (FY15: 4.3%).

Shezan International saw a 5 percent growth in its topline during FY17, crossing the Rs7 billion mark, while cost of production returned back to its previous level of averaging around 71 percent. Most of the other elements in the accounts also remained stable. Therefore, the effect of an improved gross margin owing to better topline was also reflected in the net margin that grew to around 3.6 percent.

In FY18, the company again saw nearly 5 percent growth in its topline. This was also accompanied by a slight increase in cost of production that caused gross margin to reduce marginally to almost 28 percent. However, net margin actually improved for the year to a little over 5 percent. This was due to a reduction in distribution expense that made up 14 percent of the revenue, compared to last year’s above 17 percent. Within the category, a notable decrease was seen in expense related to advertising and promotions that was primarily responsible for the decrease in overall expense.

During FY19, the food and beverages sector as a whole saw a 4.7 percent growth. Shezan International’s topline grew by 2.7 percent versus the previous two years’ 5 percent. Cost of production saw the highest incline making 80 percent of the revenue. This was due to inflationary pressure that increased price of raw material and oil prices also followed an upward trend. The company was unable to pass the increased cost entirely to the customer due to competition, therefore gross profit margin reduced drastically to near 20 percent, down from last year’s 28 percent. Although other expense reduced and some support was also contributed to the bottomline by other income, it was not sufficient to raise net margin that fell to 1.5 percent- the lowest seen thus far.

Recent results and future outlook

The company witnessed negative growth in the topline for the second time in the decade in FY20; the topline contracted by 5 percent. This was primarily due to two reasons- firstly the winter season in the country was prolonged that discouraged consumption of the company’s products. Secondly, this was soon followed by the outbreak of the pandemic that resulted in a strict lockdown. This meant malls, shops, cinemas, parks, etc. were shut, thus reducing sales of the company. However, costs were still intact causing cost of production to increase to nearly 85 percent of the revenue. Once again, costs could not be passed on to the consumer, thus contracting profit margins of the company. Owing to the high interest rates, finance cost also witnessed a significant incline, eventually resulting in the company to post a loss for the first time, of Rs236 million.

With the gradual opening up of the company the company hopes to restore its domestic as well as international sales. Moreover, it also expects finance expense to go down in the upcoming year due to falling interest rates. Apart from diversifying export destinations, the company also would like to focus on adding new products to its existing portfolio.

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