First Imrooz Modaraba

First Imrooz Modaraba (PSX: FIMM) was set up under the Modaraba Companies and Modaraba Ordinance, 1980, in 1993. It is engaged in domestic and international trading activities.

Shareholding pattern

As at June 30, 2020, nearly 80 percent of the certificates are owned by “individuals”. About 20 percent are with Modaraba Management Company while less than 1 percent of the certificates are held under joint stock companies. The directors, CEO, their spouses and minor children own 44 percent shares of which the CFO, Mr. Ateed Riaz holds the highest number of certificates.

Historical operational performance

Although topline has been fluctuating over the years for the company, profit margins have gradually gone up, particularly after FY14.

During FY17, revenue for the company fell by over 11 percent. Apart from the uncertain political conditions, the decline was attributed to court cases and market competition. With a fall in revenue, cost of sales fell in line with lower sales, hence gross margin improved slightly to 16 percent. However, the same cannot be observed for net margin that fell to 4.5 percent, down from last year’s 5 percent. This was due to operating expenses consuming a higher share in revenue. The rise in expenses was a result of a number of factors including salaries, rent, travelling, depreciation and legal and professional.

In FY18, revenue grew by over 22 percent, nearing Rs 900 million in value terms. With a lot of sectors being able to increase their toplines due to currency depreciation, particularly the textile sector, which the modaraba caters to, thus the increase in revenue can be likely attributed to this. With cost of sales remaining stable as a percentage of revenue, gross margin was also flat at 16 percent during the year. Although operating expenses made a lower part of revenue, the higher tax expense along with the workers welfare fund charges brought net margin down to 3.45 percent.

Revenue fell again during FY19, by over 21 percent. This was attributed to a general economic slow down in the country, with high interest rates and inflation, and currency depreciation. This kept the modaraba from negotiating volume-based deals. On the other hand, cost of sales went down notably, to 81 percent of revenue that helped to raise gross margin to nearly 19 percent. However, the rise in operating expenses as a share of revenue increased to over 9 percent, from last year’s 7 percent. This was due to the general inflationary pressure that kept expenses more or less flat in value terms, despite the fall in revenue. Yet, the company managed to increase its net margin, albeit very marginally to 3.5 percent due to the lower tax expense, while in value terms, net profit had actually gone down to Rs 25 million, compared to last year’s Rs 31 million.

In FY20, the outbreak of Covid-19 pandemic adversely affected the global economy, bring businesses to a halt. Similarly, First Imrooz Modaraba was also impacted as is suggested by its over 21 percent decline in income. It limited its operations, serving the healthcare and pharmaceutical sectors. On the other hand, the reduction in cost of sales as a percentage of revenue allowed gross margin to increase to its all-time high of 22.7 percent. Despite operating expenses continuing to make a larger share in revenue, the lower tax expense, along with the decline in cost of sales led to an all-time high net margin of 6.3 percent.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 16 percent year on year, but the lowest among the three quarters of FY21. Supported by the government in terms of lower interest rates and other incentive packages, economic activities resumed in the first quarter of FY21 that is also reflected in the higher topline of the modaraba. Moreover, the lower operating expenses allowed profitability to improve year on year from 9.8 percent in 1QFY20 to 10.7 percent in 1QFY21.

Topline more than doubled in the second quarter of FY21 in value terms, compared to the first quarter of FY21. Year on year too, revenue was more than double. However, the cost of sales increased to nearly 83 percent, compared to 73 percent in the first quarter. As a result, the second quarter saw the lowest profitability, despite the highest revenue. Net margin for 2QFY21 was also lower year on year, despite net profit being higher in value terms.

In the third quarter, topline was 50 percent higher year on year as business activity was somewhat at pre-Covid levels. The higher revenue, in addition to a stronger currency also helped to raise gross margins. The was also reflected in the net profit that was the highest among the three quarters. Cumulatively too, the nine months ended of FY21 saw a higher revenue that made more room for absorption of costs.

Given better results observed year on year in the nine months ended, it is plausible that the year will end at better profitability. However, the instability cannot be denied with regards to the ongoing third wave of Covid-19.