Ferozsons Laboratories Limited (PSX: FEROZ) was set up in 1954 as a private limited company and was later converted into a public limited company, in 1960. It was one of the first pharmaceutical manufacturing companies in Pakistan. The company imports, manufactures and sells pharmaceutical products and medical devices. Some of the company’s clients include United Nations, Federal Supply Services and other international relief agencies; it also exports to countries like Australia, Hong Kong, Singapore, Turkey, etc.
As at June 30, 2020, over 27 percent of the shares are held by the associated companies, undertakings and related parties. This category solely includes KFW Factors (Private) Limited. The directors, CEO, their spouses and minor children own close to 11 percent shares, while the local general public has 43 percent shares of the company. Another 8 percent shares are held by insurance companies followed by 5 percent in NIT & ICP; the remaining roughly 6 percent shares are with the rest of the shareholder categories.
Historical operational performance
Ferozsons has mostly seen a rising topline since FY14, with the exception of FY17 when it contracted by nearly 58 percent. The profit margins, on the other hand, followed a declining trend until FY18, after which it increased slightly.
During FY17, revenue contracted for the first time since FY14, by over 57 percent, reducing topline to over Rs 4 billion, compared to Rs 10 billion seen in the previous year. The latter was the highest revenue recorded between FY14 and FY20. Therefore, when revenue returned to its normal levels, the rate of decline was exorbitant. The decline in revenue was attributed to decline in imported products, particularly Hepatitis C franchise. Aside from this, net sales had actually increased by 11 percent year on year. With a slight decline in production cost, gross margin grew to 41 percent. however, the same was not observed for net margin that reduced to 9 percent as other expenses made a larger in revenue and other income also reduced. Moreover, profitability was also affected by the provision made for slow moving stock of Rs 140 million.
In FY18 the company witnessed the slowest growth in revenue at over 2 percent. The slow growth was attributed to the decline in imported line of products, outside of which sales had actually grown by 20 percent. Aside from the imported line of products, the generic product portfolio grew by 15 percent in the private market and 179 percent in sales to institutions. However, with the production cost consuming nearly 66 percent of revenue- an all-time high, gross margin reduced to its lowest of 34 percent. The higher production cost was a result of fuel expenses and currency devaluation. Despite the other income that was higher year on year, the rise in distribution expense that made nearly 24 percent of revenue, trimmed profitability further. Thus, net margin fell to an all-time low of 2 percent.
Revenue in FY19 grew by over 17 percent, crossing Rs5 billion in value terms. The company’s product portfolio in the private market registered a 25 percent growth, whereas sales to institution reduced by 33 percent. This was due to a reduction in public sector health procurement. Production cost, on the other hand, that was recorded at the highest last year, reduced to 60 percent that raised gross margin to over 39 percent. Another rationale for an improved gross margin was the “lesser diminution in net realizable value of stock”. The higher gross margin also trickled down to the bottomline with net margin more than doubling at 4.8 percent, despite the rise in distribution expense- latter a result of field force and branding expenses.
Revenue growth at over 4 percent in FY20 is subdued in comparison to the double-digit growth seen in the previous year. The private market sales grew by 11 percent whereas institutional sales were lower by 40 percent. This was because the government had directed the healthcare budgets towards relief packages for those affected by Covid-19. Production cost reduced further to nearly 59 percent, raising gross margin to 41 percent. With lockdowns imposed in the last quarter of FY20, several companies saw their sales declining, while the same of Ferozsons remained roughly the same. Rather, owing to reduced field force activities due to the lock down, profit margins actually improved in the last quarter. Thus, net margin overall improved to 7 percent for the year.
Quarterly results and future outlook
Revenue in the first quarter of FY21 was higher by over 8 percent year on year, with most of the growth coming from the private market sales as sales to institutions reduced by over 50 percent. Profit margin, at 8.5 percent, was better year on year due to reduction in production cost, and a favorable sales mix.
The second quarter of FY21 also saw revenue higher by over 16 percent year on year, driven by private market sales and export sales that grew by 11 percent and 46 percent, respectively. While gross margin remained flat, net margin improved due to lower distribution expense- a result of lower decreased field activities. Finance expense also reduced due to lower borrowing rate, thus, net margin at 11.5 percent in 2QFY21 was notably higher than 7 percent seen in 2QFY20.
The third quarter of FY21 saw revenue higher by 21.5 percent year on year owing to an abrupt increase in medical devices sales to government institutions. However, due to a higher production cost, gross margin was slightly lower at 38 percent. but operating and net margin was supported by other income that grew due to an exchange gain.
The industry overall grew by 12 percent in 9MFY21, whereas the country’s exports witnessed a 25 percent rise year on year. But while business activities have resumed, the risk and uncertainty associated with the Covid-19 pandemic has not been entirely eliminated.