Pakistan Synthetics Limited

Pakistan Synthetics Limited (PSX: PSYL) was set up as a private limited company in 1984. Three years later, in 1987 it was converted into a public limited company. The company is in the business of manufacturing and selling plastic caps and crown caps, PET Preform, PET Resin and BOPET Resin.

Shareholding pattern

As at June 30, 2021, over 90 percent shares were held under the category of ‘individuals’. Majority of the shares, around 16 percent were held by Mr. Yakoob Haji Karim, the CEO of the company, followed by another 13.4 percent owned by Mr. Noman Yakoob. Over 6 percent shares were held under mutual funds, while the remaining roughly 3 percent shares are held under the rest of the shareholder categories.

Historical operational performance

The company has largely seen a rising topline, with the exception of FY14, and fairly recently in FY20. Profit margins, on the other hand, declined sharply in FY17, and then witnessed a gradual decline until FY20.

During FY17, specifically in the second quarter of the year, PET Resin manufacturing plant began commercial production. Combined with the existing production of plastic and crowns caps, revenue jumped up by over 75 percent. However, this was matched by a more than corresponding rise in production costs, that grew to make up nearly 91 percent of revenue, compared to 72.6 percent seen in the previous year. Therefore, gross margin fell to single digits at 9 percent. With further incurrence of operating expenses, and little support from other income, net margin fell to 2.9 percent- the lowest seen in the last three years that had seen double-digit net margin consecutively.

Revenue nearly doubled year on year in FY18, as it crossed Rs 5 billion. Resin sales more than doubled in volume terms, while it sold 489,358 cartons of plastic and crown caps, registering a volumetric growth of 17 percent. Cost of production fell below 90 percent, allowing gross margin to improve to 10.8 percent, but this was matched by a rise in other expenses due to a net exchange loss. Therefore, operating and net margin remained more or less stable, although in value terms, net margin was considerably better at Rs 151 million, compared to 84 million in FY17. This is calculated without the inclusion of loss after taxation from discontinued operation.

Revenue grew by nearly 34 percent in FY19, that was although in double digits, but slower in comparison to the unprecedented growth seen in the previous two years. Production for both, plastic and crown caps, and PET Resin was lower year on year. Sales for PET Resin were higher by 11 percent, at 29,522 MT, while sales for plastic and crown caps were lower by almost 10 percent, at 442,594 cartons. On the other hand, production cost increased to over 90 percent again, reducing gross margin to 9.6 percent. Operating margin reduced further to 2.5 percent owing to the exorbitant increase in other expenses that made up 5 percent of revenue; the increase in other expenses was a result of a net exchange loss. Finance cost also increased to 4.7 percent owing to the rising interest rates that further shrunk profitability. Thus, the company incurred a loss for the first time, of Rs 124 million, excluding profit or loss from discontinued operations.

After growing consecutively for the last five years, revenue contracted by over 6 percent in FY20. Volumetric sales for both, PET resin and plastic and crown caps were lower by nearly 20 percent and less than 1 percent, respectively. Production cost was recorded at 93 percent, the highest seen since FY14; this led to a decline in gross margin to 7 percent. Fuel and power expense saw a considerable rise. On the other hand, operating margin improved to 4.4 percent due to a drop in other expenses to historic levels, that is, before FY18. But with a sustained increase in finance expense, that made up nearly 6 percent of revenue, due to rising borrowing rates, the company incurred a loss for the year, albeit lower year on year, at Rs 99 million.

Quarterly results and future outlook

Revenue in the first quarter of FY21 was lower by over 6 percent. This can be attributed to the fact that businesses were shut down in the event of the outbreak of the Covid-19 pandemic. The first quarter of FY21 had seen businesses and economic activities gradually opening up as lockdowns eased. Sales of PET Resin were lower by nearly 17 percent, while sales for plastic and crown caps were higher by nearly 20 percent. With production cost lower at 85 percent of revenue and finance expense halving year on year in value terms, profitability, with a net margin of 5.8 percent was better in 1QFY21 compared to the same period last year.

The second quarter saw revenue lower by 20 percent. This is likely due to a volumetric decline in sales; sales for PET Resin were lower by almost 27 percent during 1HFY21, while sales for plastic and crown caps were higher by 18.4 percent. Profitability was better in the second quarter of FY20 until the operating margin. The high finance expense led the company to incur a loss for the quarter, while the drop in finance expense in 2QFY21 allowed for some profit to be earned for the period, at Rs 16 million.

Revenue improved year on year in the third quarter, by almost 21 percent. Sales of PET Resin were lower by over 21 percent, while sales of plastic and crown caps were higher by 19.4 percent. With a significantly lower production cost for the quarter, combined with a reduction in finance expense and an increase in other income, net margin for 3QFY21 stood at 11 percent, compared to 2.5 percent seen in 3QFY20.

The company foresees growth in the PET sector as luxury products imports decline and the population looking towards indigenous products. However, the uncertainty with regards to Covid-19 remains, despite the roll out of vaccinations.