Biafo Industries Limited (PSX: BIFO) was set up as a public limited company in 1988 under the Companies Ordinance, 1984 (now Companies Act, 2017). It manufactures commercial explosives and blasting accessories including detonators and other materials. Because of the nature of the product, the company is required to renew its license to manufacture and sell explosives every year.
As of June 30, 2020, 64 percent shares of the company are owned by the directors, CEO, their spouses, and minor children. Within this category, the majority are held by Ms. Ayesha Humayun Khan, a non-executive director of the company. Over 27 percent of shares are owned by “other individuals”, followed by close to 8 percent of shares held by Orient Trading Limited. The remaining roughly 1 percent share is with the rest of the shareholder categories.
Historical operational performance
Biafo Industries Limited has seen a fluctuating topline, but overall, it has grown through the decade, from Rs 414 million in FY07 to Rs 1.6 billion in FY20. Profit margins remained largely stable at the beginning of the decade, reaching a peak in FY18, after which they have followed a declining trend.
Looking at the last few years, in FY17, the company saw the biggest decline in topline, at over 17 percent. This was largely due to the decline in local sales that registered a 27 percent drop. “Reduced seismic exploration programs” resulted in lower sales value to the oil and gas exploration sector by a significant 58 percent. But the company took up a new project towards the end of FY17; this would add to the future revenue stream. On the other hand, production cost remained around 53 percent during the year, reducing gross margin marginally to 46.6 percent. Distribution administrative and finance expenses made a larger share in revenue year on year, therefore net margin decreased to 26.7 percent for the year.
The company witnessed one of the highest growth rates in revenue in FY18, at nearly 41 percent. Both local and export sales increased. This was attributed to new road construction projects and large-scale mining projects that made up for the reduced seismic exploration programs. Biafo Industries also began making supplies to some Hydel projects that could add to future revenues. Production cost as a share of revenue went down considerably, to almost 50 percent, which was at an all-time low; this took the gross margin to an all-time high of 50 percent. With additional support coming from other income, the net margin also increased significantly to 31.5 percent.
In FY19, revenue contracted 16.7 percent; both, local sales and export sales registered a decline. During FY19, the economy experienced a slowdown, with high inflation and interest rates, currency depreciation, therefore the overall industrial activity saw a downward trend. Blasting activities on some of the projects had been completed. In addition, the government did not announce further infrastructure projects, keeping demand low. On the other hand, production cost jumped to nearly 57 percent of revenue, owing to the general inflationary pressure in the economy. As a result, the gross margin shrunk to 43 percent of revenue. This also trickled down to the bottomline, with a net margin recorded at 25.5 percent. The higher other income at Rs 103 million was not sufficient to offset the rise in expenses overall.
Some recovery was seen in FY20, as revenue registered a 12.6 growth. Most of this growth was seen in local sales, while export sales were reduced by 4.5 percent. A quarterly breakdown reveals that the first quarter saw the highest revenue, while the last quarter saw the lowest revenue, as the last quarter saw the development of the Covid-19 pandemic that forced operations and businesses to shut down abruptly. But the higher revenue was largely consumed by production costs that jumped to over 64 percent. This was due to a rise in input costs because of currency depreciation. This also trickled down to the bottomline, further worsened by the reduction in other income, which was recorded at a negligible Rs 5 million, compared to Rs 103 million in the previous year. Thus, the company posted a net margin of 15.5 percent.
Quarterly results and future outlook
The first quarter of FY21 saw revenue lower year on year by 22.6 percent, due to a slowdown in construction activities owing to Covid-19; however, supplies to other sectors remained. Profitability was also lower due to a decline in sales volumes and the impact of currency devaluation that increased costs as is seen by a net margin of 22.5 percent, compared to over 24 percent in 1QFY20.
The second quarter also saw a lower revenue year on year by over 12 percent, although growth was seen in export sales for 1HFY21 compared to 1HFY20. There was a decline in sales volume in addition to the construction activity picking up pace slowly. Production cost reduced notably, close to 62 percent of revenue. The resultant higher gross margin also trickled down to the operating margin, but the net margin, at 13.9 percent, was lower in 2QFY21 due to a lower finance income.
Revenue in the third quarter was a higher year on year by over 27 percent. This was due to growth in sales to the cement and export sector. Combined with production cost significantly lower as a share in revenue year on year, profitability in 3QFY21 was higher. Performance in the third quarter improved the results for cumulative 9MFY21 as well. If costs are controlled, and construction activity gains momentum encouraging demand, Biafo Industries could show a slight year-on-year improvement for FY21.