Treet Corporation Limited (PSX: TREET) was set up as a public limited company in 1977 under the Companies Act 1913 (now Companies Act, 2017). The company manufactures and sells razors and razor blades in addition to engaging in trading activities. Within the razors category, there are further sub divisions of conventional blades and disposable razors.
As at June 30, 2020, over 43 percent of shares are held by the directors, CEO, their spouses, and minor children. Of this, the majority are held by Mr. Syed Shahid Ali, the CEO of the company. Close to 35 percent of shares are held under the category of “individuals”; NIT & ICP together hold 7 percent shares, followed by 5 percent in associated companies, undertakings, and related parties. The remaining 10 percent shares are with the rest of the shareholder categories.
Historical operational performance
Topline of Treet Corporation has mostly seen a growing trend, except for in FY15 when it contracted, and another decline seen again fairly recently in FY20. Profit margins, on the other hand, have been declining gradually but consistently in the last decade. In the last few years, however, gross margin has been on a rise except for in FY19, while net margin has decreased between FY16 and FY20.
In FY17, revenue witnessed a rise of 13 percent year on year, reaching over Rs5 billion in value terms. While exports remained more or less stable, local sales picked up by 17 percent. Particularly, the growth in the blades/disposable razors division was driven by volumes. On the other hand, the cost of production grew to over 69 percent of revenue, compared to 68 percent in FY16. As a result, the gross margin contracted to over 30 percent. Moreover, the decrease in administrative expense as a share in revenue was canceled out by the rise in distribution expense whereas other income that came primarily from dividend income, allowed operating margin to improve to nearly 11 percent. But the rise in net margin to 1.2 percent was a little less pronounced due to higher finance expenses.
Revenue in FY18 continued to grow, by 13.8 percent, allowing topline to cross Rs6 billion. This was brought about by a rise in both local and export sales, while the company also undertook expansion in its pharmaceutical division through Renacon Pharma Limited. But a more than the corresponding rise in the cost of production to nearly 77 percent of revenue, shrunk the gross margin to 23.3 percent for the year. This was attributed to a rise in salary expenses. The decrease in operating margin to 9.7 percent was somewhat contained due to the support coming from other income; this was derived from financial assets, “charges to subsidiary companies” in particular. But the escalation in finance expense to consume 9.5 percent of revenue led the company to post a loss for the year of Rs83 million. This was the first time the company had incurred a loss since FY10.
Revenue growth in FY19 stood at 10.9 percent. This was again attributed to a rise in local and export sales. Export sales in the last few years had remained more or less stable, but in FY19, they posted a growth of 23 percent; it grew from Rs2 billion to Rs2.5 billion during the year. On the other hand, the cost of production fell to an all-time low of 67 percent of revenue, allowing gross margin to peak at 32.8 percent. profitability was further supported by higher other income that made up nearly 11 percent of revenue. As a result, net margin also improved to 4 percent, despite finance expense consuming more than 14 percent of revenue.
After rising consecutively for four years, revenue contracted in FY20 by 10.6 percent, keeping the topline contained at Rs 6 billion. This was due to both export and local sales registering a decrease. The decrease can be attributed to the Covid-19 pandemic that resulted in businesses, production, and trade coming to a complete halt abruptly. But with negligible change in production cost as a share in revenue, gross margin also remained stable at close to 32.8 percent. But the escalation in other expenses to Rs1 billion due to impairment allowance on investment combined with Rs1 billion of finance expense forced the company to incur a loss of Rs190 million for the year.
Quarterly results and future outlook
The first quarter of FY21 saw revenue higher by 8.7 percent year on year. In value terms, blades saw an over 9 percent rise in sales. But the rise in production cost lowered gross margin. However, the net margin was higher due to a significant reduction in finance expenses and an increase in other income. The second quarter saw revenue higher by over 20 percent year on year. Revenue from the blades division registered a 15.3 percent rise for 1HFY21. While production cost was significantly lower, net profit was adversely affected by the drop in other income that fell from Rs436 million in 2QFY20 to Rs16 million in 2QFY21.
The third-quarter revenue was higher by 46 percent year on year, with revenue from blades registering a nearly 49 percent rise. While production cost was a little lower in 3QFY21, the rise in distribution expense and decrease in other income reduced the net margin to almost 13 percent compared to 22.5 percent in 3QFY20.
Initially, there had been an impact on the profitability due to the outbreak of Covid-19, but lockdowns and restrictions have eased over time. Profits for 9MFY21 have been notably better already.