Frontier Ceramics Limited (PSX: FRCL) was set up as a public limited company listed on the stock exchange in 1982. It manufactures and sells ceramic wall and floor tiles under the brand name “FORTE”.
Shareholding pattern
As at June 30, 2021, majority of the shares of the company, nearly 95 percent are held by its directors, CEO, their spouses and minor children. Within this, the biggest shareholder is Mr. Nadeem Khalid, the CEO of the company, whereas equal shareholding is with Mr. Omer Khalid, Sanah Khalid, Amera Khalid, and Numrah Khalid. Another 4 percent shares are held by the local general public. The remaining almost 1 percent shares is with the rest of the shareholder categories.
Historical operational performance
Frontier Ceramics Limited has mostly seen a growing topline over the years, except for the three years between FY12 to FY14 when it contracted. Profit margins, in the last six years, improved in FY18, before dropping in FY19, increased again in FY20 and then remained stable in FY21.
In FY17, revenue increased by close to 5 percent, with an almost 3 percent rise in volumes; sales volumes grew from 1,123,812 sqm in FY16 to 1,153,974 sqm in FY17. The company during the year faced competition from cheaper Chinese tiles. The National Tariff Commission (NTC) imposed anti-dumping duty on it for four months that expired by June 2018. Production cost, on the other hand, increased slightly year on year to 92.7 percent, that reduced gross margin marginally to 7.3 percent. With most other elements remaining similar as a share in revenue, combined with an additional Rs 10 million in other income contributed towards the bottomline, net margin improved to 3.75 percent for the year, compared to 2.9 percent in FY16.
Topline in FY18 registered a near 56 percent rise. This was largely attributable to a rise in volumes that grew from 1,153,974 sqm in FY17 to 1,787,551 sqm in FY18. Production cost fell from nearly 93 percent in FY17 to 84 percent in FY18, significantly raising gross margin to almost 16 percent for the year. This trickled down to the bottomline as well with an additional Rs 21 million coming in through other income. The latter was sourced from liabilities written back of almost Rs 19 million. Thus, net margin was recorded at 11.4 percent for the year.
Revenue in FY19 continued to climb as it grew by 17.6 percent. This was again attributed to an improvement in sales volumes. Production cost, on the other hand, jumped to 97.8 percent due to “heavy consumption of LPG to cater to the issue of gas load shedding”. In addition, the increase in gas tariff and currency devaluation led to an overall increase in cost of sales. As a result, gross margin fell to 2 percent. With other expenses incurred, and finance expense also making a larger share in revenue due to the increase in interest rates, the company incurred a loss after a period of five years, of Rs 88 million.
The company remained on its growth trajectory in FY20 despite the outbreak of Covid-19 that had an adverse impact on the economy at large. Revenue registered a 42.6 percent increase, clocking in at over Rs 1 billion, due to an improvement in sales volumes, as well as selling price. During the year, the company managed to curtail its costs, as production cost was recorded at almost 90 percent of revenue. Therefore, gross margin improved to 10 percent. With little changes in other elements, this also trickled down to the bottomline; thus, net margin was recorded at nearly 6.4 percent for the year.
The company witnessed an unparalleled growth in revenue during FY21; it more than doubled year on year, crossing Rs 2.8 billion. This was attributed to a rise in construction activity that generated demand for the company’s products. With a marginal incline in production cost as a share in revenue, gross margin reduced slightly to 9.6 percent. This also trickled down to the operating margin. But with a decrease in finance expense due to lower interest rates, net margin improved marginally to 6.4 percent.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by 44.6 percent due to an improvement in sales volumes. The company sold 1,195,930 sqm in 1QFY22 versus 900,230 sqm in 1QFY21, registering a growth of almost 33 percent. Production costs were also notably lower year on year at 87 percent of revenue, compared to 1QFY21 when costs made over 91 percent of revenue. This resulted in a marked improvement in profitability as net margin stood at 5.4 percent for the period, compared to 8.75 percent in the same period last year.
While the company continues to attempt to reduce costs and maximise profitability, it has also acquired a land off-CPEC highway which is planned to be used to set up a large ceramic factory in the future.
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