Wah Nobel Chemicals Limited

Wah Nobel Chemicals Limited (PSX: WAHN) was set up as a public limited company in 1983 under the Companies Act, 1913 (now the Companies Act, 2017). The company manufactures Urea Formaldehyde Moulding Compound, Formaldehyde and Formaldehyde based liquid resins for use as bonding agent in the chip board, plywood and flush door manufacturing industries.

Shareholding pattern

As at June 30, 2021, close to 57 percent shares are held by the associated companies, undertakings and related parties. Of this, majority are owned by Wah Nobel (Pvt) Limited. The local general public holds another over 26 percent of shares, followed by over 9 percent held in insurance companies. The remaining roughly 7 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline over the years, whereas profit margins, particularly in the last six years, declined gradually between FY16 to FY20, before improving in FY21.

At over 34 percent, the company witnessed the highest growth in topline seen in the last five years. But this also came with a more than corresponding rise in cost of production that consumed 81 percent of revenue, compared to 78.3 percent in the previous year. Purchases of raw material were a prominent component of the cost of production. This could be attributed to higher production volumes of Formaldehyde and Formalin Solvent and UFMC. Therefore, gross margin reduced to 18.9 percent. However, operating margin increased year on year due to a drop in distribution expenses, but the rise in provision for doubtful debts and a relatively higher tax expense led net margin to be marginally lower at 10.35 percent, compared to 10.5 percent.

In FY19, revenue increased by another 34.6 percent, taking topline to cross Rs 2 billion. However, the continuous rise in cost of production as a share in revenue, kept gross margin from rising. Costs grew to 84.3 percent of revenue; therefore, gross margin was recorded at 15.7 percent. Cost of raw materials largely dominated the cost of production. Since the industry is claimed to be highly competitive, the company could not pass the burden of high costs to the consumer coupled with an escalation in finance expense due to rising interest rates, net margin reduced to 7.8 percent.

After growing for three consecutive years; revenue in FY20 contracted by 13.8 percent. This was attributed to the lockdowns as a result of the outbreak of the Covid-19 pandemic. The company witnessed a growing topline for the first nine months of the year, but the outbreak of the pandemic in the last quarter led to overall depressed sales for the year. There was a marginal decline in cost of production that allowed gross margin to improve slightly to 16.7 percent. But this did not trickle down to the net margin as the latter was impacted by the rise in finance expense that made up nearly 4 percent of revenue. Additionally, provision for doubtful debts also more than doubled year on year in value terms due to delay in payments by customers as a result of lockdowns. Thus, net margin was recorded at 6.7 percent for the year.

In FY21, the company posted the highest revenue at Rs 2.7 billion, as it grew by nearly 40 percent. There was an increase in revenue in all the product categories. As a result, gross margin increased to 20.5 percent, the highest seen in the last four years. This also trickled down to the bottomline as finance expense reduced, partly due to a reduction in interest rates, and partly due to efficient utilization of resources. Provision for doubtful debts was also considerably lower. Thus, net margin increased to 12.3 percent- the highest seen in a decade. At Rs 335 million, the bottomline was at an all-time high.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by over 30 percent year on year. Again, the increase in revenue was observed in all the product categories. However, this could not be translated into higher profitability as cost of production consumed nearly 85 percent of revenue compared to nearly 80 percent of revenue in the same period last year. The reasons for higher costs were higher raw material prices combined with currency devaluation against US dollar. Therefore, gross margin was lower year on year at 15 percent, versus 20 percent in 1QFY22. With little changes in other aspects, this also reflected in the bottomline that was posted at Rs 60 million and a net margin of 8.2 percent compared to 11.8 percent seen in 1QFY21.

With the constantly changing situation of Covid-19, uncertainty continues to exist. In addition to the pandemic, the company also faces challenges of increase in input prices and currency devaluation, particularly when a corresponding increase in selling prices is unaccepted in the market. Wah Noble also foresees competition from existing competitors and those that are entering the industry.