Synthetic Products Enterprises Limited (PSX: SPEL) was set up in 1978 as a partnership. In 1982 it was incorporated as a private limited company and in 2015 it started an IPO for expansion.
The company’s product categories include plastic containers, spoons, cups, glasses, plastic crates, automotive parts and road vehicle parts. Some of its clients include Unilever, Pepsi, Nestle, Martin Dow, Honda, Suzuki, Toyota, etc.
Shareholding pattern
As at June 30, 2021, over 74 percent shares are held by the sponsors, directors, CEO and children. Within this, Mr. Almas Hyder, the Chairman of the company is a major shareholder. The local general public owns 15 percent shares whereas the remaining 10 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has mostly seen a growing topline except for in FY20 when it contracted by 9.7 percent. Profit margins, on the other hand, declined between FY17 and FY19 before improving again in FY20 and FY21.
Revenue growth in FY17 stood at over 16 percent. This was attributed to higher volumes. This was also accompanied by a marginal reduction in costs that allowed gross margin to increase to 26.5 percent. However, the improvement in net margin was less pronounced due to a decrease in other income that fell from Rs43 million in FY16 to Rs14 million in FY17. This was due to fixed deposits being cashed. Thus, net margin was only marginally higher at 15.4 percent.
In FY18, revenue increased by 10.6 percent, to reach close to Rs3 billion. However, this did not translate into higher profitability as cost of production grew to consume more than 79 percent of revenue, compared to over 73 percent in FY17. Most of the increase in costs was associated with a rise in raw material prices and currency devaluation. Additionally, there was also a rise in electricity and fuel charges. Therefore, gross margin shrunk to 20.5 percent. With little changes in other elements, net margin was also lower year on year at 11.5 percent.
Revenue growth in FY19 stood at close to 15 percent. It crossed Rs3 billion in value terms. A sales breakdown reveals that local sales registered a 16.5 percent, whereas a product breakdown reveals that both food and packaging division and auto division witnessed a rise. But cost of production continued to hamper profitability as the former consumed over 83 percent of revenue, thereby reducing gross margin to 16.7 percent. This also trickled to the bottomline as net margin was recorded at a lower 7 percent for the year.
After rising consecutively for the last five years, revenue in FY20 contracted by 9.7 percent. This was partly attributed to the decline in auto segment. This was due to a ban imposed on purchase of vehicles by non-filers of income tax return and an imposition of excise duty that increased the prices of vehicles, and thus reduced sales. This also reflected in a 37 percent decrease in revenue from the company’s auto division. Despite the lower revenue, the company was able to post a higher gross margin at 18.5 percent due to a reduction in costs as a share in revenue, at 81.5 percent. With some support also coming from the other income, net margin was also higher year on year at 8.36 percent.
Synthetic Products witnessed the biggest growth in revenue at over 34.6 percent, with topline crossing Rs4 billion. Both local sales and export sales witnessed a rise, whereas revenue from auto division also reverted somewhat to its previous levels as it grew by 52 percent. Food and packaging division also registered a rise by 27.3 percent. With a further reduction in costs at over 78 percent, gross margin was recorded at 21.5 percent. In addition to a rise in other income, finance expense also reduced due to falling interest rates. Thus, the company posted the highest bottomline at Rs460 million, with a net margin of 11 percent.
Quarterly results and future outlook
Revenue for the first quarter of FY22 was higher by nearly 60 percent year on year. Local sales increased by over 60 percent, while export sales grew by 57 percent, although the contribution of export sales to the total revenue pie was significantly lesser compared to local sales. But with cost of production being only marginally lower at close to 79 percent compared to above 79 percent in the same period last year, profitability was also only marginally higher year on year, with net margin at 11 percent versus 9.7 percent in 1QFY21.
The company set up a new plant in Karachi that became operational, thereby increasing production capacity. It was also in line with company’s strategy of widening its markets. Some of the challenges for the company are the currency devaluation and inflationary pressures that also hold true for the general business environment in the country.
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