Shabbir Tiles and Ceramics Limited

Shabbir Tiles and Ceramics Limited (PSX: STCL) was established as a public limited company in 1978 under the repealed Companies Act 1913. The company manufactures and sells tiles while also trading allied building products. Its products include feature wall tiles, floor tiles, bathroom tiles, kitchen tiles and outdoor tiles. It also has an exclusive emporium collection.

Shareholding pattern

As at June 30, 2021, close to 3 percent shares are held with the directors, their spouses and children, within which Mr. Rafiq Habib is a major shareholder. Nearly 55 percent shares are categorized under “foreign companies” followed by over 20 percent shares held by modarabas and mutual funds. The local general public owns almost 18 percent shares, while the remaining 4 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline, with the exception of a few years. Profit margins, in the last six years have grown between FY17 and FY18, remained stable until FY19, before declining in FY20, after which they inclined in FY21.

In FY18, revenue registered a growth of almost 15 percent that had been the highest seen thus far. This can be partly attributed to the company’s efforts to build brand equity, improve displays and open design studios. Additionally, the increase of regulatory duty and anti-dumping duty on imported and relatively cheaper tiles allowed the company to maintain its market share. Yet, some level of smuggling continued due to currency depreciation of regional countries. The company also improved its cash flows that resulted in a lower finance expense as a share in revenue. With production cost also down to 78 percent of revenue, compared to over 89 percent in FY17, net margin for the year improved to 3.36 percent versus the loss incurred in FY17 of Rs 151 million.

Revenue growth climbed further up to over 20 percent in FY19 to reach Rs 6.9 billion in value terms. This was attributed to the investments made to undertake BMR activities that resulted in an improvement of the range of products offered and their quality. In addition, marketing and promotions encouraged sales further. With production cost slightly down to nearly 77 percent, gross margin improved to 23.2 percent compared to 21.8 percent in the previous year. However, similar increase was not seen in net margin that remained more or less flat at 3.38 percent, as taxation expense increased significantly. During the year, the company also earned considerably higher other income, through gain on disposal of operating fixed assets and sale of scrap.

In FY20, topline contracted by 6.6 percent due to the outbreak of the Covid-19 pandemic that resulted in lost volumes in the second half of the year. In order to contain the spread of Covid-19, lockdowns were imposed that caused a shutdown of production and markets. On the other hand, the first half also witnessed challenges such as increase in gas tariffs and freight costs and the requirement of documentation that largely impacted small traders. Thus, the company incurred an all-time high loss of Rs 326 million.

At nearly 53 percent, topline growth stood at an all-time high in FY21, with revenue reaching Rs 9.9 billion in value terms. This was also the highest seen. This growth was largely attributed to an increase in volumes that was also the target of the company. Volumes, in turn, grew on the back of an increase in construction activity. The higher volumes also helped to bring down costs that are evident from production cost consuming 69 percent of revenue. Thus, gross margin peaked at 30.9 percent. This trickled to the bottomline that was also supported by other income. The latter was abnormally higher due to gain on remeasurement of GIDC payable. Thus, net margin also peaked at 9.3 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 15.7 percent year on year. The company achieved its production and sales volumes target during the period, while demand from the construction also encouraged sales. With a very marginal change in production cost as a share in revenue, gross margin remained flat year on year. However, net margin at 7.6 percent versus 6.4 percent in 1QFY21, improved on the back of higher other income.

In the second quarter, revenue was higher by nearly 22 percent year on year. However, production was impacted due to gas shortages as the company had to resort to sources like LPG and diesel to run its plants. This caused a surge in costs as the company generates its own power, and is therefore reliant on provision for gas. Combined with this was the increase in sea freight rates and congestion at port that also increased costs. Thus, net margin was halved at 7 percent, compared to 14.7 percent in 2QFY21.

The third quarter saw revenue higher by 14 percent year on year. With the prevalence and increase in severity of similar environment, profitability reduced further at a net margin of 1.5 percent compared to 9.3 percent in 3QFY21. While demand has been encouraged partly by the resumption of activities after lockdowns and to some extent by the construction industry, however as the industry relies on natural gas heavily, it is vulnerable to rise in prices, and currency depreciation. In addition, the geopolitical tension between Ukraine and Russia and the political environment within the country have also adversely impacted business sentiments that will reflect in the future profitability.