Leather Up Limited (PSX: LEUL) was incorporated as a private limited company in 1990 and was converted into a public limited company in 1993. The principal activity of the company is the manufacturing and export of leather bags and leather garment products.
Pattern of Shareholding
As of June 30, 2022, LEUL has a total of 6 million shares outstanding which are held by 1303 shareholders. Directors, CEO, their spouse and minor children have the major stake of 51 percent in the company. This is followed by local general public holding 48.3 percent shares of LEUL. Investment companies account for 0.6 percent shares of the company while the remaining 0.06 percent shares are held by NIT and ICP.
Performance Trail (2018-22)
LEUL’s topline has been shrinking over the years except for 2022. The bottomline posted net profit only in 2018. In 2018 too, the net profit boasted by the company came on the heels of hefty other income, the absence of which would’ve resulted in a negative bottomline as the company posted operating loss in 2018 too. The huge other income registered by the company in 2018 was on account of gain on the sale of land. Hence, we can say without a second thought that in any of the years under consideration, LEUL’s topline is not robust enough to produce a positive bottomline, neither does the company have any commendable and sustainable alternate source of income to buttress the bottomline. The detailed performance overview of each of the years under consideration is given below.
In 2019, LEUL’s topline slid by 7 percent year-on-year due to the cyclical nature of fashion industry as well as loss of priority of leather garments in the international market. The company curtailed its production to match the demand level which resulted in a 9 percent year-on-year fall in the cost of sales, resulting in a 72 percent year-on-year jump in the gross profit. GP margin also improved from 2.9 percent in 2018 to 5.4 percent in 2019. Low export sales meant low freight and handling charges which pushed the distribution expense down by 13 percent year-on-year in 2019, however, administrative expense slightly increased by around 1 percent year-on-year. The company posted an operating loss in 2019, however, the magnitude of operating loss lessened by 22 percent. The company’s capital structure is equity oriented with a debt-to-equity ratio of 13.2 percent in 2019. While finance cost increased by 119 percent in 2019, however, it majorly comprises of bank charges and commissions. Other income also posted around 100 percent drop in 2019 as the company realized gain on the sale of land in 2018. LEUL posted a net loss of Rs.8.2 million in 2019 as against with a loss per share of Rs.1.37 as against the EPS of Rs.7.54 in 2018.
In 2020, LEUL’s topline drastically fell by 43 percent year-on-year on the back of low demand. The associated reduction in the capacity utilization from 19 percent in 2019 to 10 percent in 2020 pushed the cost of sales down by 44 percent year-on-year. While the gross profit also slipped by 32 percent in 2020, GP margin ticked up to 6.4 percent. Significant reduction in advertising and sales promotion as well as freight and handling charges resulted in a 75 percent year-on-year dip in the distribution expense. Administrative expense also nosedived by 34 percent year-on-year on account of lesser fee and subscription charges, lesser utility expense as well as lesser salaries expense due to reduction in the human resource count from 38 people in 2019 to 26 people in 2020. The operating loss further shrank by 58 percent in 2020. Finance cost fell by 93 percent year-on-year in 2020 due to reduction in bank charges and commission. The company has no outstanding long-term and short-term loans in 2020, hence, no markup/interest charges. Other income considerably improved during the year due to reimbursement of penalty as well as PM package for the business community. The net loss lessened by 90 percent year-on-year in 2020 to clock in at Rs.0.86 million in 2020 with a loss per share of Rs.0.14.
LEUL posted a further 38 percent year-on-year plunge in its revenue in 2021. The company reduced the industrial sewing machines installed from 195 to 57 and utilized 21 percent of the installed capacity. The cost of sales also declined by 34 percent year-on-year in 2021 resulting in a 100 percent drop in the gross profit. GP margin fell to 0.05 percent in 2021. Administrative expense surged by 129 percent in 2021 due to hefty growth in fees and subscription charges, auditor’s remuneration, entertainment and utilities expense during the year. Distribution expense also grew by 34 percent year-on-year on the back of freight, handling and insurance charges incurred in 2021. The result was a 283 percent year-on-year growth in the operating loss in 2021. The company also incurred other expense of Rs.50.22 million in 2021 as against the other income of Rs.1.79 million in the previous year. The other expense was mainly on account of the raw material written off during the year as the company’s inventory was completely destroyed due to flooding of mill area because of heavy rainfall. Consequently, net loss magnified by 6721 percent in 2021 to stand at Rs.58.68 million. Loss per share also mounted to Rs.9.78 in 2021.
After continuous fall in the topline since 2017, LEUL’s topline posted a 59 percent year-on-year rise in 2022 as the company was able to increase its export sales. The cost of sales grew by 24 percent during the year; the gross profit boasted a staggering growth of over 754 times in 2022 with GP margin of 22.2 percent – the highest among all the years under consideration. Distribution expense almost remained intact in 2022 while administrative expense inched up by 5 percent due to rising inflation. The company wasn’t able to post an operating profit in 2022, however, the magnitude of operating loss greatly reduced by 68 percent. The reduction in other expense by 77 percent during 2022 was due to the fact that the company sold the remaining spoiled inventory to one of its suppliers at less than cost price. The net loss also dwindled by 75 percent year-on-year to clock in at Rs.14.48 million in 2022 with a loss per share of Rs.2.41.
Recent Performance (9MFY23)
As the main export market of LEUL is Central Europe which is suffering from recession, the company once again suffered from tamed demand in 9MFY23. The topline fell by 10 percent in 9MFY23. The reduction in the cost of sales because of low capacity utilization improved the GP margin from 20.8 percent in 9MFY22 to 21.4 percent in 9MFY22. Administrative and distribution expense rose by 20 percent and 16 percent respectively in 9MFY23 which drove the operating loss up by 93 percent. LEUL made other income of Rs.0.77 million in 9MFY23 as against other expense of Rs.8.22 million in 9MFY22. This reduced the magnitude of net loss by 80 percent in 9MFY23. Net loss clocked in at Rs.1.84 million in 9MFY23 with a loss per share of Rs.0.31 versus a loss per share of Rs.1.60 in 9MFY22.
Future Outlook
Due to reduced demand from the major export destinations of LEUL, the sales are expected to remain tamed; however, operational efficiencies, cost optimization and exploration of new markets may ease the burden on bottomline and margins.
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