Hala Enterprises Limited

Hala Enterprises Limited (PSX: HAEL) was incorporated in Pakistan as a private limited company and was subsequently converted into a public limited company. The company began its operations in 1974. The principal activity of the company is the manufacturing and sale of terry towels, kitchen towels and terry cloth.

Pattern of Shareholding

As of June 30, 2023, HAEL has a total of 12.996 million shares outstanding which are held by 817 shareholders. Directors, CEO, their spouse and minor children have the major stake of 54.77 percent in the company, followed by its parent company, M/S Teejay Corporation Limited holding 30.31 percent shares. Local general public accounts for 14.40 percent shares of HAEL. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-23)

Barring a decline in 2020, HAEL’s topline has been posting decent growth since 2018. On the contrary, Its bottomline plunged in 2019. HAEL’s margins depict a fluctuating pattern. Gross margin, which was on the rise since 2018, tumbled in 2022 and then recovered in 2023. Operating margin has been rising and falling during the period under consideration to reach its optimum level in 2023. Conversely, net margin followed an upward trajectory until 2020, fell in 2021 and then took the route to recovery thereafter (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, HAEL’s net sales grew by 23 percent year-on-year on the back of diversified product portfolio of the company as well as the sale of specialized towels. In 2019, HAEL made 98.62 percent of its revenue from export market. Pak Rupee depreciation in 2019 proved to be a good omen for the company and buttressed its gross margin which clocked in at 18.24 percent in 2019 versus 17.6 percent in 2018. HAEL’s operating expense escalated by 33 percent year-on-year in 2019 which was mainly on account of elevated sales commission, freight, octroi and cartage charges as well as clearing charges. Communication, utility and vehicle running expense also significantly surged during the year. Considerable boost in exchange income also buttressed the company’s other income in 2019. Operating profit picked up by 30 percent year-on-year in 2019 with OP margin rising from 5.1 percent in 2018 to 5.4 percent in 2019. Finance cost mounted by 19 percent year-on-year in 2019 on account of higher discount rate as well as increased borrowings. The drop in HAEL’s gearing ratio from 44.6 percent in 2018 to 38.8 percent in 2019 was due to the issuance of shares during the year which took the authorized share capital from Rs.80 million in 2018 to Rs.160 million in 2019. Net income rose by 45 percent year-on-year in 2019 to clock in at Rs.7.84 million. This translated into an EPS of Rs.0.60 in 2019, up from Rs.0.42 in 2018. NP margin also grew from 1.7 percent in 2018 to 2 percent in 2019.

In 2020, the outbreak of COVID-19 and the associated lockdowns and restrictions on the movement of people and goods took its toll on the net sales of HAEL which plunged by 10 percent year-on-year. As shipments couldn’t be made, the company shrank its production which clocked in at 365,065 kgs in 2020, down 10 percent year-on-year. As institutional sales suffered due to shut-down of hospitality industry during the lockdown period, the company focused on retail sector and tapped the high value-added market. As a result, its gross profit remained static while GP margin jumped up to 20.3 percent in 2020. HAEL was able to cut down its operating expense by 3 percent year-on-year in 2020 on account of lower sales commission, air freight charges as well as octroi, cartage and clearing charges. Lower other income due to thinner lease rentals, dividend income and interest charged to related parties squeezed the other income by 58 percent year-on-year in 2020. As a consequence, operating profit slid by 18 percent year-on-year in 2020 with OP margin slipping to 4.9 percent. HAEL maintained its finance cost at Rs.8.8 million in 2020 despite increased borrowings. This was on account of lower bank commission, interest charged by related parties as well no interest payments due to Comfort Textile (Private) Limited. HAEL’s gearing ratio hiked to 43.8 percent in 2020. The company’s profit after tax in 2020 was 44 percent lower than the previous year, however, the gain on disposal of land held for sales drove the net profit of the year to Rs.12.89 million which translated into an EPS of Rs.0.99 and NP margin of 3.7 percent – he highest among all the years under consideration.

HAEL’s topline showed signs of recovery as it built up by 13 percent in 2021. Owing to demand recovery and resumption of the shipments which were stuck due to COVID-19, HAEL increased its production b 7 percent year-on-year to clock in at 390,286 kgs in 2020. Cost of sales spiked by 11 percent on account of higher prices of cotton in the international market and Pak Rupee depreciation. However, as the company derives more than 98 percent of its revenue from export market, higher cost was largely offset by lofty translation gain. This pushed the gross profit up by 19 percent year-on-year in 2021 with GP margin rising to 21.5 percent. HAEL’s ever-increasing focus on higher value-added products also gave a boost to its GP margin in 2021. Operating expense elevated by 11 percent year-on-year in 2021 due to higher selling and distribution charges on account of improved sales volume. Operating profit enlarged by 23 percent year-on-year in 2021 with OP margin moving up to 5.3 percent. Finance cost escalated by 17 percent year-on-year in 2021 despite monetary easing due to increased short-term and long-term borrowings and higher bank commission. HAEL’s gearing ratio surged to 45.8 percent in 2021. Net profit slumped by 45 percent in 2021 to clock in at Rs.7.04 million with an EPS of Rs.0.54 and NP margin of 1.8 percent.

Among all the years under consideration, HAEL boasted the highest topline growth of 41 percent in 2022. The company produced 445,615 kgs of product, up 14 percent year-on-year in 2022, to meet rising demand. The growth in net sales was also the result of upward price revision to account for high inflation, increased commodity prices, Pak Rupee depreciation and a sharp spike in energy tariff during the year. Due to the aforementioned factors, HAEL’s cost of sales rose by 47 percent year-on-year. While gross profit picked up by 20 percent year-on-year in 2022, the upward trajectory of GP margin halted as it slipped to 18.3 percent. Operating expense mounted by 23 percent year-on-year in 2022 due to exorbitant sea freight charges. The company also realized an exchange income of Rs.2.690 million in 2022 unlike the realized exchange loss of Rs.2.56 million in 2021. As a consequence, operating profit in 2022 turned out to be 37 percent bigger when compared to that of 2021. OP margin slightly tumbled to 5.2 percent in 2022. Finance cost ticked up marginally by 7 percent year-on-year in 2022 despite multiple rounds of monetary tightening undertaken by the central bank during the year. This was on account of a plunge in external borrowings which squeezed HAEL’s gearing ratio to 29.1 percent in 2022. Net profit boosted up by 67 percent year-on-year to clock in at Rs.11.78 million in 2022 with an EPS of Rs.0.91 and NP margin of 2.1 percent.

Recent Performance (2023)

The uphill ride of HAEL’s topline continued in 2023 as it improved by further 18 percent. Diminished demand in the global market due to recessionary pressure and stiff competition from regional counterparts pushed the company to reduce its production to 381,154 kgs in 2023. This shows that change in the pricing strategy was the major contributor of enhanced net sales in 2023. Cost of sales hiked by 13 percent year-on-year in 2023, yet HAEL was able to drive its gross profit up by 39 percent, resulting in a GP margin of 21.5 percent- the highest since 2018. Operating expense grew by 18 percent year-on-year in 2023 on account of higher commission on sales, freight and clearing charges. HAEL incurred an exchange loss of Rs.3.565 million in 2023. Finance cost enlarged by 63 percent year-on-year in 2023 despite a drop in borrowings. This was the consequence of high discount rate during the year. HAEL’s gearing ratio ticked up to 29.5 percent in 2023. Net profit rose by 61 percent year-on-year in 2023 to clock in at Rs. 18.93 million with an EPS of Rs.1.46 and an NP margin of 2.9 percent.

Future Outlook

With shrinking demand in the global market as well as local market on account of recession and a hike in the cost of living of its consumers. Rigorous competition from other countries may not allow the company to increase its prices drastically in order to stay competitive. In such a gloomy landscape where sales are shrinking and costs are hiking, the only viable solution for HAEL to stay viable in the coming times is to focus on new export markets, diversify its product line and add more value added products to its portfolio.