Hoechst Pakistan Limited (PSX: HPL) (formerly known as Sanofi-aventis Pakistan Limited) was incorporated in Pakistan in 1967. The company got listed on Pakistan stock exchange in 1977. It underwent several mergers, acquisitions and divestments over the course of years which led to the change of company’s name to Sanofi-Aventis Pakistan Limited. The company’s manufacturing site was established in Karachi in 1972. The principal activity of the company is the manufacturing, selling and trading of pharmaceutical and related products ranging from oral solids and liquid dosage to highly sophisticated sterile products
Pattern of Shareholding
As of December 31, 2022, HPL has a total of 9.645 million shares outstanding which are held by 961 shareholders. Associated companies, undertakings and related parties have the majority stake of 79.5 percent in the company. This category is majorly dominated by Sanofi Foreign Participations B.V. with 5.099 million shares (52.87 percent). Directors, CEO, their spouse and minor children represent 13.77 percent of the company’s shareholding followed by general public owning 2.6 percent shares. The remaining shares are held by other categories of shareholders. During 2023, a consortium comprising of Packages limited, IGI Investments (Private) Limited and affiliates of Arshad Ali Gohar Group acquired entire 52.87 percent shares from Sanofi Foreign Participations B.V. and changed the name of the company from Sanofi-aventis Pakistan Limited to Hoechst Pakistan Limited with effect from September 27, 2023.
Historical Performance (CY17- CY21)
The topline of HPL has been riding a growth trail in all the years except in CY20. Conversely, its bottomline slid twice during the period under consideration i.e. in 2019 and 2022. HPL’s margins which considerably eroded in 2019 rebounded in 2020. In 2021, while gross margin ticked down, operating and net margin registered growth. Conversely, in 2022, the company recorded a slight growth in its gross margin while other margins drastically fell (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.
In 2019, HPL’s topline posted year-on-year growth of 12.3 percent. The major growth propellers were Flagyl, Clexane and Plavix whose sales grew by 26 percent, 37 percent and 32 percent respectively during the year. High inflation, Pak Rupee depreciation and significant dependence on imported raw materials drove up the cost of sales by 19.5 percent in 2019. Moreover, stiff price regulations also affected the company’s gross margin which slid from 30.45 percent in 2018 to 25.69 percent in 2019. Gross profit also shrank by 5.6 percent in 2019. Distribution and administrative expense escalated by 9.8 percent and 11.1 percent respectively in 2019 on account of higher staff cost. Other expense showed a rather favorable picture owing to better management of exchange loss. Other income almost doubled mainly on the heels of recovery of insurance claims during the period. HPL’s operating profit plunged by 34.2 percent in 2019 with OP margin dipping to 4.27 percent. Finance cost surged by 389 percent in 2019 on account of higher discount rate coupled with a substantial increase in the company’s short-term borrowings. HPL bottomline plunged by 74.7 percent year-on-year in 2019 to clock in at Rs.154.84 million with EPS of Rs.16.05 versus EPS of Rs.63.54 in 2018. NP margin also drastically dropped from 4.73 percent in 2018 to 1.07 percent in 2019.
In 2020, HPL’s sales dropped by 2.7 percent year-on-year. This was on account of closure of HCP clinics throughout the lockdown period. 71 percent of HPL’s sales came from antibiotics, diabetics and cardiology while the remaining sales were contributed by pain & allergy and other categories. Local sales continued to form 95.21 percent of HPL’s gross sales, export sales grew by 74 percent year-on-year in 2020 particularly to Afghanistan. Cost of sales dropped by 4.4 percent in 2020 due to rationalization of commercial conditions, price increase etc. This resulted in 2.1 percent bigger gross profit recorded by HPL in 2020 with GP margin rising up to 26.97 percent. Selling & distribution expense slid by 15.1 percent in 2020 on account of a drop in marketing activities and decrease in travel costs due to lockdown. Conversely, administrative expense registered 10.3 percent hike in 2020 on the back of higher payroll expense although number of employees were reduced from 1099 in 2019 to 968 in 2020. Huge exchange loss on account of Pak Rupee depreciation was somewhat offset by no provisioning done for tax receivable in 2020. Nevertheless, other expense climbed up by 4.2 percent in 2020. Operating profit of the company grew by 51.6 percent year-on-year in 2020 culminating into OP margin of 6.65 percent. In 2020, HPL was able to contain its financial cost which dropped by 19.4 percent year-on-year. This was mainly due to significant drop in short-term borrowings by streamlining the payment cycle and changing the distributor model coupled with downward revision in discount rate during the year. The company also availed refinance scheme by SBP to ensure continued employment and ease liquidity challenges during the global pandemic. HPL bottomline posted a staggering 218.4 percent year-on-year growth in 2020 to clock in at Rs.493.07 million with EPS of Rs.51.12 and NP margin of 3.5 percent.
2021 was the year when local as well as global economy was overcoming from Covid-19 shocks. SBP had made downward revisions in the discount rate to stabilize the economy. HPL’s net sales showed a year-on-year growth of 12.6 percent in 2021 as HCP clinics resumed after the lockdown period which meant greater accessibility. High prices also played a role in topline growth. Gross profit also improved by 8.4 percent in 2021, however, GP margin marginally plummeted to clock in at 25.96 percent owing to Pak Rupee depreciation and company’s dependence on imported active pharmaceutical ingredients (APIs) and finished goods. HPL was successful in keeping a check on its selling and distribution expense which nosedived by 2.8 percent and 9 percent respectively in 2021. This was on account of lower staff cost as the company’s workforce was trimmed down to 869 employees during the year. This coupled with buoyant other income mainly coming on account of massive insurance claim recovery resulted in an impressive OP margin of 9.22 percent in 2021 along with 56 percent higher operating profit. Finance cost nosedived in 2021 owing to lower discount rate. The bottomline bagged a year-on-year growth of 83.7 percent in 2021 to clock in at Rs.905.95 million with NP margin of 5.7 percent and EPS of Rs.93.93 – the highest among all the years under consideration.
Among all the years under consideration, 2022 stands out with 16.9 percent year-on-year rise in its topline. During the year, HPL’s flagship brand registered 41 percent growth. This pushed the sales of antibiotics category up by 34 percent in 2022. Cost of sales surged by 16.4 percent during the year which was mainly on account of higher raw material prices coupled with Pak Rupee depreciation which further drove up the cost. Gross profit improved by 18 percent in 2022, however, GP marginal registered a trivial uptick to clock in at 26.24 percent. Upbeat sales volume was driven by increase in promotional activities and engagement with the healthcare professionals which increased the selling and distribution expense by 36 percent in 2022. Moreover, rise is logistics cost and relentless efforts to recover the outstanding receivables also played a considerable role in pushing the selling and distribution expense up. Administrative expense soared by 44 percent in 2022 on the back of higher staff cost. Massive depreciation in the value of local currency resulted 137 percent higher other expense incurred by HPL in 2022. Operating profit deteriorated by 47 percent in 2022 with OP margin slipping to 4.17 percent. Higher discount rate and short-term borrowings obtained by the company in 2022 translated into 75 percent spike in finance cost in 2022. Gearing ratio also touched its highest value of 22 percent during the year (see the graph of gearing ratio & finance cost). HPL’s net profit plummeted by 81.6 percent in 2022 to clock in at Rs.166.78 million with EPS of Rs.17.29 and NP margin of 0.9 percent – the lowest among all the years under consideration.
Recent Performance (9MCY23)
2023 was characterized by multiple upward revisions in the discount rate, Pak Rupee depreciation, skyrocketed inflation, import restriction, energy crisis and general slowdown in economic activity. Despite all the headwinds, HPL attained a reasonable topline growth of 13 percent during 9MCY23. The growth was mainly driven by Enterogermina, Clexane and Lantus which registered growth of 41 percent, 30 percent and 18 percent respectively during the period. Cost of sales also grew by 13 percent year-on-year in 9MCY23 on the back of aforementioned challenges. Gross profit also increased by 13 percent during the period with GP margin staying intact at 27.3 percent. While the company curtailed its travelling and promotion activities in 9MCY23, 2.7 percent higher distribution expense was the consequence of towering inflation. Administrative expenses also surged by 18 percent during the period. Gigantic exchange loss translated into 178.6 percent escalation in other expenses in 9MCY23. HPL posted 50 percent smaller operating profit in 9MCY23 with OP margin sliding down from 6.09 percent in 9MCY22 to 2.71 percent in 9MCY23. Finance cost mounted by 607 percent in 9MCY23 on account of higher discount rate. HPL recorded net loss of Rs.52.83 million in 9MCY23 versus net profit of Rs.213.01 million during the similar period last year. The company posted loss per share of Rs.5.48 in 9MCY23 versus EPS of Rs.22.09 in 9MCY22.
Future Outlook
The future doesn’t look promising for the pharmaceutical sector as majority of the industry’s raw materials and packaging materials are imported. While local currency has portrayed some stability off-late coupled with stability in the prices of commodities in the global market, high indigenous inflation, exorbitant energy cost and hiking discount rate will continue to squeeze HPL’s margins in the coming times. The company should focus on unleashing its export potential to attain improved margins and profitability.
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