Dadex Eternit Limited (PSX: DADX) was incorporated in Pakistan as public limited company in 1959. The company is engaged in the manufacturing and sale of construction material including piping system and other allied products manufactured from chrysotile cement, rubber and plastic. DADX also undertakes the merchandising of imported pipe fittings, accessories and other building products. The company’s products are used in construction and housing, architecture, telecommunication and infrastructure segments catering to the needs of public, industrial, commercial, consumer and private segments in local and export markets.
Pattern of Shareholding
As of June 30, 2023, DADX has a total of 10.764 million shares outstanding which are held by 3671 shareholders. Sikander (Private) limited which is the associated company of DADX holds 63.18 percent of its shares followed by local general public holding 21.29 percent shares. Directors, CEO and their family members account for 15.28 percent shares of DADX. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-23)
The topline of DADX has been deteriorating over the period under consideration except for a marginal uptick in 2021. The bottomline also shows a sorry picture witnessing net losses in all the years. The net loss reached its highest level in 2023. Among all the years under consideration, the company posted operating profit only in 2021. DADX’s gross margin followed a downward trajectory until 2020, rebounded for the subsequent two years followed by a slump in 2023.
In 2019, the topline dipped by 3.7 percent year-on-year which was the result of reduced government spending on infrastructure projects and the restriction imposed by the Supreme Court on construction activities in Bahria Town and other high-rise projects. This took a toll on the overall sales volume of the company despite growth in export sales. The continuous rise in the prices of energy and petroleum products coupled with Pak Rupee depreciation resulted in 30 percent year-on-year dip in gross profit with GP margin clocking in at 11.42 percent in 2019 versus 15.7 percent in 2018. Administrative expense remained in check during the year as the company greatly restructured its workforce which included 215 employees as of June 30, 2019 versus 349 employees in 2018. Distribution expense grew by 17.7 percent year-on-year mainly on the back of payroll expense as well as transportation and other charges against export sales. Other expense posted a drastic jump of over 100 percent year-on-year in 2019 on account of provision booked against doubtful trade debts as well as exchange loss incurred during the year. Conversely, rental income and write-back of liabilities no longer payable pushed other income up by 29 percent year-on-year which almost counterbalanced the other expense. DADX reported operating loss of Rs.16.82 million in 2019 as against an operating profit of Rs.180.12 million in the previous year. Finance cost also gave a major blow to the bottomline as discount rate soared during the year and also because of increased short-term borrowings. This culminated into net loss of Rs.195.53 million in 2019 as against a net profit of Rs.5.28 million in 2018. DADX posted loss per share of Rs. 18.16 in 2019 as compared to EPS of Rs.0.49 in 2018.
In 2020, DADX’s topline further shrank by 15.6 percent year-on-year due to sudden outbreak of COVID-19 which put brakes on the business activities within the country as well as major export destinations of DADX due to lockdown imposed by the governments. This led to reduced capacity utilization and inefficient absorption of fixed cost. This resulted in DADZ’s gross profit thinning down by 26.8 percent year-on-year in 2020 with GP margin ticking down to 9.90 percent. Operating expenses also posted a slump primarily due to curtailed payroll and export related expenses incurred during the year. DADX further squeezed its workforce to 204 employees in 2020. Other expense didn’t show any respite in 2020 and magnified by 68.6 percent year-on-year on account of provisions booked by the company in respect of GIDC and expected credit losses. Other income couldn’t offer any support either as it narrowed down by 32.6 percent year-on-year due to high-base effect as DADX had written off some liabilities in 2019. This drove up operating loss by 843.7 percent year-on-year to Rs.158.74 million in 2020. Finance cost also grew as the discount rates were on the rise during the first three quarters of 2020. Moreover, DADX also availed the refinance scheme initiated by the SBP for the payment of salaries and wages. Net loss escalated by 84.9 percent year-on-year to clock in at Rs.361.52 million in 2020 with loss per share of Rs.33.59.
As the economic activity began to resume, DADX’s net sales began to tick up, however, it is not eminent in the meager topline growth of 3 percent year-on-year. During the last quarter of 2021, the company divested some of its units and laid off some employees to manage its cost, however, the strategy backfired as the employees went on strike and closed down the complete factory. This nullified the sales growth attained by the company in the first three quarters. However, gross profit improved by 32.2 percent year-on-year with GP margin of 12.72 percent in 2021. Operating expenses ticked down during the year as number of employees was reduced to 176 in 2021. Other expense posted a plunge as the company didn’t book provision for GIDC and expected credit losses in 2021 as it did in the previous year. These two elements which shrank the other expense drove the other income up by 162 percent year-on-year as the company reversed the allowance for expected credit losses and realized gain on the extinguishment of GIDC. After two years of reporting operating losses, DADX was able to post operating profit of Rs.152.01 million in 2021 with OP margin of 6.22 percent, almost same as that of 2018. The cost of borrowing reduced during the year due to monetary easing which narrowed down the finance cost of DADX by 27 percent year-on-year. However, the finance cost was still huge enough to suck up the profitability of the company and translated into net loss of Rs.39.01 million in 2021 with loss per share of Rs.3.62, down 89.2 percent year-on-year.
In 2022, DADX’s topline dropped by 30.6 percent year-on-year. Lack of funds for public sector development projects coupled with cautious infrastructure spending in private sector on the back of economic and political uncertainty wreaked havoc on the sales volume of the company. Lesser volume pushed the cost of sales down by 32.1 percent year-on-year. Gross profit tumbled by 20.3 percent in 2022, however, GP margin climbed up to 14.6 percent. Operating expenses continued to slide for the third consecutive year due to lower export related expenses as well as reduced payroll expense as DADX workforce comprised of only 157 employees as of June 30,2022. Conversely, other expenses magnified by 250 percent year-on-year on the back of massive exchange loss due to Pak Rupee depreciation and loss on disposal of fixed assets. During the year, the company disposed off its Lahore and Karachi building and land on forced sales value and incurred a loss which is reported in other expense. The disposal of these fixed assets was intended to restructure the financial obligations of the company and to reduce its bank loans. Other income shrank by 44.3 percent in 2022 on account of lesser reversal of allowance for ECL and no gain recorded on the extinguishment of GIDC in 2022. DADX registered operating loss of Rs.21.21 million in 2022. Due to settlement and re-profiling of its outstanding loans, DADX was able to cut down its finance cost by 12.7 percent despite discount rate hikes during 2022. The company posted net loss of Rs.142.94 million which is 266.4 percent higher than the net loss reported by the company in 2021. The loss per share stood at Rs.13.28 in 2022.
DADX recorded 16.7 percent erosion in its topline in 2023 due to political and economic headwinds which restricted construction activity in the country. Tardy disbursements of PSDP funds coupled with devastating floods in the southern region of the country at the onset of the financial year further squeezed DADX’s sales volume. Hike in the international prices of raw materials coupled with Pak Rupee depreciation and surge in energy tariff compressed gross profit by 42.8 percent in 2023 with GP margin slipping to 10 percent in 2023. Distribution expense multiplied by 16 percent in 2023 due to elevated payroll expense, transportation and other charges related to exports as well as utility charges incurred during the year. While number of employees was further reduced to 151 in 2023, adjustment of minimum wage rate drove administrative expense up by 28.3 percent in 2023. 34.8 percent higher other expense incurred by DADX in 2023 was the effect of hefty exchange loss as well as allowance for ECL booked during the year. Other income also improved by 30.5 percent in 2023 due to higher other income, write back of liabilities as well as gain on disposal of property, plant & equipments during the year. Among all the years under consideration, DADX posted the highest operating loss of Rs.196.23 million in 2023, up 825 percent year-on-year. Finance cost escalated by 24.7 percent in 2023 due to sky-rocketed level of discount rate despite reduction in its outstanding loans during the year. Net loss clocked in at Rs.420.029 million in 2023, up 193.9 percent year-on-year with loss per share of Rs.39.02.
Recent Performance (1HFY24)
The onset of 2024 brought no signs of relief for the company as political and economic uncertainties continued to take its toll on the financial performance of the company. During 1HFY24, DADX’s topline further slid by 41 percent year-on-year due to halted public and private infrastructure projects. High raw material and fuel prices as well as Pak Rupee depreciation pushed gross profit down by 73.9 percent year-on-year with GP margin of 4.22 percent in 1HFY24 versus 9.53 percent in 1HFY23. During the period under review, distribution expense plummeted by 9.3 percent due to lower sales volume. Administrative expense inched up by 3.7 percent during 1HFY24 on account of inflationary pressure. Other expenses nosedived by 99 percent year-on-year in 1HFY24. Other income also ticked down by 10 percent year-on-year as no gain was recorded on the sale of fixed assets during the period. Operating loss clocked in at Rs.80.10 million in 1HFY24, up 44 percent year-on-year. Finance cost added further insult to injury as it escalated by 12.7 percent year-on-year in 1HFY24 due to high discount rate. This was despite considerable drop in the outstanding loan portfolio during the period. The net loss enlarged by 21.1 percent year-on-year to clock in at Rs.176.22 million in 1HFY24. Loss per share also grew from Rs.13.52 in 1HFY23 to Rs.16.38 in 1HFY24.
Future Outlook
As of December 31, 2023, the company’s current liabilities exceed its current assets by Rs.1,457.221 million. After making persistent losses since 2019, the accumulated losses of the company as of December 31, 2023 have reached Rs.946.903 million. The company is receiving demand notice from its financing banks for the repayment of credit facility and is depending on the restructuring of its debt profile and support of its directors for any financial assistance amidst lackluster sales. This casts doubts on the ability of the company to continue as a going concern. The performance of the company is contingent on public and private spending on infrastructure projects which promise no improvement in the near term on the back of low public sector spending on construction projects and lack of appetite in the private sector due to record high inflation. The company is in the process of disposing off its assets to restructure its loan profile and reduce its finance cost. The company is also continuously streamlining its workforce to reduce its operating expenses.
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