Hallmark Company Limited

Hallmark Company Limited (PSX: HCL) was incorporated in Pakistan as a public limited company in 1981. The company is engaged in providing IT products and IT related services which includes devices for data centers, end user computing, identity & security portfolio etc. The company initially worked as an insurer, however, post enhancement of MCR for insurance companies in 2003, the company ceased to underwrite insurance business. In 2017, the company began its journey as an IT company.

Pattern of Shareholding

As of June 30, 2023, HCL has a total of 0.5 million shares outstanding which are held by 363 shareholders. Individuals have the majority stake of 87.44 percent in the company followed by joint stock companies holding 12.5 percent shares of HCL. The remaining shares are held by investment companies.

Financial Performance (2019-23)

Except for a year-on-year rise in 2019, HCL’s topline had been following a downward trajectory. Its bottomline had been shrinking since 2019 and ended up in net loss in 2022 and 2023. The company’s gross margin posted considerable improvement in 2019, however, its net and operating margins declined. In 2020, all the margins fell followed by a rebound in 2021. In 2022, gross margin continued to enhance while operating and net margins entered negative zone. HCL’s gross margin fell in 2023 while operating and net margins stayed in the red zone. The detailed performance review of the period under consideration is given below.

In 2019, HCL’s topline grew by 22.07 percent. This was on account of sale of used computers and accessories. Such transaction, although gave a boost to HCL’s topline, however, are non-recurring in nature and can’t be banked on. Cost of sales grew by 14.72 percent in 2019 mainly on account of purchase of imported used computers. HCL’s gross profit enhanced by 40.16 percent in 2019 with its GP margin climbing up from 28.92 percent in 2018 to 33.2 percent in 2019. Administrative expense multiplied by 15.44 percent in 2019 on the back of induction of additional resources. Other expense multiplied by 2.44 percent in 2019 due to uptick in auditors’ remuneration, higher fee & subscription charges as well as increased provisioning for WWF. Other income plummeted by 87.89 percent in 2019 due to high-base effect as the company received rental income on investment property and gain on sale of investment property in 2018. Operating profit slid by 11.69 percent in 2019 with OP margin falling down from 15.23 percent in 2018 to 11.02 percent in 2019. The company had no any external borrowings and hence no finance cost. HCL had a gearing ratio of 23 percent in 2018 which dropped to zero in 2019. Its bottomline contracted by 38.2 percent to clock in at Rs.1.32 million in 2019 with EPS of Rs.2.63 versus EPS of Rs.4.26 in 2018.

In 2020, HCL’s topline dipped by 12.39 percent year-on-year. This was on account of lesser sales of used computers due to the outbreak of COVID-19. Cost of sales declined by 5.84 percent in 2020 translating into 25.57 percent smaller gross profit recorded by HCL in 2020. Operating expense hiked by 29 percent in 2020 due to higher payroll expense as well as higher budget allocated for advertising and marketing. Other expense narrowed down by 76.71 percent in 2020 due to no provisioning done for WPPF and no professional charges incurred during the year. HCL didn’t earn other income in 2020. Operating profit tumbled by 80.53 percent in 2020 with OP margin drastically falling down to 2.45 percent. No finance cost was incurred during the year due to no outstanding borrowings. Net profit shrank by 70.9 percent year-on-year in 2020 to clock in at Rs.0.383 million with EPS of Rs.0.77 and NP margin of 2.41 percent.

HCL’s net sales slid by 45.26 percent year-on-year in 2021. While the company earned revenue worth Rs.6.88 million by rendering services, drastic decline in sale of goods due to COVID-19 didn’t allow HCL to register any growth in its net sales in 2021. Cost of sales dropped by 71.2 percent in 2021 as the company didn’t purchase imported used computes in 2021, rather focused on clearing the old stock. This resulted in 20.75 percent higher gross profit with GP margin registering a staggering rise to clock in at 62.22 percent. Operating expense escalated by 17.18 percent in 2021 mainly on account of increased payroll expense as well as rent & utilities expense incurred during the year. Operating profit improved by 6.09 percent in 2021 with OP margin rising up to 4.75 percent. During the year, HCL obtained long-term loan of Rs.1.4 million from related parties. As a consequence, it incurred finance cost of Rs.0.075 million. The company’s gearing ratio surged from zero to 20.18 percent in 2021. HCL’s net profit slumped by 37.47 percent to clock in at Rs.0.239 million in 2021 with EPS of Rs.0.48 and NP margin of 2.76 percent.

The declining trend continued in 2022 with 31.76 percent thinner topline posted by HCL in 2022. During the year, the company didn’t undertake any sale of goods because it cleared its existing stock. Sale of services also dropped during the year as due to import restrictions, the cost of IT items massively increased. This pushed the company to enhance its service charges resulting indecline in the company’s business. Cost of sales dropped by 51 percent in 2022 as there was no cost incurred associated with goods. Gross profit contracted by 20.02 percent in 2022, however, GP margin attained its highest level of 72.92 percent. Operating expense registered a sharp spike of 66.37 percent in 2022 due to elevated rent & utility charges, legal & professional charges and security expense. During the year, the company’s management was changed by way of an election as more than 50 percent of the company’s shares were acquired by Supernet Infrastructure Solutions Private Limited. HCL recorded operating loss of Rs.3.34 million in 2022. Finance cost tamed down by 57.67 percent in 2022 as the company settled its long-term loan. This resulted in gearing ratio of zero yet again in 2022. The effect of deferred tax charged during the year resulted in 26.95 percent higher tax expense incurred by HCL in 2022. This resulted in net loss of Rs.3.492 million in 2022 with loss per share of Rs.6.98.

In 2023, HCL’s topline shrank by 69.54 percent. This was due to lesser IT services rendered during the year on account of slowdown of businesses due to political and economic instability in the country coupled with hike in the cost of IT related items due to inflation, Pak Rupee depreciation and import restrictions. HCL posted 70.65 percent thinner gross profit in 2023 with GP margin inching down to 70.25 percent. Operating expense tumbled by 34.47 percent in 2023 due to significant decline in rent & utilities, legal & professional charges and security expense. Pak Rupee depreciation resulted in exchange gain of Rs.0.814 million recorded by the company in 2023. HCL’s operating loss plummeted by 14.4 percent in 2023 to clock in at Rs.2.86 million. HCL didn’t incur any finance cost in 2023 due to no outstanding borrowings. Net loss clocked in at Rs.2.84 million, down 18.67 percent in 2023 with loss per share of Rs.5.68.

Recent Performance (1HFY24)

After years of witnessing declining revenue, 2024 seems to have brought a streak of luck for HCL as its topline registered a massive 1985 percent year-on-year growth in 1HFY24. During the year, Telecard Limited acquired 62.84 percent shares of HCL from Supernet Infrastructure Solutions (Private) Limited and hence HCL became a direct subsidiary of Telecard Limited. Higher IT developer charges and business development charges pushed up HCL’s cost of services by 3291 percent in 1HFY24. This resulted in 1432 percent higher gross profit, however, GP margin dropped from 70.25 percent in 1HFY23 to 51.62 percent in 1HFY24. Administrative and selling expenses multiplied by 542 percent and 551 percent respectively in 1HFY24 in line with enhancement in the company’s operations. The main growth drivers were elevated payroll expense, advertising expense as well as legal & professional charges incurred during the period. HCL recorded operating profit of Rs.3.6 million in 1HFY24 versus operating loss of Rs.1.335 million in 1HFY23. OP margin stood at 9.57 percent in 1HFY24. HCL posted net profit of Rs.3.228 million in 1HFY24 with EPS of Rs.6.46 versus net loss of Rs.1.348 million and loss per share of Rs.2.7 in 1HFY23. However, it is to be noted that the company is saving a significant amount of cost by not remunerating its directors and other top officials (with their consent). If that is to be taken into account, HCL might not be able to post net profit.

Future Outlook

The company is exploring new avenues in technology and other sectors particularly alternative power solutions to enable its users to use digital technologies conveniently and efficiently. HCL is also looking into enhancing its working capital by injecting more equity. While this may boost HCL’s revenues, whether or not HCL will end up making net profit after incorporating all its costs is yet to be seen.