Archroma Pakistan Limited (PSX: ARPL) is a limited liability company that was previously known as Sandoz (1963-1995) and Clariant (1996–2013). The principal activity of the company is the manufacturing, import, and sale of chemicals, dyestuffs, coating, adhesives, and sealants. It is also engaged in the indent business for textile, paper, adhesives, sealants, coating, and construction industries. ARPL is a subsidiary of Archroma Textiles Gmbh having its headquarters in Reinach, Switzerland.

Pattern of Shareholding

As of September 30, 2023, ARPL has a total of 34.118 million shares outstanding which are held by 1912 shareholders. Archroma Textiles Gmbh (parent company) holds 75 percent of ARPL’s shares followed by the local general public having a stake of 14.78 percent in the company. Around 4.67 percent of ARPL’s shares are held by Modarabas & Mutual Funds and 2.54 percent by Insurance companies. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

With the exception of 2020, ARPL’s topline followed a growth trajectory in all the years under consideration. Conversely, its bottom line was enhanced only in 2019 and 2021. The margins which had been deteriorating until 2020, posted a significant rebound in 2021 only to subside in the subsequent years. ARPL’s margins portray their lowest level in 2023. The detailed performance review of the period under consideration is given below.

In 2019, ARPL’s topline posted a 21.43 percent year-on-year rise. While sales volume remained depressed during the year due to sluggish market demand, the company was able to attain topline growth by revising its price upwards and passing on the onus of cost increase to the customers. 33.1 percent of the sales were contributed by the Paper & Packaging segment while the Business line Brand & Performance Textiles accounted for 24.9 percent of the net sales in 2019. The cost of sales grew by 22.87 percent year-on-year in 2019 due to inflation, Pak Rupee depreciation, and an increase in commodity prices in the international market. ARPL posted 18.32 percent year-on-year growth in its gross profit; however, GP margin slid from 31.6 percent in 2018 to 30.8 percent in 2019. Distribution expense grew by 17.84 percent year-on-year in 2019 mainly due to a tremendous rise in the royalty fee payable to Archroma Management Gmbh, an affiliated company of ARPL, and also because of a hike in outward freight and handling charges on the back of high fuel charges. Administrative expenses rose by only 1.78 percent year-on-year in 2019 due to higher outside service charges incurred during the year. During the year, ARPL booked an impairment allowance of Rs.143.41 million which was 138.30 percent higher than the allowance booked in 2018. Other expenses also grew by 5.76 percent year-on-year in 2019 due to higher provisioning for WWF and WPPF while other income slid by 32.89 percent during the year as no mark-up income was earned from the retirement benefit plan unlike 2018. Operating profit posted 19.22 percent year-on-year growth in 2019; however, OP margin posted a marginal downtick from 16.6 percent in 2018 to 16.3 percent in 2019. 58.22 percent year-on-year spike in finance cost was the result of higher discount rates and increased borrowings. Net profit grew by 12.11 percent year-on-year to clock in at Rs.1722.38 million with an NP margin of 9.93 percent in 2019 versus 10.75 percent in 2018. EPS grew from Rs.45.03 in 2018 to Rs.50.48 in 2019.

2020, scarred by COVID-19, resulted in 13.34 percent year-on-year drop in ARPL’s topline. Its major customers operated at less than 50 percent capacity during the period due to lockdown, supply chain disruptions, and demand contraction. Cost of sales slid by 9.77 percent year-on-year in 2020, translating into a 21.35 percent year-on-year dip in gross profit. GP margin plunged to 27.96 percent. Distribution expense posted 10 percent year-on-year slide in 2020 due to lower royalty charges and outward freight and handling charges. Administrative expenses continued to grow and posted a 10.33 percent hike in 2020 mainly on account of market-induced rise in salaries and wages while there was a drop in the number of employees from 284 in 2019 to 276 in 2020. Impairment allowance on trade receivables tremendously fell to Rs.13.18 million in 2020 as the company started the policy of cash collection over sales during the year. Other expenses shrank by 17.87 percent year-on-year in 2020 which was the result of lower provisioning for WPPF. Other income grew by 62.2 percent year-on-year in 2020 on the back of higher scrap sales. Despite keeping a check on expenses, lower sales volume pushed ARPL’s operating profit down by 30.19 percent year-on-year in 2020 with OP margin settling down to 13.14 percent. Finance costs contracted by 35.43 percent year-on-year in 2020 due to a lower discount rate, lesser exchange loss, and a slump in short-term borrowings. Net profit plunged by 32.11 percent year-on-year in 2020 to clock in at Rs.1169.266 million with an NP margin of 7.77 percent. EPS climbed down to Rs.34.27 in 2020.

ARPL’s net sales recovered by 32.14 percent year-on-year in 2021. This came on the back of a staggering rise in sales volume as the major customers of ARPL i.e. Textile and Construction sector boasted tremendous growth on account of regional competitiveness, fiscal measures to boost textile exports, and low-cost housing and infrastructure-related projects initiated by the government. Increased demand also spurred upward price revision which also buttressed ARPL’s topline in 2021. Cost of sales grew by 26.39 percent year-on-year in 2021 as the resumption in demand post-COVID resulted in supply chain delays due to the non-availability of containers and vessels globally. This not only increased the cost and lead time of raw materials. ARPL managed to record a 46.96 percent year-on-year surge in its gross profit with GP margin bouncing back to 31.1 percent in 2021. Distribution expenses piled up by 25.73 percent year-on-year in 2021 due to a rise in sale volume which incited outward freight and handling charges. Higher royalty fees paid to the holding company and higher payroll expenses also contributed to hefty distribution expenses incurred in 2020. Administrative expenses ticked up by 4.23 percent year-on-year in 2021 due to higher payroll expenses. During 2020, the company booked a reversal on its trade receivables due to improved cash generation. This was on account of improved business sentiment as the signs of COVID-19 caved in. Other expenses magnified by 120.39 percent year-on-year in 2021 due to higher provisioning for WWF and WPPF. The higher indenting commission, grant income, and scrap sales drove other income up by 123.51 percent year-on-year in 2021. Operating profit jumped up by 75.18 percent year-on-year in 2021 with OP margin growing up to 17.42 percent – the highest among all the years under consideration. Due to the low discount rate and lesser borrowings on account of improved cash generation, finance costs tapered off by 38.15 percent year-on-year in 2021. Net profit incredibly grew by 97.51 percent year-on-year in 2021 with OP margin mounting to 11.62 percent. EPS also grew to Rs.67.69 in 2021.

In 2022, ARPL’s net sales mustered a 26.58 percent year-on-year rise. The year began on a robust note with the textile and construction sectors attaining new highs, however, in the last quarter, both sectors started underperforming due to political uncertainty, high energy and commodity prices, record high inflation, Pak Rupee depreciation as well as devastating floods during the year translated into demand compression, Cost of sales grew with an even higher magnitude of 30.97 percent due to the factors stated above, squeezing GP margin to 28.7 percent in 2022. Distribution expense ascended by 31.47 percent year-on-year due to a massive rise in royalty fees coupled with a hike in outward freight and handling on the back of higher fuel charges. Administrative expenses grew by 7.46 percent year-on-year in 2022 which was the consequence of higher payroll expenses and outside service charges. The company also booked a reversal of impairment allowance on trade receivables worth Rs.16.72 million in 2022. Other expenses nosedived by 1.21 percent year-on-year due to lower provisioning for WWF and WPPF in 2022 while other income grew by 1.83 percent due to higher indenting commission earned during the year. Operating profit mounted by 10.67 percent year-on-year in 2022, however, OP margin dived to 15.2 percent. Finance cost gave a major blow to the bottom line as it surged by 155.10 percent year-on-year on account of hefty exchange loss, higher discount rate as well as increased short-term borrowings. Sizeable growth in finance cost translated into an 18.37 percent year-on-year decline in net profit in 2022 which stood at Rs.1885.064 million with an NP margin of 7.5 percent. EPS also marched down to Rs.55.25 in 2022.

During 2023, textile and construction sector performance remained sluggish due to economic and political headwinds. ARPL’s topline posted a 19.32 percent year-on-year rise on the back of increased sales to textile effects and paper, packaging, and coatings business. High inflation and discount rate, steep depreciation in the Pak Rupee, higher energy and commodity prices triggered by the Russia-Ukraina conflict, and devastating floods in the southern region of the country during the period resulted in a 25.71 percent year-on-year hike in the cost of sales in 2023. This resulted in a paltry 3 percent uptick in gross profit. GP margin tumbled to 24.88 percent in 2023 – the lowest during the period under consideration. Distribution expense mounted by 18.15 percent during 2023 due to elevated royalty charges and outward freight & handling charges incurred during the year. Administrative expenses surged by 22.36 percent in 2023 due to higher outside service charges, legal & professional charges as well as repair & maintenance charges. Other expenses slumped by 25.96 percent due to lower profit-related provisioning made during the year. Other income also shrank by 27 percent in 2023 due to lower indenting commissions, lesser scrap sales, and no grant income recorded during the year. Operating profit nosedived by 8.54 percent in 2023 with OP margin hitting its lowest level of 11.67 percent. Finance cost mounted by 82.14 percent in 2023 due to the unprecedented level of discount rate due to hefty exchange loss and a significant rise in short-term borrowings. Net profit declined by 33.99 percent in 2023 to clock in at Rs.1244.382 million with EPS of Rs.36.47 and NP margin of 4.15 percent.

Recent Performance (Six Months Ended March 2024)

ARPL’s net sales stood at Rs.14,281 million during a six-month period ended March 2024, down 0.05 percent year-on-year. Despite tapered sales, the cost of sales soared by 10.39 percent during the period on account of the depreciated value of local currency versus other currencies as well as the high cost of imported raw materials. Gross profit slid by 29.11 percent during the six-month period with GP margin lowering to 18.76 percent versus GP margin of 26.44 percent recorded during the same period last year. Distribution and administrative expenses surged by 12.86 percent and 19.75 percent respectively during the six-month period due to inflationary pressure. Other expenses considerably declined by 88.26 percent during the period. Conversely, other income strengthened by 246.10 percent (detailed financial statements are not yet published to comment on the underlying reason behind this increase). Operating profit tumbled by 65.74 percent year-on-year during the six-month period with an OP margin of 4.52 percent versus an OP margin of 13.18 percent posted by ARPL during the same period last year. Despite a high discount rate, ARPL was able to cut down its finance cost by 35 percent during the period maybe on account of lower exchange loss as short-term borrowings continued to rise. The company posted a net loss of Rs.125.171 million during the six months ended March 2024 versus a net profit of Rs.621.767 recorded during the same period last year. ARPL posted a loss per share of Rs.3.62 during the period under consideration versus EPS of Rs.18.22 during the same period last year.

Future Outlook

With no considerable recovery in textile and construction sector in sight, the demand for ARPL’s products is expected to remain lackluster. However, the ongoing merger of Archroma Chemicals Pakistan (Private) Limited into ARPL after its merger with Huntsman Textile Effects Pakistan (Private) Limited will diversify the product portfolio of the company and boost its consolidated earnings.

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