Hoechst Pakistan Limited

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.

During 2023, a consortium led by Packages limited, including 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.

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, 2024, HPL has a total of 9.645 million shares outstanding which are held by 881 shareholders. Associated companies, undertakings and related parties have the majority stake of 74.73 percent in the company.

Directors, CEO, their spouse and minor children represent 17.45 percent of the company’s shareholding followed by local general public holding 2.82 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (CY19- CY24)

The topline of HPL has posted growth 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 margins registered growth. Conversely, in 2022, the company recorded a slight growth in its gross margin while operating and net margins drastically fell.

In 2023, gross margin slightly dipped while operating and net margins ticked up. In 2024, all the margins significantly picked up and attained their optimum level (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, HPL’s topline posted year-on-year growth of 11.88 percent to clock in at Rs.14,500.68 million. 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 19.54 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 5.62 percent in 2019. Distribution and administrative expense escalated by 9.79 percent and 11.11 percent respectively in 2019 on account of higher staff cost. Other expense showed a rather favorable picture as it slid by 24.38 percent in 2019 owing to better management of exchange loss.

Other income almost doubled in 2019 mainly on the heels of recovery of insurance claims. HPL’s operating profit plunged by 34.22 percent in 2019 with OP margin dipping to 4.27 percent from OP margin of 7.26 percent recorded in 2018. Finance cost surged by 389.23 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 74.73 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 2.71 percent year-on-year to clock in at Rs.14,107.80 million. 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 formed 95.21 percent of HPL’s gross sales in 2002. Export sales grew by 74 percent year-on-year in 2020 which particularly comprised of sales to Afghanistan.

Cost of sales dropped by 4.39 percent in 2020 due to rationalization of commercial conditions, price increase etc. This resulted in 2.14 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 10.33 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 4.17 percent in 2020. Operating profit of the company grew by 51.62 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 19.44 percent year-on-year. This was mainly due to significant drop in short-term borrowings on account of streamlining of 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 218.44 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 3.49 percent.

2021 was the year when local as well as global economies were 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 12.57 percent in 2021 to clock in at Rs.15,880.million. This was because 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 8.36 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 distribution & administrative expenses which nosedived by 2.85 percent and 8.96 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 56.14 percent higher operating profit. Finance cost nosedived by 51.23 percent in 2021 owing to lower discount rate. The bottomline bagged a year-on-year growth of 83.74 percent in 2021 to clock in at Rs.905.95 million with NP margin of 5.7 percent and EPS of Rs.93.93.

In 2022, HPL posted 16.87 percent year-on-year rise in its topline which was recorded at Rs.18,559.88 million. 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 16.42 percent during the year which was mainly on account of higher raw material prices coupled with Pak Rupee depreciation. Gross profit improved by 18.15 percent in 2022. GP marginal registered an 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 35.93 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 44.20 percent in 2022 on the back of higher staff cost. Massive depreciation in the value of local currency resulted 137.25 percent higher other expense incurred by HPL in 2022. Operating profit deteriorated by 47.17 percent in 2022 with OP margin slipping to 4.17 percent.

Higher discount rate and increased short-term borrowings obtained by the company in 2022 translated into 75.23 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 81.59 percent in 2022 to clock in at Rs.166.78 million with EPS of Rs.17.29 and NP margin of 0.9 percent.

2023 was characterized by multiple upward revisions in the discount rate, Pak Rupee depreciation, skyrocketed inflation, import restriction, energy crisis and general slowdown in the economic activity. Despite all the headwinds, HPL attained a reasonable topline growth of 15.14 percent in 2023. Net sales were recorded at Rs.21,368.95 million in 2023. While local sales posted growth during the year, export sales dipped.

The sales proceeds from the flagship brand “Flagyl” crossed Rs. 5 billion mark in 2023. Cost of sales also grew by 15.73 percent year-on-year in 2023 on the back of aforementioned challenges. Gross profit increased by 13.46 percent in 2023 with GP margin slightly ticking down to 25.86 percent. While the company curtailed it’s travelling and promotion activities in 2023, 1.12 percent higher distribution expense was the consequence of increased freight charges, sales commission and insurance charges incurred during the year.

Administrative expense also surged by 8.91 percent in 2023 on the back of high software license/maintenance. HPL streamlined its workforce from 744 employees in 2022 to 734 employees in 2023, resulting in lower staff cost. This greatly offset the software license fee incurred during the year.

Gigantic exchange loss translated in 44 percent escalation in other expense in 2023. Other income mounted by 114.94 percent in 2023 due to higher insurance claim, markup on bank deposits, dividend income, scrap sales and reversal of provision against stamp duty.

Operating profit strengthened by 40.96 percent in 2023 with OP margin ticking up to 5.10 percent. Finance cost mounted by 250.77 percent in 2023 on account of higher discount rate. The company had no outstanding borrowings as of December 31, 2023. This resulted in gearing ratio of 0 percent in 2023. Net profit built up by 116.33 percent in 2023 to clock in at Rs.360.807 million. This culminated into EPS of Rs.37.41 and NP margin of 1.69 percent.

In 2024, HPL registered 25.17 percent year-on-year growth in its topline which clocked in at Rs.26,747.83 million. 70 percent of the net sales of the company came from Antibiotics, Diabetics and Cardiology segment. Within antibiotics segment, 78 percent of the sales are contributed by the flagship brand “Flagyl”. Deregulation of the prices of non-essential medicines (initiated from February 19, 2024) contributed a great deal in driving up the GP margin of the company which clocked in at its optimum level of 31.51 percent in 2024. In absolute terms, gross profit surged by 52.49 percent in 2024.

Selling & distribution expense mounted by 26 percent in 2024 which was mainly driven by higher salaries of sales force, freight charges, sales commission, travelling & conveyance charges as well as conferences and exhibitions expense incurred during the year.

Administrative expense escalated by 31 percent in 2024 on the back of higher payroll expense, security, repair & maintenance charges incurred during the year. HPL expanded its workforce from 717 employees in 2023 to 807 employees in 2024. Other expense plunged by 60.49 percent in 2024 as the company recorded exchange gain in 2024 as against exchange loss recorded in the previous year.

Other income also slumped by 39.38 percent in 2024 due to considerably lower markup income recognized from bank deposits, lower insurance claim, lesser scrap sales and no reversal of provision against stamp duty booked during the year. Operating profit strengthened by 232.21 percent in 2024 with OP margin climbing up to 13.55 percent.

Finance cost tapered off by 17.31 percent due to the onset of monetary easing cycle in 2024. This was despite the fact that HPL obtained fresh short-term borrowings and lease liabilities in 2024 which resulted in a gearing ratio of 16 percent from gearing ratio of 0 percent recorded in 2023. Net profit improved by 414.72 percent in 2024 to clock in at Rs.1857.147 million in 2024. This translated into EPS of Rs.192.56 and NP margin of 6.94 percent.

Future Outlook

The company is putting its best foot forward to navigate through the macroeconomic challenges by controlling its cost, attaining operational efficiency, increasing market penetration and attaining price rationalization.

The company is reducing its energy cost by generating solar energy which increased from 436,648 kWh in 2023 to 1,324,843 kWh in 2024.

The company has also approved the formation of a wholly owned subsidiary in the UAE which will expand its international footprint. Besides, the company has also approved the acquisition some products with associated trademarks from Sanofi affiliates under transfer and assignment agreement. This will diversify the company’s sales mix.