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Coronavirus
VERY HIGH Source: covid.gov.pk
Pakistan Deaths
27,004
6624hr
Pakistan Cases
1,215,821
3,01224hr
5.3% positivity
Sindh
447,678
Punjab
418,196
Balochistan
32,671
Islamabad
103,549
KPK
169,972

Leather Up Limited was established in 1990, as a private limited company. It was later converted into a public limited company in 1993. The company produces and exports leather related goods such as jackets, purses, wallets, laptop bags. Its export markets are mostly concentrated in Europe; France, Italy, Germany, UK. Therefore, naturally, the company’s business and financials are impacted by the happenings in these economies; demand, consumption patterns, preferences, purchasing power, etc.

Shareholding pattern

More than 95 percent of the shares are distributed with the individuals, while directors, CEO, their spouses and minor children own a negligible amount.

Historical operational performance

Between, FY13 and FY14, the business expanded by unprecedented levels as a result of expanding its product portfolio. From making leather garments, the company also ventured into making ladies leather bags. In addition, the company also received significant orders from Europe, primarily Italy. In addition, during FY14, Leather Up secured a number of export orders, the result of which was materialised in FY14 and FY15, evidenced by the jump in net revenue. However, the high revenue came with added costs which reduced gross margins. The rest of the operating expenses were insignificant relative to the higher revenue, bringing the company out of losses.

Leather Up saw the continuation of growing revenue in FY16, growing by close to 12 percent, year on year. This was due to higher volume of exports. According to the company’s report for the year, exports for the year grew to almost Rs123 million from Rs110 million in the previous year. Moreover, the company claims to have been consistently working towards cost curtailment, as is evident by cost of production consuming a lower percentage of revenue for the year. Despite the fall in other income, Leather Up was able to improve its margins year on year.

Although topline continued to grow year on year in FY17, a decline was seen in the rate of growth. Because of greater rupee value of exports, revenues increased to Rs133 million, compared to Rs128 million in the previous year. While most other elements remained more or less similar, Leather Up saw a net loss in ‘other income’, unlike the previous year. This was due to a net exchange loss of Rs63,000. However, since it made a small part of the revenue, it did not create a big difference to the overall accounts and profit margins continued to grow, even if marginally.

In FY18, the net revenue of the company nosedived to about Rs51 million from Rs133 million in FY17. The company attributed this to factors inherent with the nature of the product. Internationally, leather industry did not enjoy the same priority has it had in the last decade or so.

Moreover, a company representative revealed that around the same time, China introduced an alternate material to leather which also adversely impacted the global leather market. Demand shifted from pure leather to the new, cheaper alternative. In addition, the cost per unit was also not feasible, as costs took up 97 percent of the revenue in FY18. If not for other income which exceeded the topline, the company would have incurred a loss. Other income which came from the sale of plot valued at Rs72 million was sold during the year which provided immense support to the bottomline.

In FY19 the company’s net revenue declined by 7 percent year on year. This was due to lower production and lower business activity in Europe. Moreover, the company also faced problems with ‘limitations of the natural raw material’, significant fluctuations in the price of raw material in addition to high cost per unit.

Upon speaking to BR Research a representative of the company revealed that in order to curtail cost of production, the company decided to outsource some part of the production to market vendors. This seemed a more cost efficient way than manufacturing 100 percent in-house. The result of this can be seen in higher gross margins, if one were to eliminate the abnormal income earned last year. However, since the full benefit has still not been seen, costs consumed 95 percent of the revenue which made the company incur a loss for the period.

Half yearly results and future outlook

Net revenue growth in 1HFY20 was negative for Leather Up. The effects of high costs and lower demand and business activity in the EU continued to adversely impact the financials of the company since Leather Up exports 100 percent of its production. The decision to outsource some part of the manufacturing to vendors proved feasible as there was a notable fall in costs consuming topline. This allowed gross margins to improve. Operating margins improved due to net exchange gain accounted in other income as rupee devaluation favoured exports. This was absent in the same period in the previous year.

In addition, the company’s management decided to be debt-free. This was the rationale for selling land to pay off existing debts. A source of BR Research said that the company wanted to generate cash from internal equity as borrowings adversely impacted the financials of the company. The effect of this can be seen as finance cost for 1HFY20 is almost nonexistent when compared to that of 1HFY19.

Since the company’s model is such that it exports 100 percent of its goods, the ongoing pandemic and the resultant halt in trade will take a hit on its financials for the year. So far the company has contributed more than Rs1.5 billion in terms of money entering the country. However, in the wake of current situation, the future is unpredictable as even after trade resumes, the purchasing power and wants of the consumer would not be the same as before Covid-19.

Copyright Business Recorder, 2020

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