Shabbir Tiles and Ceramics Limited – BR Search
Shabbir Tiles and Ceramics Limited (PSX:STCL) was established as a limited company in 1978 under the repealed Companies Act 1913. The company manufactures and sells tiles while marketing related building products. Its products include wall tiles, floor tiles, bathroom tiles, kitchen tiles and outdoor tiles. It also has an exclusive emporium collection.
As of June 30, 2021, nearly 3% of the shares are held with the directors, their spouses and their children, in which Mr. Rafiq Habib is a majority shareholder. Nearly 55% of shares are categorized as “foreign companies,” followed by more than 20% of shares held by modarabas and mutual funds. The local general public owns almost 18% of the shares, while the remaining 4% belongs to the rest of the shareholder categories.
Historical operating performance
The company has mostly seen revenue growth, with the exception of a few years. Profit margins, which have increased over the past six years between FY17 and FY18, remained stable until FY19, before declining during FY20, after which they declined during FY21.
In FY18, revenue grew nearly 15%, the highest on record. This can partly be attributed to the company’s efforts to boost brand equity, improve displays and open design studios. In addition, increased regulatory duties and anti-dumping duties on relatively cheaper imported tiles helped the company maintain its market share. However, some level of smuggling continued due to the depreciation of the currencies of countries in the region. The company also improved its cash flow, which resulted in lower financial expense as a share of revenue. With production costs also down to 78% of revenues from over 89% in FY17, net margin for the year improved to 3.36% from the loss incurred in of FY17 by 151 million rupees.
Revenue growth further surged to more than 20% in FY2019 to reach Rs 6.9 billion in value. This was attributed to the investments made to undertake the BMR business which resulted in an improvement in the range of products offered and their quality. In addition, marketing and promotions further encouraged sales. With production costs down slightly to almost 77%, the gross margin improved to 23.2% from 21.8% the previous year. However, a similar increase was not seen in the net margin which remained more or less stable at 3.38%, as tax charges increased significantly. During the year, the company also realized significantly higher other income, thanks to a gain on the disposal of operating assets and the sale of scrap metal.
In fiscal 2020, revenue contracted by 6.6% due to the outbreak of the Covid-19 pandemic which led to a loss of volumes in the second half. In order to contain the spread of Covid-19, confinements were imposed which caused a halt in production and markets. On the other hand, the first half of the year was also marked by challenges such as rising gas tariffs and freight costs and documentation requirement which largely impacted small traders. Thus, the company suffered a record loss of Rs 326 million.
At nearly 53%, revenue growth hit a record high in FY21, with revenue reaching Rs 9.9 billion in value. It was also the highest observed. This growth was largely attributed to an increase in volumes which was also the company’s goal. Volumes, in turn, rose thanks to an increase in construction activity. The higher volumes have also contributed to lower costs which are evident from the fact that production costs consume 69% of revenue. Thus, the gross margin peaked at 30.9%. This impacted the net result which was also supported by other income. The latter was abnormally higher due to the GIDC revaluation gain to be paid. Thus, the net margin also peaked at 9.3%.
Quarterly results and future outlook
Revenue for the first quarter of FY22 increased 15.7% year-on-year. The company met its production and sales volume target during the period, while construction demand also boosted sales. With a very marginal variation in the cost of production as a percentage of sales, the gross margin remained stable year-on-year. However, the net margin at 7.6% versus 6.4% in 1Q21 improved thanks to the increase in other income.
In the second quarter, revenue grew nearly 22% year-over-year. However, production was affected due to gas shortages as the company had to resort to sources such as LPG and diesel to run its plants. This has caused increased costs as the company generates its own electricity and is therefore dependent on the gas supply. Combined with this, rising sea freight rates and port congestion have also increased costs. As a result, net margin was halved to 7% from 14.7% in 2QFY21.
The third quarter saw revenue increase 14% year-on-year. With the prevalence and increasing severity of a similar environment, profitability further declined to a net margin of 1.5% from 9.3% in 3QFY21. Although demand has been buoyed in part by the resumption of activities after the shutdowns and to some extent by the construction industry, however, as the industry is heavily dependent on natural gas, it is vulnerable to rising prices. and currency depreciation. Additionally, the geopolitical tension between Ukraine and Russia and the political environment in the country have also had a negative impact on business sentiment which will be reflected in future profitability.