Services Industries Limited – BR Research

Service Industries Limited (PSX: SRVI) was established in 1957 as a limited liability company under the Companies Act 1913 (now the Companies Act 2017). The company buys, manufactures and sells shoes, tires, inner tubes and technical rubber products. In addition to serving the local market, the company also exports to countries like Europe, the United States, Australia, and the Middle East.

Ownership model

As of December 31, 2021, nearly 45% of the shares are held by the directors, the CEO, their spouses and their minor children. In this category, an executive director, Mr. Hassan Javed is a major shareholder holding more than 19% of the shares, followed by 10% held by each of the following: the CEO, Mr. Arif Saeed and Mr. Omar Saeed, another director executive. The local general public owns over 27% of the shares while 13% of the shares are held in NIT & ICP. The remaining 14% of shares belong to the rest of the shareholder classes.

Historical operating performance

The company has largely seen its revenue increase over the years, with the exception of CY20 where it contracted by 6.5%. Profit margins over the past six years have been more or less stable with a slight decline seen in CY21.

In CY18, revenue increased by more than 15% to reach Rs 24 billion in value. While footwear exports grew by 45% due to a combination of increased volumes and prices, domestic sales declined. The tire division, which is also a major contributor to total sales, recorded growth of 21%. But the cost of production remained close to 82%, thus keeping the gross margin also stable at around 18%. While net margin also increased slightly to 4.4%, net income was recorded at its second highest in a decade at over Rs 1 billion.

CY19 revenue showed growth of nearly 9% to cross Rs 26 billion in value. The majority of this growth was concentrated in local sales, while export sales declined by 13%. Footwear export sales declined, while within the tire division, local and export sales increased, with local tire sales being the main contributor to revenue. With production costs reduced to less than 82%, gross margin improved slightly to 18.7%. However, the same could not be observed for the net margin which was reduced to 3.4% due to higher interest rates which considerably increased the financial charges.

Topline contracted 6.5%. This is largely attributed to the Covid-19 outbreak towards the end of the first quarter. This resulted in strict shutdowns, which hampered operations and production for several weeks. Demand was also impacted, particularly for shoe sales as consumers stayed indoors. Thus, there was a 69% drop in shoe export sales as borders were also closed and trade was also halted. The tire division, however, continued to sell due to the nature of the product. With production costs reduced to nearly 80%, the gross margin rose to 20%. But as finance costs continued to consume a larger share of revenue, net margin fell to its lowest level at 2.8%.

In CY21, the company experienced the highest increase in revenue of nearly 34% to reach its all-time high of Rs 32.7 billion. Biggest revenue contributor – the tire division saw 38% growth while the footwear division saw 21% growth as demand recovered somewhat a year after the pandemic. However, due to a sharp increase in raw material prices, the cost of production increased to almost 84% of sales, reducing the gross margin to 16%. This was also reflected in the net margin which was recorded at its lowest level of 1% for the year.

Quarterly results and future outlook

CY22 first week revenue increased nearly 25% year-over-year, with the tire division up 31%. The latter resulted from the expansion of production capacities. However, profit margins in this segment were negatively impacted by rising input costs, exchange rate fluctuations and general inflationary pressure. Footwear sales also recorded double-digit growth of 11%. Retail, although strained as the company claims, saw an expansion from 91 stores in December 2021 to 104 outlets at 1QCY22. Although the overall gross margin was better at 1QCY22 at 19%, the net margin was lower at less than 1% (1QCY21: 2.3%) due to an exorbitant increase in financial charges.

The second quarter also saw year-over-year revenue growth of 46.6%, with the tire division recording overall growth of 33% in 1HCY22, while the footwear division grew 53%. % over the same period. The increase in turnover was also reflected in the net margin which increased to 3.6% in 2QCY22 compared to 0.4% in 2QCY21. With the expansion of production capacity coupled with the expansion of the retail network, the turnover will continue to increase, however, the profit margin will depend on the development of input costs which have mostly been falling.

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