Karam Ceramics Limited – BR Research

Karam Ceramics Limited (PSX: KCL) was established in 1979 as a limited company. Manufactures and markets tiles used for interiors, exteriors and bathroom floors. Some of his clients include Kidney Centre, Dolmen Mall, Saima Mall, Bahria Town, Karachi and Model Town, Lahore.

shareholding pattern

As of June 30, 2022, more than 71 percent of the shares are owned by the directors, the CEO and the children. Within this, Mr. Irshad Ali Shaban Ali Kassim and Mr. Munawar Ali Kassim are the major shareholders. The local general public owns about 21 percent of the shares, while the remaining 8 percent is held by the rest of the shareholder categories.

Historical operating performance

The company has experienced fluctuating billings over the years, while profit margins in recent years have largely followed a downward trend.

In fiscal year 2018, gross revenue increased at a record growth rate of more than 40 per cent, to reach Rs 1,200 crore in value terms. This was the result of an improvement in sales prices as well as sales volumes. On the other hand, the cost of production dropped dramatically from more than 97% of revenue the year before to nearly 89% in fiscal 2018, allowing gross margin to rise to 11.2%. This also trickled down to the bottom line which was recorded at Rs 14 crore as compared to the net losses seen in the last two years.

Topline continued to grow in fiscal 2019, by almost 19 per cent to reach an all-time high of Rs 1,400 crore in value terms. This was again attributed to an upward revision in prices, as well as an increase in sales volumes. This is reflected in the highest gross margin recorded at 13 percent. With declines in other factors as well, such as a share of revenue, operating margin also posted an all-time high of nearly 8 percent. But the increase in net margin was slightly less pronounced due to a higher tax figure. The net margin stood at 2 per cent for the year, while the bottom line was recorded at a four-year high of Rs 29 crore.

Revenue in fiscal year 20 witnessed the biggest drop at more than 35 percent. This was mainly the result of the outbreak of the Covid-19 pandemic which led to strict lockdowns. The company resumed operations at the end of May 2020, resulting in a significant loss of days of sales and production. However, fixed costs are unavoidable, so the company incurred a gross loss of Rs 67 crore. There was some support from other income which was unusually high at Rs 90 million, coming from “present value adjustment on directors interest free loan modification”. But as financial expenses continued to eat up more of the income due to higher interest rates, the net loss was recorded at the highest level seen so far at Rs 44 crore.

In FY21, the top line rebounded as it grew by over 21 per cent to reach Rs 1,100 crore in value terms. This can be attributed to the resumption of business activities and the easing of lockdowns which led to some growth in demand. Production cost consumed nearly 97 percent of revenue, allowing some room for profitability, as evidenced by a positive, albeit nominal, gross margin of 3 percent. “Present value adjustment on directors interest-free loan modification” continued to support the bottom line, in the “other income” category. Coupled with a reduction in operating expenses as part of revenue and a positive tax figure, the company posted a record net margin of 3.7 per cent and the highest final figure of Rs 42 crore.

Recent results and future prospects

Topline in FY22 contracted by more than 27 per cent, falling to a record low of Rs 818 million in value terms. This was attributed to lower production. The latter is also seen in considerably lower capacity utilization that fell from more than 36 percent in the prior year to 21.5 percent in the current period. In terms of units, actual production for the year was recorded at 1,392,304 compared with 2,357,994, representing a 41 percent year-on-year decrease. Unable to cover costs with lower revenue, the company incurred a gross loss of a remarkable Rs 198 crore. With other income also halved in value terms and operating and financial expenses incurred, the net loss stood at an all-time high of Rs 252 crore.

Until last year, the expectation was that with increased construction, which increased demand for steel and cement, there would eventually be a generation of demand for roof tiles as well. However, given the current political and economic scenario, construction and its related industries have been profoundly and adversely impacted. This has been seen in the financials of fiscal year 22, in which the company incurred the largest loss seen since fiscal year 2010. With considerable inflationary pressures and great uncertainty on the political front, demand for the company’s products also seems uncertain.

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