Chenab Limited

Chenab Limited (PSX: CHBL) was incorporated in Pakistan as a private limited company in 1985 and was subsequently converted into a public limited company. Its ordinary shares and preference shares were listed on the Pakistan Stock Exchange in 2004 and 2005 respectively. The company is engaged in the export of value-added fabrics, textile made-ups, and casual and fashion garments. It is also engaged in the toll manufacturing of fabric in the local market.Pattern of Shareholding As of June 30, 2024, CHBL has a total of 115 million ordinary shares and 80 million preference shares outstanding which are held by 2020 shareholders and 1740 shareholders respectively. Directors, CEO, their spouses, and minor children have the majority stake of 52.31 percent in the outstanding ordinary shares of CHBL followed by individuals holding 47.39 percent shares. The remaining shares are held by other categories of shareholders. In the case of preference shares, 54.20 percent stake is held by financial institutions, 43.59 percent by individuals and 2.13 percent by joint stock companies. The remaining shares are held by other categories of shareholders.Financial Performance (2020-2024)CHBL didn’t make any sales in 2020 and 2021, however, posted a staggering topline growth in the subsequent three years. The company failed to register net profit in any of the years under consideration except in 2021 where it didn’t make any sales – thanks to robust other income. CHBL’s margins stayed in the negative zone over the period under consideration except in 2023 and 2024 where it posted positive gross profit margin (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.In 2020 and 2021, the company was under liquidation and its affairs were run by Joint Official Liquidators appointed by the court. Hence, CHBL didn’t carry out its sales and purchases. The only source of revenue during the period was the rental income of its business assets. In 2021, other income rose by 1607 percent owing to balances written back during the year. This enabled the company to post a net profit of Rs.999.743 million and EPS of Rs.8.49 in 2021 versus a net loss of Rs.96.58 million and loss per share of Rs.0.84 registered in 2020. In 2022, the company received a reversal of the winding-up order and constituted its board. During the year, the loans of the company were restructured through a “Scheme of arrangement” (SOA) approved by the High Court, Lahore. The company initiated a trial run of BMR followed by the commencement of commercial operations. It registered net sales of Rs.503.74 million in 2022. CHBL’s net sales largely comprised proceeds from exports of garments, made-ups, and fabrics. The plant was non-operational for quite some time coupled with underutilization of capacity in 2022 resulted in high cost of sales. This resulted in a gross loss of Rs.220.93 million in 2022. Administrative expenses also mounted by 29 percent in 2022 due to a momentous spike in payroll expenses, legal & professional charges as well as directors’ remuneration. The company hired new employees to develop its workforce which stood at 843 employees as of June 30, 2022, versus 38 employees in the previous year. Distribution expenses of Rs.7.33 million incurred by CHBL in 2022 mainly comprised carriage & freight charges as well as export clearing & forwarding charges. Loss incurred on the disposal of investment property and operating assets culminated in other expenses of Rs.34.96 million in 2022. Other income dropped by 83,93 percent in 2022 due to the high-base effect as the company wrote off credit balances in the previous year. The shrinkage of other income resulted in an operating loss of Rs.262.59 million in 2022 versus an operating profit of Rs.1019.84 million registered in 2021. Finance cost surged from Rs.0.03 million in 2021 to Rs.180.72 million in 2022 due to mark-up charges incurred on Tier-1 debt as Tier-2 debt was to be repaid after Tier-1 debt as per the scheme of arrangement. To put into context, according to the SOA approved by the High Court, the total outstanding debt of the company was divided into two equal portions of Rs.4737.486 million each, termed Tier-1 and Tier-2 debt. While Tier-1 debt was to be repaid in seven and half years starting from FY22, Tier-2 debt was to be repaid in six and half years after the payment of Tier-1 debt. The lenders waived off the past markup and initial Tier-2 debt markup on the condition that the principal and the subsequent markup will be paid in a timely manner. CHBL incurred a net loss of Rs.452.377 million in 2022 with a loss per share of Rs.3.93. In 2023, CHBL posted a tremendous 322.44 percent year-on-year growth in its topline. After the implementation of the SOA, the banks provided the company with fresh working capital lines to carry on its operations. Sponsors also injected fresh capital of Rs.808.90 million as directors’ loans to help the company meet its financing needs. During the year, export sales grew by a massive 8 times when compared to the previous year. Export sales contributed 57.5 percent to the overall sales mix of CHBL in 2023 versus its share of 26.88 percent in the previous year. Pak Rupee depreciation also provided impetus to the export sales of the company, providing it with a robust exchange gain. Cost of sales hiked by 189.764 percent in 2023, resulting in a gross profit of Rs.28.14 million. This was the first time CHBL posted a gross profit during the period under consideration. GP margin clocked in at 1.32 percent in 2023. Administrative expenses mounted by 34.93 percent in 2023 mainly on account of payroll expenses and directors’ remuneration. The company expanded its workforce to 877 employees in 2023. Distribution expenses escalated by a massive 410.425 percent in 2023 mainly on the back of carriage & freight, export clearing & forwarding charges as well as export development surcharge incurred during the year. Other expenses slid by 50.92 percent in 2023 due to the high-base effect as the company recorded a loss on the disposal of operating assets and investment property in the previous year. Other expenses of Rs.17.16 million recorded in 2023 were due to loss on disposal of non-current assets held for sale. The company sold its non-core assets under the SOA and was liable to pay 75 percent of the sales proceeds to the agent bank which will then pay each lender on a pro-rata basis. The remaining 25 percent was injected as working capital for the company. Other income contracted by 36.92 percent in 2023 as CHBL didn’t write back any credit balances in 2023, unlike last year. The company recorded an operating loss of Rs.159.99 million in 2023, down 39 percent year-on-year. Finance cost surged by 23.71 percent in 2023 on account of markup due in accordance with the SOA as well as short-term borrowing of Rs.70 million acquired during the year for working capital requirements. CHBL recorded a net loss of Rs.405.14 million in 2023 with a loss per share of Rs.3.52. It is to be noted that as of June 30, 2023, the principal payment amounting to Rs.457.34 million was overdue. This was in violation of the terms set under the SOA. In 2024, CHBL’s net sales mounted by 57 percent. Export sales continued to lead the topline growth with year-on-year growth of 67.13 percent. Export sales share in the sales mix of CHBL grew to 61.16 percent in 2024. Cost of sales mounted by 58.65 percent in 2024 on the back of high electricity tariffs, inflationary pressure as well and Pak Rupee depreciation which resulted in a net exchange loss for the company. Gross profit also shrank by 61.37 percent to clock in at Rs.10.869 million in 2024. This translated into a thinner GP margin of 0.33 percent in 2024. Administrative expenses multiplied by 39.58 percent in 2024 primarily due to higher payroll expenses, utility expenses as well as vehicle running expenses incurred during the year. During the year, the company further expanded its workforce to 1109 employees. Distribution expenses escalated by a massive 246.365 percent in 2024 due to a drastic spike in carriage & freight charges as well as export clearing & forwarding charges incurred during the year. Last year, the company sold off its non-current assets at a loss as per the SOA which resulted in other expenses. However, in 2024, CHBL sold its non-current assets at a gain. This coupled with balances written back during the year resulted in 258.976 percent stronger other income in 2024. CHBL incurred an operating loss of Rs.46.29 million in 2024, down 71 percent year-on-year. Finance costs inched up by 9 percent in 2024. Since the company failed to fulfill its commitment the principal of Rs.4.29 million was overdue as of June 30, 2024. The same infringement happened in the previous year too. Hence, the past mark-up which was waived off on the condition of timely payment, was also applied. CHBL incurred a net loss of Rs.326.210 million in 2024, down 19.48 percent year-on-year. This culminated in a loss per share of Rs.2.84.Recent Performance (1QFY25) In 1QFY25, CHBL posted year-on-year topline growth of 16.32 percent. While local sales slid during the period owing to inflationary pressure which squeezed the pockets of consumers, export sales posted a reasonable growth of 18.37 percent in 1QFY25. Export sales constituted 68.58 percent of the overall sales mix of CHBL in 1QFY25. Cost of sales surged by 18.29 percent due to higher electricity tariffs and underutilization of the plant capacity which resulted in lesser absorption of fixed costs. Gross profit dipped by 46.96 percent to clock in at Rs.12.62 million in 1QFY25. This translated into a GP margin of 1.38 percent in 1QFY25 versus GP margin of 3 percent recorded during the same period last year. Administrative expenses mounted by 18.6 percent in 1QFY25 due to higher payroll expenses as well as utility charges and vehicle running charges incurred during the year. Distribution expense increased by 108 percent during the period owing to higher carriage & freight charges as well as export forwarding & clearing charges incurred during the year. No other expenses were incurred during the year. Other income also nosedived by 19.74 percent in 1QFY25 due to lesser balances written back during the year coupled with thinner rental income and lower gain recorded on the disposal of assets. CHBL recorded an operating loss of Rs.42.96 million in 1QFY25 versus an operating profit of Rs.28.67 million posted in 1QFY24. Finance costs slid by 11.47 percent during the period due to a downtick recorded in the outstanding borrowings. Net loss clocked in at Rs.111.817 million in 1QFY25, up 148.30 percent year-on-year. This translated into a loss per share of Rs.0.97 versus a loss per share of Rs.0.39 recorded during the same period last year.Future OutlookCHBL is all set to further expand its export sales, however, is constrained due to the limited availability of funds. As of September 30, 2024, CHBL has an accumulated loss of Rs.8.242 million. Moreover, its current liabilities exceed its current assets by Rs.618 million. Besides, the company has also not redeemed its preference shares for three consecutive years, which are on the exercise of a put option by the holders. The company is arranging working capital lines coupled with the injection of equity and subordinated loans by the sponsors to run its operations smoothly. With the onset of monetary easing, the company can acquire fresh loans on easier terms given the FIs agree to provide sufficient financial limits. Whether or not CHBL can turn the tables in its favor is yet to be seen.