KTM leather (Pvt.) Ltd (Herein after referred to as ‘KTM’ or ‘the Company’) formerly known as Khawaja Tanneries (Pvt.) Limited is a private limited concern. Initially, incorporated as a partnership firm in 1935. During 1961, the status was changed to a Private Limited Company.

The Company is part of the Mahmood Group, which originally started its operations in the tannery business. Founded in 1935 by Mr. Khawaja Muzaffar Mahmood, Mahmood Group has since evolved into a diversified conglomerate. Over the decades, the Group has expanded its presence across various industries in Pakistan, establishing itself as a significant player in sectors such as textiles, leather, food and poultry, restaurants, power, equity investments, and real estate. This strategic diversification has enabled the Group to leverage its strengths and capitalize on emerging opportunities, thereby solidifying its position as a leading business empire in the country.

The Company is principally engaged in the manufacturing of a wide range of leathers, from raw hide to crust and finished stages, for both cow and buffalo. In 2017, the Company expanded its operations by initiating a leather shoe manufacturing division with a production capacity of approximately 2,000 pairs per day, including both open and closed designs. This diversification has enabled the Company to broaden its product offerings and tap into new markets, reinforcing its position as a leading player in the leather industry.

Mahmood Group maintains complete ownership of the Company with a ~100% shareholding through its family members. The ownership is divided among three brothers: Mr. Muhammad Ilyas, the Chairman, holds 2.8%; Mr. Muhammad Younas holds 28%; and the late Mr. Iqbal, whose 28% stake is further divided among his five family members. Additionally, the Chairman's two sons, Mr. Mehr Ali and Mr. Muhammad Qasim, each hold 12.8%. Furthermore, Masood Model Ginning Factories (Pvt) Ltd, an associated company, holds a 16% share. This diverse yet tightly knit ownership structure ensures strong family control and coherence in strategic decision-making, reinforcing the Company's stability and long-term vision.

The Group is planning to establish a holding structure to enhance the stability of KTM Leather (Pvt.) Ltd. This strategic move aims to streamline operations, optimize resource allocation, and improve financial management, ultimately bolstering the Company's resilience in the face of market fluctuations. Additionally, by documenting the succession plan, the Group aims to provide greater clarity and ensure a smooth transition of leadership. This forward-thinking approach not only addresses potential uncertainties but also aligns with best practices in corporate governance, securing the long-term success and sustainability of the Company.

The Khawaja Family has operated for several decades, earning a reputation as one of Pakistan's largest exporters. Over time, Mahmood Group has significantly broadened its scope, diversifying into a wide array of industries. These include textiles, leather, food and poultry, restaurants, power, equity investments, and real estate. This strategic expansion has allowed the Group to leverage its expertise and resources across multiple sectors, enhancing its market presence and driving sustained growth. By entering diverse industries, the Mahmood Group has demonstrated its commitment to innovation and adaptability, positioning itself as a key player in Pakistan’s economic landscape.

The Group maintains a robust financial profile, bolstered by a substantial equity base and a diversified portfolio of investments. This solid financial foundation highlights the Sponsors' ability to provide support if necessary. In addition to its current operations, the Group is planning to diversify by entering the vegetable and fruit exports market. This strategic move aims to further strengthen its position in the global agricultural sector, leveraging existing strengths while tapping into new growth opportunities. By expanding its reach into the agricultural exports market, the Group is poised to enhance its competitive edge and drive sustainable growth.

The Board consists of four members, including the Chairman, Mr. Muhammad Ilyas. The absence of independent directors and the board's dominance by the sponsoring family impede effective governance. Additionally, all directors have been associated with the board for over two decades, further contributing to the lack of diverse perspectives.

Mr. Muhammad Ilyas, the Chairman, brings over four decades of industry experience to the table. Similarly, Mr. Muhammad Mehr Ali, the CEO, has 16 years of experience. Both have held key positions in various local corporate bodies in Pakistan. The board possesses extensive knowledge and experience in the tannery industry, complemented by a diverse range of experiences.

The Board of Directors meets quarterly, adhering to the regulatory framework. Full attendance at these meetings significantly enhances the board's effectiveness, and minutes are meticulously documented. However, there is still room for improvement to optimize governance and decision-making processes.

During FY24, the Company has changed its auditors and appointed M/S. Yousaf Adil Chartered Accountants who expressed an unqualified audit opinion on the financial statements for the year ended June 30th, 2024. Previous Auditors M/S EY Ford Rhodes, the ‘Big 4’ accounting firm, also expressed an unqualified audit opinion on the financial statements for the year ended June 30th, 2023.

A well-designed organizational structure exists in the Company. In the first tier, operations are segregated into 7 broad departments: (i) KTM Leather Wing, (ii) Accounts & Taxation, (iii) HR, (iv) MIS & IT, (v) Internal Audit, (vi) Administration, and (vii) KTM Footwear Wing. Clear lines of responsibility are defined for each department.

Overall management control is led by Mr. Mehr Ali, son of Mr. Muhammad Ilyas, who serves as the CEO. He brings a wealth of experience and strategic vision to the Company. Under his leadership, the Company has seen significant growth and innovation. His management expertise has been instrumental in driving financial strategies and ensuring compliance with regulatory standards. Financial management is overseen by Mr. Mehmood Ahmad, the CFO. Mr. Ahmad is a CA Finalist with over 12 years of experience in finance and accounting. He has played a crucial role in maintaining the Company's strong financial health.

With a highly qualified and experienced team, the Company is enhancing its capabilities and expanding its presence both locally and internationally. Each management function is clearly defined and well-organized, enabling the Company to effectively achieve its goals. This strategic approach ensures every team member understands their role, contributing to the Company’s overall success and growth. By fostering collaboration and continuous improvement, the Company empowers its employees to deliver their best, driving innovation and operational excellence.

Currently, the Company is using Oracle based ERP solution with version R-12.2.9. The management entered into a contract with “System Haus” – a Brazilian vendor to acquire bespoke leather production software “Antara.” It went Go-Live w.e.f. July 1st, 2022.

The Company adheres to a balanced and environment-friendly growth strategy across all its operations, embracing sustainable principles that minimize environmental impact while upholding the interests of social stakeholders. As part of its commitment to sustainability, the Company has installed a state-of-the-art Waste Water Treatment Plant by Italprogetti Spa. Additionally, the Company has been awarded various ISO certifications, ensuring the highest standards of overall quality and excellence in its practices. In FY24, the Company's "Eco-Tan" initiative gained significant traction. KTM is also set to introduce new chrome-free and metal-free leather solutions to establish even higher benchmarks in sustainable production. KTM also achieved an impressive ~99% physical traceability in LWG certification in FY24.

Renowned for its exceptional craftsmanship and strict adherence to quality standards, Pakistan's leather goods are highly sought after both domestically and internationally. The industry's recent growth trajectory showcases its resilience and adaptability, even amidst economic challenges. Investments in advanced manufacturing techniques and sustainable practices have significantly enhanced production efficiency. The sector has also benefited from substantial investments in state-of-the-art equipment and technology. As Pakistan continues to prioritize this vital sector, it is well-positioned to solidify its status as a leading player in the global leather market. Ongoing efforts to expand market reach, diversify product offerings, and maintain stringent quality controls will contribute to sustained growth and success. Pakistan's leather industry is segregated into 5 major divisions including: i). Tanned Leather, ii). Apparel & clothing, iii). Gloves, iv). Footwear and v). other products. In terms of sector share, apparel & clothing of leather contributed (~31%) in total export market, accompanied by leather gloves (~35%), tanned leather (~17%), all three aggregating to ~82.82%. Leather footware (~15%) in FY24 having huge potential arising due to Trade war between USA & China & having GSP status for Europe has also stuck in low growth zone due to incompetent policies of government. Aggregating all sectors, the overall performance of the Leather Sector in terms of exports declined by ~9.01% compared to the previous year, indicating a concerning trend. With government support at the macro level and BMR investments at the micro level by industries, the sector has the potential to perform better in the coming future.

The Company is operating in ~56 countries, and continues to build lasting partnerships with international associates. In FY24, KTM has secured its position as one of the largest leather exporters in Pakistan. The Company also enjoys the increased average selling price from the national average. Despite this, FY24 presented significant challenges, resulting in a net loss for the year. Key issues included the global economic slowdown, which adversely affected performance, and domestic monetary policy adjustments, such as high-interest rates, which increased financing costs and strained the Company's cash flow.

During FY24, the Company’s topline decreased to PKR 3,773mln from PKR 4,004mln in FY23, marking a year-over-year decline of around ~6%. This reduction is primarily due to strategically decreased local sales in FY24. KTM made this strategic decision due to challenges in recovery within the local market and shifted its focus towards exports to improve overall sales recovery and financial performance. However, export sales in FY24 remained almost stagnant, decreasing slightly from PKR 3,477mln to PKR 3,452mln. This marginal decline indicates a minor drop in export performance during FY24. KTM's primary business line, tanned leather, has been the hardest-hit division within the leather sector. The tanned leather export sector has experienced significant turmoil, with exports from Pakistan declining continuously over the past years.

During FY24, the Company’s gross margin slightly increased to ~26%, up from ~25% in FY23. This improvement is attributed to a proportionate average increase in the prices of finished leather (exports) sold. The operating profit margin also rose to about ~13% in FY24, compared to ~10% in FY23, due to decreased operating expenses year-on-year. However, the net profit margin declined to -1.4% in FY24 from ~0.5% in FY23. This decline in net profit is attributed to increased finance cost in FY24. Moving forward, proactive measures can help regain momentum and ensure sustainable growth.

KTM Leather (Pvt.) Ltd's management envisions a sustainable presence in both local and international markets by investing in new technologies and machinery to enhance and streamline its production lines. Over the past year, the Company has made strategic investments to support various projects, including the installation of a Lime Split Machine and a new Toggle Machine. These advancements are aimed at improving efficiency and increasing production capacity, thereby solidifying the Company's competitive edge.

During FY24, the Company’s gross working capital days increased to ~221 days, up from ~173 days in FY23. This rise is primarily attributed to an increase in trade payables days and an extended average inventory period, which reached around ~161 days compared to ~126 days in FY23. Additionally, average receivable days rose to ~60 days from ~46 days in FY23. As a result, the net working capital cycle also lengthened to around ~73 days, up from ~61 days in FY23.

During FY24, the Company’s free cash flows from operations (FCFO) marked at PKR ~555mln, an increase attributed to the higher EBITA compared to FY23: PKR ~323 mln). Interest coverage ratio of the Company stood to ~1.1x in FY24 (FY23: ~1.2x) whereas core-debt coverage ratio remained at ~22x (FY23: ~27x).

The Company maintained a leveraged capital structure with a leveraging ratio of ~63% in FY24 (FY23: ~65%). Over the past three years, the leveraging ratio has remained within the range of ~61% to ~65%. A significant portion of the Company's debt consists of short-term borrowings, which accounted for about ~84.4% in FY24 (FY23: ~80.5%), sourced from various commercial banks.