Craftsman Footwear, a newly listed shoemaker and exporter under the SME board, gained healthy profits in the last three financial years, but its profit growth has declined, interest rate rose, and debt became significant, while leather goods and footwear exports fell globally.
The string of events has created challenges for the company, according to a research paper by EBL Securities.
The company is highly exposed to credit risk and interest rate risk as the company’s debt-to-equity ratio and interest coverage ratio stood at 1.87 times and 0.03 times respectively, read the paper.
Craftsman Footwear’s debt amount reached Tk 56.86 crore, while the asset value was Tk 91.12 crore at the end of FY23, which means the loans were 62.40 per cent against the asset.
Recently, the Bangladesh Bank hiked the policy rate to 8.5 per cent to control the ongoing high inflationary pressure. This move will increase the bank loan interest rate to around 14 per cent to 15 per cent. It will increase the cost to fund.
That is why Craftsman Footwear had decided to list in the Dhaka Stock Exchange (DSE) and get node in February this year.
Speaking to The Business Post, Craftsman Footwear Managing Director Sadat Hossain Salim said, “The bank loan interest has already increased, and could reach 15 per cent in the coming days, which will impact sustainable business growth.
“That is why we want to raise funds from the stock market for business expansion.”
Craftsman Footwear manufactures and sells different kinds of leather footwear and leather goods in the local and export markets. The company primarily exports its products to Europe, USA, and Japan.
It registered 237 per cent year-on-year growth in export revenue for the period of FY23, which accounted for 96.8 per cent of the total revenue during the period. The company exported around 340,000 pairs of shoes until June 2023.
To further increase its export volume, the company has plans to enhance production capacity by adding 2 new lines in the sewing department and 1 new line in the lasting department at the export unit within FY24.
The expansion initiative is expected to increase the capacity of the sewing department and lasting department by 900 pairs and 850 pairs per day respectively.
Craftsman listed in the stock market to raise Tk 5 crore. It will allocate Tk 3.54 or 71 per cent of the total QIO proceeds for BMRE and working capital investment, which is anticipated to increase the revenue and earnings of the company in the upcoming years, said the research.
It should be noted that Riff Leather Ltd is one of only five companies in the country certified by Leather Working Group (LWG), and is a major supplier of Craftsman, which can provide it a competitive edge of availing higher prices in the export market.
However, Export cash incentive on leather goods is slashed to 12 per cent from 15 per cent, which may reduce the contribution of the export cash incentive (223.7 per cent of net profit for the company) in the bottom line of the company.
According to the EPD data leather footwear export growth was negative 25.8 per cent, with only 1.63 per cent positive growth in leather products and the leather export growth was 10 per cent positive for the July-April period of FY24, compared to year on year.
Besides, overall leather sector earning growth against export was negative 18.45 per cent, while leather products export growth was 17.4 per cent and footwear growth was negative around 7 per cent in FY23, compared to FY22.
Investment concern
Craftsman has several good features but has also some areas of concern, which is indicated by the EBL research. The concern areas are declined gross profit, a short period of operation, and highly concentrated with two customer bases on the export side.
Both the gross profit margin and operating profit margin of the company have declined by 1,240 bps and 1,710 bps respectively since the inception of commercial operation, owing to higher production cost and buying agent commission.
The company initiated commercial operation only three years ago and that entails significant risks due to the uncertainty regarding the sustainability of revenue and earnings growth over the long term.
The customer base of Craftsman is highly concentrated as ALDOPAR and DEICH jointly constituted 58.3 per cent of the total export volume until FY23.
About Craftsman
The company has two production units – Unit 1 produces for local sales, while Unit 2 manufactures for exports, which started operation in April 2021, located in Sreepur, Gazipur.
To achieve the target, it plans to introduce a double shift at its factory in Gazipur by next year. Currently, it operates three production lines – cutting, sewing, and lasting – manufacturing around 2,000 pairs of shoes daily.
Incorporated in 2017, Craftsman started commercial production in 2020 as a shoe manufacturer for the export market, with 35 employees at a small factory unit at Joina Bazar in Sreepur upazila of Gazipur district.
Craftsman Footwear started its journey as a diversified business unit in leather segments and began manufacturing different types of “leather goods, crafts, and footwear.”
The company also has a state-of-the-art manufacturing facility with a 100,000-square-foot factory area with more than 750 employees.
Its managing director mentioned that skilled designers at the Craftsman factory produce a diverse range of shoes that adhere to global standards. The production unit has cutting-edge machinery from Italy and Germany.
Green Delta Capital is acting as the issue manager for the company.
