In early 2020, the Mohsin family of Renala Khurd was about to pocket a small fortune. For the past six decades, the family had been operating a 720 acre operation in this small corner of Okara that was the home base of Mitchell’s Fruit Farms.
One of the most iconic and recognisable retail brands in Pakistan, the family that owned it was in final stage negotiations to sell it. The market was buoyant. Mitchell’s stock price had soared from a low of Rs195 per share on October 11, 2019 to Rs 344.99 per share on January 27, 2020 – a stunning 77% jump in the stock price in just over three months – around the time the transaction was announced.
At the time, the company had a market capitalization of close to Rs 2 billion, and the Mohsins would have made over Rs 1.2 billion from the sale if they managed to get a price even close to this. Then the deal fell through. The Covid-19 pandemic jolted the world economy, and the offer made by Bioexyte dropped dramatically. The sale fell through.
And the news was not taken well by the family.
Mitchell’s was struggling. Established in 1933 by Francis J Mitchell, it had been purchased by Syed Maratib Ali, the father of Syed Babar Ali, in 1958 and given to his son-in-law S M Mohsin to run. For decades, this branch of Syed Maratib Ali’s family turned Mitchell’s into an impressive company. Over time, S M Mohsin was joined by his son Mehdi Mohsin. But persistent losses since 2015 had brought the family to a point where they wanted out. When the deal fell through, fingers were pointed towards Mehdi Mohsin and the family decided to go in a different direction.
Enter Najam Sethi.
Chief Minister, Cricket Boss, journalist, publisher, CEO, and now son-in-law extraordinaire. Mr Sethi is the husband of Syeda Maimanat Mohsin, better known as Jugnu Mohsin. Even though the company was being run by S M Mohsin and his son Mehdi Mohsin, S M Mohsin’s two daughters also have an equal share in Mitchell’s at just over 20% each. So when Mehdi was ousted, Najam Sethi became the Chairman of the Board for Mitchell’s.
In the four years since, Mr Sethi has gone one to establish his control on Mitchell’s. He appointed a loyalist from his days at the cricket board as the CEO, before resigning from the Chairmanship of the Board to take up the CEO job himself.
And this year he has managed to oversee an event that last took place in 2015: Mitchell’s posted a profit. This is despite the fact that the financial year 2022-23 had presented a bleak picture, with Mitchell’s posting a loss of Rs 5.9 crores, and its short-term liabilities exceeding its short-term assets by Rs 37.1 crores. That’s not all: the accumulated losses were such that the company’s reserves were depleted, and it was negotiating with banks to renew loans.
So what happened to turn that around? And how does Najam Sethi figure into all of it?
The prodigious son (in law)
Even before Mitchell’s went up for sale, Najam Sethi was involved in the business. Kind of.
In 2018, he was appointed as a non-executive director to the company’s board. It is a position essentially created for son-in-laws of rich business owners. And while he may have been Chief Minister, Chairman of the PCB, and the editor of a national newspaper (admittedly this last one isn’t as impressive, but it means something to those of us in the news industry), he had never really been part of the business.
Mr Sethi’s real involvement begins, as we have noted, in 2020 when he becomes chairman of the board. At the time, the understanding among the Mohsin family was that Mehdi Mohsin had failed to see through the sale of the company, and someone else should be at the helm while they found another buyer. As Chairman of the Board, Sethi was in charge but he was allowing his CEO to run the show.
The situation, however, did not seem to change as the company kept making losses. Things came to a head in 2022 when the company registered its biggest loss in history, going down by Rs 62.2 crores. Something had to give. That is when he decided to get into the driver’s seat himself, resigning as Chairman of the Board and becoming the company’s CEO.
After taking charge, he promised to make the company profitable again. After just one and a half years, the company has recorded a profit of Rs 45.6 crores. Considering that the company has been making losses since 2015, this is a significant development as a financial milestone for the company. Should Sethi be taking a victory lap for this achievement? The answer might be a timid maybe for the time being. But why do we advise this caution? The answer is in some of the finer details of Mitchell’s performance in the past two decades.
Before and After Sethi
The financial performance of the company has to be seen in context to before Sethi and after Sethi. From 2009 to 2020, gross profit margins were averaging around 22%. By 2022, this had plummeted down to 8%. Sethi has not only seen gross profit margin return back to 24% in 2023 but has been able to grow it to almost 30% in 2024. Similarly, operating profit margin from 2009 to 2020 averaged at around 4% seeing a low of -16.5% in 2018 and a high of 9.3% in 2012. By 2022, the ratio fell to a low of -22% in 2022 and has recovered back to 22% in 2024.
The problem that has plagued the company since 2015 has been consistent losses. Before 2016, the company was recording steady profits with an average net profit margin of 4% from 2009 to 2015. After 2016, the loss of the company started to rack up leading to a net profit margin of -18% in 2018 which had returned to -2.6% in 2020. The worst was still to come when the company saw a net loss margin of 25% in 2022. Since Sethi has taken over, the net losses have reduced and Mitchells saw its net profit margin rise to 17% in 2024.
To really see how bad things had gotten for the company, the valuation of the equity of the company has to be considered. Just before the losses started to hit the company, the company had an equity of Rs 57.3 crore in 2015. As losses started to accumulate, the company saw its equity fall to Rs 74 crores, marking a decrease of 87%. Between 2019 and 2020, the company suffered losses of Rs 55 crores, which meant that accumulated profits went from Rs 38 billion to losses of Rs 14 billion. Due to the steady hemorrhage of profits, the company started to lose equity and had to supplement it with the use of additional liabilities.
As assets remained similar, the company had to borrow, leading to its short term liabilities growing from Rs 53.1 crores in 2015 to Rs 1.1 billion in 2019. This increase in liabilities was carried out in order to fund the operations and the working capital of the company as it could not be supplemented with profits. One of the biggest components of these liabilities was the loan that was procured from the shareholders of the company who lent around Rs 20. crores to the company in order to fund its working capital needs. There was a linear relationship that was seen as equity started to fall, these loans were used in order to plug the working capital gap that started to emerge at the company.
The management change
Once it was decided to bring in a new management, the shareholders started by injecting new equity into the company. This was done by carrying out a right issue of 190% at a premium of Rs 40 per share. This meant that an individual with 1 share of the company was given 1.9 shares and had to invest Rs 40 per share in order to exercise the right and get additional shares in the company.
The company saw its share capital rise from Rs 7.9 crores to Rs 22.9 crores due to the share issue. The company was also able to get a share premium which increased its capital reserves from Rs 90 lakh to Rs 60.9 crores. This injection was vital in order to help the company get additional funding which could be used for working capital needs and other requirements that the company had. Rather than depending on additional loans and liabilities, the company could sustain itself based on the investment that was carried out. This can be seen as a vote of confidence from the company as they saw the prospects getting better in the future and shareholders were willing to invest further in the company.
When the old management left in August of 2020 and Sethi was made the chairman of the board, one of the initial changes that was made was that the new board appointed Naila Bhatti to replace the previous CEO. Armed with additional funding and fresh blood, it was expected that the company would be able to change its own fortunes. Sadly, things got worse before they got better. Any signs of profits returning to the company soon subsided when in 2022 the company recorded the highest losses in its history of Rs 62.2 crores. Much of the equity that had been raised was wiped out. It was felt that another change was needed and so Sethi decided to roll up his sleeves and jump in.
The Sethi effect
The appointment of Sethi seems to have paid off for the time being. Sethi was not only able to halt the slide that the company was experiencing but even turned the company profitable. He was able to turn losses of Rs 62.2 crores to Rs 5.9 crores in 2023 and has been able to earn profits for the company of Rs 456 million in 2024. Comparing the performance of the company in 2023 and 2024 shows that Sethi has been successful in his initial mission. The performance of the company has shown that one of the biggest cost centers of the company has been its cost of sales which were 92% in 2022 and have averaged 78% from 2009 to 2023. This can be seen in the fact that revenues were quite similar in 2023 of Rs 2.7 billion and Rs 2.6 billion in 2024, however, gross profits increased from Rs 64.8 crores to Rs 78.9 crores in a year. Sethi has been able to decrease these costs and has brought them down to 70% in 2024 which is the lowest it has been for the last 15 years.
Similarly, in an environment when many companies are seeing their costs rise, Mitchells has been able to decrease its distribution and administrative costs from 31% in 2022 to 20% in 2024. This was reflected in the amounts which were Rs 63.2 crores in 2023 and decreased to Rs 51.9 crores in 2024. Due to cost savings, the company saw an increase in profits from Rs 1.5 crores to Rs 27.1 crores. This points towards the efforts of the senior management.
Other operating expenses of the company also decreased from Rs 6.4 crores to Rs 5.4 crores. This shows that Sethi does deserve a pat on the back as he has been able to increase profits by Rs 25.6 crores for the company which was primarily making losses just 18 months ago.
But is it all due to his efforts? Maybe not so much.
One of the biggest generators of revenues has been Rs 37.2 crores which is part of other income for the company. It has been seen that the company is writing back many of its liabilities. In other terms, a liability is written back when it is settled for an amount less than the one that was originally recorded at. A loan of Rs 100 is recorded at cost. If at a later date, it is settled for Rs 80, the Rs 20 is seen as an income for the company. It seems that Mitchells has seen something similar. In 2022, other income only clocked in at around Rs 4.8 crores which increased to Rs 10.8 crores in 2023 and Rs 37.2 crores in 2024. Out of the Rs 10.8 crores seen last year, Rs 8 crores were liabilities written back. The amount seen in the latest year also points towards something similar taking place as the company saw other income of Rs 3 crore until March of 2024 which has increased 12 folds in a matter of three months. Once detailed accounts are released, this hypothesis will be confirmed as it will be seen that the company has been able to settle its debts at a lower cost.
So where do we stand? On one hand, we can credit Sethi for making the company leaner and more efficient. Seeing a turnaround in a matter of months does go to show that he has been successful in bringing a change at the company. But that is only half of the tale. It can also be seen that the company is depending for half of its performance on writing back liabilities as the company looks to settle or clear its liabilities and debts at a lower price. The journey of the turnaround will start to become clearer in the next year or so when it can be seen which of these reasons wins out and whether the company stays in the black under Sethi’s leadership.
