Security Papers Limited (SEPL), the country’s specialist maker of banknote paper and other high-security substrates, closed fiscal year 2025 with an 8% rise in net sales and modest growth in earnings, underscoring both the company’s defensiveness and its growing exposure to Pakistan’s gradual shift away from cash. The manufacturer reported earnings per share of Rs25.72 for FY25, up slightly from Rs25.12 a year earlier, with fourth-quarter EPS at Rs7.14 versus Rs6.85 in the same period last year. Operating profit for the year rose 8% to Rs1,702 million as gross margins held steady at 28%.
The topline grew from Rs7,312 million to Rs7,871 million as the State’s demand for banknote paper and related security-grade products remained steady after two years of currency in circulation expanding rapidly during high inflation. But the cadence is clearly slower now. With headline inflation easing from last year’s peaks, the central driver of physical-cash demand – household and retail cash balances chasing rising prices – has cooled. For a company whose principal customer is the State’s banknote printing apparatus and whose revenues ultimately reflect the economy’s reliance on cash, this slow down matters.
SEPL’s business model has long been a mirror to how Pakistan pays, saves and transacts. When inflation is raging, currency in circulation tends to expand faster, banks load ATMs more frequently, and wear-and-tear retires notes sooner – each of which pulls forward demand for fresh banknote paper. When inflation slows and digital alternatives – RTP rails, QR wallets, and card acceptance – chip away at cash’s share of transactions, that pull moderates. FY25’s results capture the inflection: growth, but at a reduced speed, and profitability that relies more on disciplined operations than on extraordinary volume.
That is not to say demand has vanished. SEPL still produced roughly 3,500 tonnes of banknote paper in FY25, and management has signalled that FY26 will be a “transition year” during which inventory is run down as the company upgrades production. The centrepiece is a Rs3.4 billion capital investment to modernise Paper Machine-2 (PM-2) – a project already mobilised with a 15% advance from internal cash – so that future output can embed enhanced security features demanded by its principal client.
SEPL’s FY25 income statement reads like that of a disciplined, utility-adjacent supplier: steady revenue, tightly managed costs, and a small decline in dividend per share to Rs11.5 from Rs12.5 to conserve cash for capex. Net sales rose 8% year on year to Rs7,871 million; cost of sales grew at the same 8% pace to Rs5,667 million; and gross profit improved to Rs2,204 million, maintaining the 28% gross margin seen last year. Operating profit advanced in lockstep to Rs1,702 million, while EBITDA rose 9% to Rs1,956 million on higher depreciation associated with ongoing asset renewal. Fourth-quarter dynamics were similar: revenue up 2% to Rs2,045 million and operating profit up 7% to Rs483 million as the product mix skewed slightly richer, nudging quarterly gross margin to 30%.
The more consequential development sits off the P&L: the supply contract with Pakistan Security Printing Corporation (PSPC) – historically priced to deliver a 28% margin – concluded in June. Pricing is under renegotiation “in accordance with prevailing industry benchmarks”. Depending on where the parties land, the margin structure that has anchored SEPL’s economics could shift up or down a few percentage points – material for a business with a single dominant buyer and a narrow product set.
Against this backdrop, Pakistan’s payment mix is changing. The company’s ability to make money is fundamentally tied to the lifecycle of physical cash: notes must be issued, handled, and eventually replaced. Lower inflation reduces churn; better banknote substrates lengthen circulating life; and every incremental digital transaction is one less note handled. None of this spells immediate obsolescence for banknote paper – cash remains deeply embedded in retail and informal trade – but it does cap the growth rate. FY25’s slower revenue expansion is an early data point for that thesis.
Security Papers Limited is a purpose-built enterprise: it exists to supply the sovereign (via PSPC) with secure paper for currency and other sensitive instruments. Over decades, the firm has built process know-how in fibre selection, watermarking, embedded threads, and surface treatments that deter counterfeiting and extend note life. The company is listed on the Pakistan Stock Exchange and treated by investors as a defensive industry: demand is anchored in sovereign operations, volumes track macro variables like inflation and currency in circulation, and pricing is shaped by negotiated contracts rather than purely by spot competition.
While the company’s early history is bound up with the State’s need to localise banknote supply, its modern arc has been one of gradual integration and periodic technology refreshes. PM-2’s planned upgrade is of a piece with that approach: a step-change in capability to meet the latest security spec, rather than an expansion in nameplate tonnage for its own sake. Management’s indication that FY26 will be used to “reduce inventory” reinforces the view that SEPL is prioritising mix and specification over sheer output tonnage, aligning manufacturing with client roadmaps for future note series and anti-counterfeit features.
SEPL’s portfolio centres on high-security paper, most critically banknote paper destined for PSPC. The hallmark is not the fibre alone but the multi-layered security embedded during papermaking: watermarks, security threads, windowed features, and chemical markers that perform under machine and manual verification. The PM-2 upgrade is explicitly targeted at enabling “enhanced security features” in future runs – a requirement now common in the global banknote industry as central banks fight increasingly sophisticated counterfeiting techniques.
The company reports only a limited requirement for cotton comber and sources most of it through imports, insulating it from domestic cotton shocks – including the recent flood-related disruptions in local supply. This raw-material posture reduces one of the classic volatility channels in Pakistani paper and textile manufacturing, where local cotton crop variability often whipsaws margins.
SEPL produced around 3,500 tonnes of banknote paper in FY25. The plant’s near-term emphasis is on upgrading PM-2 and running down inventories in FY26 to smooth the transition. The capex – Rs3.4 billion – has been approved by shareholders and partly advanced from internal cash, signalling both balance-sheet capacity and urgency. For a niche, single-buyer supplier, this is a strategic investment: it preserves SEPL’s position as a qualified source for the next generation of Pakistani banknotes, where feature-sets (e.g., denser threads, optically variable elements, durable coatings) demand precise process control at high yields.
SEPL’s anchor relationship is with PSPC. The FY25 note that the legacy “28% margin” contract ended in June, and that new pricing will align with industry benchmarks, is the single most important commercial update this year. It suggests a pivot from administratively stable margins to potentially more market-referenced pricing, which could narrow or widen spreads depending on raw-material indices, energy costs, and peer benchmarks in comparable economies.
FY25’s Rs7,871 million net sales represent an 8% increase over Rs7,312 million in FY24. At face value, that is simply growth. Stripped to drivers, however, the number likely reflects a combination of (i) residual note-replacement demand after two inflationary years, (ii) modest price effect from input pass-throughs, and (iii) normalisation of production following earlier supply chain tightness. The 2% year-on-year growth in the fourth quarter implies momentum softened into year-end as inflation – and with it, currency-in-circulation-linked demand – receded.
Gross margin held at 28% for the full year, with a more favourable 30% print in 4QFY25. The steadiness suggests SEPL executed well on raw-material sourcing and energy cost control. Depreciation rose 13% to Rs254 million, consistent with recent capital works; EBITDA margin ticked up, with EBITDA reaching Rs1,956 million (up 9%). These are robust numbers for a manufacturer in a high-energy-cost country and owe much to the contractual nature of pricing and the limited competition in SEPL’s niche.
PSPC pricing. The previous framework yielded a 28% margin; if the new benchmarked pricing were to tighten, SEPL would need to defend unit economics through yield improvements and lower waste, or through mix that favours higher-spec banknote series. Conversely, if inflation’s long-term trend down supports fewer note issues per year, the pricing formula may need to preserve margin on lower volumes to sustain domestic capability. Either way, the FY26 “transition year” suggests the company is engineering its production plan and inventory to that negotiation timeline.
On raw materials, management notes only a “limited requirement for cotton comber”, largely imported, and therefore not materially affected by flood-hit domestic cotton supply in 2025. This is a meaningful insulation from a classic Pakistan risk factor and helps explain the margin stability this year despite agricultural shocks. Energy remains a separate, non-trivial cost driver, but the steady gross margin implies either reasonable pass-throughs or efficiency offsets.
SEPL’s near-term priorities are clear: complete the PM-2 upgrade on time and on budget; manage the PSPC renegotiation to a sustainable benchmarked price; and use FY26 to recalibrate inventories and product mix for a next-generation banknote specification. Each of these is within management’s control.
The less controllable variable is the payments landscape. Pakistan remains a cash-heavy economy by international standards, but digitisation is compounding: real-time rails broaden acceptance; government-to-person payments digitalise; and retail QR adoption expands. As this continues, the lifecycle demand for banknotes grows more slowly than nominal GDP. SEPL’s response – investing in higher-security, longer-life note paper and running a lean balance sheet – aims to protect margins even if total note-paper tonnage plateaus.
There are also hedges the company could consider over time. Globally, security-paper makers have diversified into passports, identity documents, tax stamps, and certificates. The skills are transferable: embedded features, substrate chemistry, and precision process control. SEPL’s disclosure for FY25 does not detail such expansions, but the PM-2 upgrade is a platform on which adjacent products could, in principle, be developed if domestic demand or policy opens space. For now, however, the business remains tightly focused on Pakistan’s banknote paper requirements.
FY25 shows a franchise in good operational health, modestly growing revenues in a slower-inflation environment, and maintaining enviable margins while stepping up investment for the next security-feature cycle. The stock’s appeal to investors rests on three pillars: (i) visibility of sovereign-linked demand; (ii) low leverage and strong cash generation; and (iii) a credible capex plan tied to clear client specifications rather than speculative capacity. The key watch-items for FY26 will be the PSPC pricing outcome, progress on PM-2, and evidence that SEPL is successfully managing a cash-lite future – by extracting more value per tonne through enhanced features and by keeping the cost base disciplined as volumes normalise. Of all three, FY25 provides reasons for cautious confidence.
