Verdict: Service Industries Limited delivered a materially stronger operating first half in 2026, led by the tyre business. Consolidated revenue rose 20.6%, gross margin expanded by almost four percentage points and finance cost fell 26.4%, more than doubling profit before tax. The apparent contradiction is Q2: operating profit grew strongly, yet reported profit after tax declined 24.6%. The reason is the comparison base. Q2 2025 contained a Rs3.06 billion tax credit, whereas Q2 2026 carried a Rs563.7 million tax charge. The quarter therefore looks weaker at the bottom line than the underlying operating progression suggests. The other key watchpoint is working capital: cash from operations improved, but inventory, receivables and advances expanded sharply as the group invested heavily and scaled the tyre platform.
Results at a glance
Company Name: Service Industries Limited
Ticker: SRVI
Reporting period: Six months ended 30 June 2026, including separate three-month Q2 figures for the quarter ended 30 June 2026.
Reporting basis: Consolidated condensed interim financial statements are used as the primary analytical basis because Service Industries functions largely as an investment holding company with material tyre and footwear subsidiaries. The consolidated statements are unaudited. The statutory auditor’s limited-review report in the half-year report covers the unconsolidated cumulative half-year statements; it explicitly does not constitute an audit opinion, and the separate three-month unconsolidated figures were not reviewed.
Alpha QoQ Score: 77.33
TTM Performance Score: 94.77
3Y Business Perf Score: 98.53
Sector Leadership Score: 49.6417
These four measures are AlphaGen model outputs, not company-reported figures.
- H1 consolidated revenue: Rs84.75bn, up 20.6% from Rs70.29bn. Q2 revenue: Rs42.52bn, up 12.6% from Rs37.77bn.
- H1 gross profit: Rs22.41bn, up 41.5%; gross margin expanded to 26.4% from 22.5%. Q2 gross profit rose 30.6% to Rs10.98bn and margin improved to 25.8% from 22.3%.
- H1 operating profit: Rs13.44bn, up 55.7%. Q2 operating profit: Rs6.40bn, up 37.5%.
- H1 profit before levy and tax: Rs11.21bn, up 100.6%. H1 PAT: Rs9.69bn, up 23.6%; profit attributable to parent shareholders rose 27.1% to Rs5.79bn.
- Q2 PAT: Rs4.64bn, down 24.6%, while parent-attributable Q2 profit fell 16.1% to Rs2.77bn. The decline came despite higher pre-tax profit because the prior-year quarter included a Rs3.06bn tax credit versus a Rs563.7m tax charge this year.
- H1 net operating cash flow: Rs6.89bn, up 41.3% from Rs4.88bn, even as working-capital absorption increased materially.
- Board recommendation for the H1 result: no cash dividend, bonus shares, rights issue or other entitlement.
What improved
The improvement starts at gross margin. Revenue grew 20.6% while cost of sales rose only 14.5%, lifting consolidated gross margin to 26.4% from 22.5%. Management attributes the group-level improvement to wider gross margins and operating leverage, and the segment detail shows where this came from: tyres. Tyre sales increased 30.0% to Rs64.43bn and tyre gross profit jumped 65.8% to Rs16.05bn. The segment’s gross margin therefore rose to about 24.9% from 19.5%. Management specifically cites disciplined pricing, higher volumes and operating efficiencies.
The tyre mix also shifted strongly toward the domestic market. Local tyre sales grew 37.3% to Rs52.40bn, while tyre exports increased 5.5% to Rs12.03bn. Across the group, total local sales rose 30.9% to Rs64.66bn while exports declined 3.8% to Rs20.09bn. That makes domestic tyre demand the clearest top-line engine in H1 rather than a broad-based export surge.
The wider operating backdrop was supportive but not sufficient by itself to explain SRVI’s result. Pakistan’s Economic Survey reported strong automobile production and sales growth through July–March FY2026, including a 45.5% increase in passenger-car sales and strong growth in trucks and buses. PBS later reported 4.98% growth in overall large-scale manufacturing for FY2026. These indicators are consistent with a healthier domestic industrial and auto-demand environment, but the size of SRVI’s tyre margin expansion still reflects company-specific pricing, capacity and execution as disclosed by management.
Finance cost provided another meaningful tailwind. H1 finance cost fell 26.4% to Rs2.27bn from Rs3.08bn, while Q2 finance cost fell 22.4% to Rs1.20bn. The group also reduced short-term borrowings to Rs42.30bn from Rs54.18bn at December 2025. This supports the view that lower financing intensity helped earnings. Monetary conditions were not uniformly easier throughout the period — SBP raised the policy rate to 11.5% in late April and held it there in June — so the finance-cost decline should not be attributed to policy rates alone. The period-end reduction in short-term borrowings suggests lower financing intensity may also have helped, although the filing does not disclose an average borrowing balance sufficient to quantify that effect.
Tyres are now doing most of the heavy lifting
The tyre segment contributed roughly three quarters of H1 group revenue and an even larger share of gross profit. That concentration makes the quality of tyre growth more important than the consolidated headline alone. The group reported a 25% expansion in Truck and Bus Radial tyre production capacity during the period, from 1.6 million to 2.0 million tyres per year. It also completed the listing of Service Long March Tyres Limited on PSX. The IPO raised about Rs7.77bn through issuance of 5% of post-IPO share capital, with proceeds earmarked for the Passenger Car Radial Tyre Project.
The Service Long March transaction is economically important in two different ways. First, it brings external equity capital into the tyre platform for growth investment. Second, it changes the group’s ownership structure and non-controlling interest. The consolidated cash-flow statement shows Rs7.48bn of proceeds from shares issued by subsidiary companies to non-controlling interests, while the statement of changes in equity records the impact of the deemed disposal. Those are financing and equity events, not recurring operating earnings, so they should not be confused with the improvement in H1 profit.
Capital deployment accelerated at the same time. H1 cash capital expenditure on operating fixed assets was Rs8.97bn, up 54.8% from Rs5.80bn a year earlier. Fixed assets rose to Rs56.32bn from Rs49.22bn at December. The expansion is therefore already visible in the balance sheet and cash flow, not merely in forward guidance.
Footwear: weaker sales, but better margin discipline
Footwear was the opposite mix of volume and margin. Segment sales declined 4.3% to Rs18.02bn, driven by a 15.0% fall in export sales to Rs8.05bn, partly offset by 6.5% growth in local sales to Rs9.97bn. Yet footwear gross profit increased 4.2% to Rs6.17bn and gross margin improved to about 34.2% from 31.4%. Management attributes this to prudent procurement and tight cost control.
Management says the export footwear business faced de-stocking following U.S. tariff revisions and softer U.S. and European retail demand, which shortened order horizons. This is company disclosure rather than an inference from the financial statements. The newly formed Service Athletic Global Footwear joint venture was in trial production and workforce training during the period. For the next result, the useful test is whether export orders recover while the improved footwear margin is preserved.
Why Q2 PAT fell despite a stronger business quarter
Q2 is the most easily misread part of the result. Revenue grew 12.6%, gross profit 30.6%, operating profit 37.5% and profit before levy and taxation 66.8%. Gross margin improved by about 3.6 percentage points. On those operating measures, the quarter strengthened materially year on year.
Reported Q2 PAT nevertheless fell to Rs4.64bn from Rs6.16bn. The bridge is taxation: Q2 2025 recorded a positive taxation line of Rs3.06bn, whereas Q2 2026 recorded a Rs563.7m tax expense. The official statements do not provide enough evidence in the current filing to assign a precise recurring explanation to the prior-year tax credit, so it is safest to treat it as an unusual comparative benefit rather than invent a cause. Parent-attributable Q2 profit declined less sharply than total PAT, to Rs2.77bn from Rs3.31bn.
This distinction matters for earnings quality. The current quarter’s operating improvement is visible before tax and is supported by segment margins and lower finance cost. The year-on-year decline in reported Q2 PAT is primarily a tax-base effect. That does not make tax irrelevant, but it means Q2 PAT alone understates the change in core operating economics.
What weakened / needs attention
Operating expenses rose faster than revenue. H1 distribution cost increased 15.4%, administrative expense 27.8%, and other expenses more than doubled to Rs1.16bn. The filing does not provide a sufficiently specific causal breakdown for the increase in other expenses to support a stronger claim, so it should be monitored rather than attributed to an assumed one-off.
Working capital is the bigger operational watchpoint. Stock-in-trade rose 21.8% from December to Rs32.26bn, trade debts increased 23.5% to Rs20.95bn, and loans and advances increased to Rs3.74bn from Rs1.10bn. In the cash-flow reconciliation, working-capital changes absorbed Rs5.87bn, more than twice the Rs2.47bn absorption in H1 2025. Inventory alone used Rs5.83bn of cash and trade debts used Rs4.19bn, partly offset by higher payables and contract liabilities.
The group still generated Rs6.89bn of net operating cash, up 41.3%, because the stronger pre-tax result more than compensated for the working-capital drag. That is better than a situation in which growth is entirely debt-funded, but the conversion gap matters: a large share of incremental capital is sitting in inventory, receivables and expansion assets. The next cycle should show whether this is temporary growth working capital or a persistent cash-conversion burden.
The balance sheet did improve in several respects. Current assets rose to Rs88.53bn while current liabilities fell to Rs72.18bn, taking the current ratio to about 1.23x from 1.06x at December. Short-term borrowings fell almost 22%. At the same time, long-term financing rose to Rs14.85bn from Rs12.35bn and trade payables increased 44.1% to Rs21.14bn. Liquidity is therefore stronger on the headline current ratio, but the composition of current assets — especially inventory and receivables — still deserves attention.
Recurring versus non-recurring drivers
- More recurring/core: tyre volumes, local tyre pricing and mix, tyre manufacturing efficiency, footwear procurement and conversion costs, distribution and administration expenses, financing costs and working-capital discipline.
- Comparative distortion: the Rs3.06bn Q2 2025 tax credit materially inflated the prior-year bottom line. Q2 2026 records a tax expense instead, making reported PAT growth a poor standalone measure of operating progress.
- Capital structure, not earnings: the Service Long March IPO brought roughly Rs7.5bn of subsidiary-equity proceeds into the consolidated cash flow and increased non-controlling interest. It strengthens funding for expansion but is not operating profit.
- Share subdivision: shareholders approved a 10-for-1 subdivision after the reporting date, reducing face value from Rs10 to Rs1. The company restated EPS for all periods shown; the split changes per-share presentation, not the underlying economics.
What changed versus the recent pattern
The first half marks a stronger margin phase for the consolidated group. The important change is not simply that revenue is larger; gross profit grew roughly twice as fast as revenue and profit before tax roughly doubled. Tyres are responsible for most of that operating acceleration. At the same time, footwear demonstrates that margin improvement is possible even with weaker export sales, which gives the group a second source of earnings resilience.
What has not yet been proven is cash-light scalability. The group is simultaneously carrying more inventory and receivables, spending heavily on fixed assets and funding new tyre capacity. The fall in short-term borrowing and rise in operating cash flow are constructive, but the next few periods need to show that working capital does not absorb an increasing share of operating profit as the tyre platform expands.
What to monitor next
- Tyre segment growth quality: whether local tyre sales and the roughly 25% segment gross margin can be sustained as new capacity ramps.
- Passenger Car Radial project execution: deployment of the Service Long March IPO proceeds, commissioning milestones and whether new capacity converts into revenue without excessive inventory buildup.
- Footwear exports: whether the 15% export decline reverses as customer order horizons normalize, while the segment holds the margin gains achieved through procurement and cost control.
- Working capital and cash conversion: inventory, trade debts and advances versus operating cash flow, especially after the Rs5.87bn H1 working-capital absorption.
- Funding mix: whether lower short-term borrowings persist despite elevated capex and whether finance cost continues to benefit from balance-sheet deleveraging.
- Tax normalization: future effective tax charges after the unusual prior-year credit, so reported PAT can be compared on a cleaner basis.
- Operating expenses: whether administrative and other expenses grow more slowly as the higher revenue base scales.
Verdict
Service Industries’ H1 2026 result is stronger than the Q2 PAT decline initially suggests. The operating story is a tyre-led step-up in scale and margin, supported by lower finance cost and substantial investment in capacity. Q2 itself produced higher revenue, gross profit, operating profit and pre-tax profit; the lower reported PAT was mainly the consequence of losing an unusually favorable tax comparison. The counterweight is capital intensity. Inventory, receivables and capex all increased sharply, so the next result should be judged on whether new tyre capacity and domestic demand translate into cash as effectively as they translated into accounting profit in H1.
Public sources
- Pakistan Stock Exchange — official Service Industries H1 2026 report, including Directors’ Review, consolidated and unconsolidated interim statements, segment notes, balance sheet and cash flow. Open official H1 2026 report
- Pakistan Stock Exchange — official August 27, 2026 financial-results announcement confirming the half-year and Q2 figures and nil entitlement recommendation. Open official result announcement
- Pakistan Stock Exchange — Service Industries company page, used to verify company identity, fiscal year and official announcement dates. Open PSX company page
- Pakistan Stock Exchange — official Service Long March Tyres listing/Gong Ceremony note confirming the June 2026 listing and approximately Rs7.78bn IPO proceeds. Open PSX SLM listing note
- Government of Pakistan, Finance Division — Pakistan Economic Survey 2025-26, used for first-party automobile-industry production and sales context. Open Pakistan Economic Survey 2025-26
- Pakistan Bureau of Statistics — June 2026 Large Scale Manufacturing release, used for the full-year manufacturing backdrop. Open PBS June 2026 LSM release
- State Bank of Pakistan — June 15, 2026 Monetary Policy Statement, used only to contextualize the financing-rate environment. Open SBP June 2026 monetary policy statement