Feroze1888 Mills Limited (PSX: FML) was established in 1972 as a public limited company under the repealed Companies Ordinance 1984. The company primarily produces and exports towels. Over the years, the company has added several units; beginning from weaving to stitching to spinning to dyeing and processing unit. The company caters to domestic and export destinations, alike.
Feroze1888 is majorly owned by its directors, CEO, their spouses and minor children; about 41 percent of the shares are held under this category. A little over 34 percent is with the individuals whereas 15 percent is with the associated companies, undertakings and related parties. The remaining about 10 percent is held with the rest of the categories.
Historical operational performance
Feroze1888 has maintained positive growth rate in its revenue for the most part, while profit margins have also mostly remained in the green, despite the decline in FY17 and FY18.
Topline saw a marginal decline of almost 1 percent in FY15. Although sales volumes were higher than last year, due to low cotton prices, sales in value terms saw a decline. Cost of production as a percentage of revenue improved, as it declined to 78 percent. While most factors remained same, the only major increase in costs was seen in fuel, power and water expense. The effect of this was reflected in the bottomline as though the company saw its distribution and administrative costs increasing driven by salaries and other factors, finance cost nearly disappeared in comparison to the previous year; this was due to a contraction in short term borrowings. Thus, net margin reached 13 percent, the highest seen so far.
Where a lot of the companies within the textile sector saw poor financial performance in FY16, Feroze1888 Mills saw its sales volume increasing as well as in value terms; the latter grew by 12 percent. This could be attributed to the fact that it produces value added items, whereas companies that were focused primarily on revenue from their spinning units saw their earnings decline due to low demand. Selling prices were also stable for the company during the year. Cost of production, on the other hand, as a percentage of revenue fell to its lowest at close to 72 percent, which allowed profit margins to peak to a level not seen again until FY19. The effect of this was seen trickling down to the bottomline as other expenses were kept in check.
Growth rate of topline almost halved during FY17, registering at 6.5 percent. This was due to lower selling prices, despite a 5 percent increase in sales volume. Cost of production also increased to take up nearly 77 percent of the revenue, up from 72 percent in the previous year; reason being higher raw material prices, which make up a significant portion of the total cost. The increase in distribution cost was noteworthy as it more than doubled during the year. This was prominently made up of marketing and related expenses. Thus, profit margin reduced to its lowest in five years.
Growth rate in topline further reduced to increase by 4 percent in FY18. where a lot of the companies benefitted by the exchange rate depreciation which made exports favourable in the international market, Feroze1888 Mills saw a subdued demand for its products. In addition, regional competition also made it difficult to claim international clients. Cost of production increased to make up 78 percent of the revenue, largely driven by increasing raw material yarn prices. Other costs continued to climb on marginally, however in FY18 the company earned income through “exchange differences on realization of export receivables”, that provided some support to the bottomline; net margin reduced marginally year on year.
In FY19, the company saw its highest rate of growth in topline as it increased by a whopping 34 percent. This is again mostly due to a volumetric increase than as a result of sales price improvement. The company generates most of its revenue from exports. Therefore, it faces risks and competition when peer country offers better prices. Cost of production went down comparatively to make up 74 percent of the revenue, whereas considerable support to the net margin was brought about by income earned through “exchange differences on realization of export receivables”. Thus, net margin reached its highest at 20.5 percent.
While the fairly recent US-China war caused a demand contraction and decline in trade, it also created opportunities particularly for the companies that were engaged in the production of value-added items, as demand shifted from these countries to countries like Pakistan.
Quarterly results and future outlook
Sales revenue continued to increase in 9MFY20 as a result of an increase in volume. This time there was also the additional benefit of USD exchange rate difference. However, this was offset by cost of production that saw inflationary pressures; expenses rose and other income reduced year on year causing net margin to decline to 11 percent during the 9-month period.
Given that textile sector is one of the major contributors to the country’s export earnings, the ongoing pandemic would have serious impact on the sector and would be long before it can recover.