Babri Cotton Mills Limited

Babri Cotton Mills Limited (PSX: BCML) was established as a public limited company in 1970. It is engaged in the business of manufacturing and selling yarn. Their mills are in Kohat with a capacity of 53,256 spindles as of 2019.

Shareholding pattern

More than 50 percent of the shareholding is held under the category of associated companies, undertakings and related parties, of which Bibojee Services (Pvt) Limited holds 35 percent shareholding. The latter was incorporated by Lt. General (R) M. Habibullah Khan, who also set up Babri Cotton Mills. The local general public holds about 39 percent. The remaining about 5 percent is distributed with the rest of the categories.

Historical operational performance

From FY15 onwards Babri Cotton Mills has seen a negative growth period in its bottomline, with net margins staying in the red until FY19. Despite a double-digit growth in topline, the company has so far been unable to come out of losses, albeit the improvement witnessed in FY19.

Looking at the past five years’ performance, the company saw a negative 9 percent decline in its sales revenue during FY15. This was for the third time in the last three years. Contrary to expectations built up by the grant of GSP+ status by the European Union, sales revenue failed to pick up in FY15 due to the slump in US and European markets. In addition, demand was also lower for yarn in the international market. As a result, yarn was directed towards the domestic market which led to a fall in prices. It must also be considered that cost of production, which was already high, around more than 85 percent, further increased to consume more than 100 percent, causing net margins to run into a negative nearly 5 percent. The increase in cost of production was driven by increase in labour cost.

Revenue further went down by almost 18 percent in FY16- the highest decline seen in revenue in the decade. As it is that the textile industry of the Pakistan had been facing a myriad of problems, with losing competitiveness in the international market, the spinning segment within the sector faced a major decline; value-added sectors comparatively fared better. Although cost of production reduced in comparison year on year, it was still abnormally high at more than 95 percent. However, some support was brought in by a reduction in finance costs which halved year on year, mostly due to reduction in mark up on short term finances.

Babri Cotton Mills managed to grow its topline by 14 percent in FY17. This was due to some improvement in yarn prices. There was a marginal decline in cost of production; it remained similar due to an increase in labour costs and fuel and power expenses. The country has been facing high costs of inputs when compared to regional players, while devaluation of rupee currency further added to the risk. The company which has consistently faced a high cost of production, particularly in the last five years, tried to focus on new markets, better quality and marketing in order to reduce losses.

Although the company saw one of the highest growth rate in its topline of 14.5 percent during FY18, its bottomline continued to decline. The cost of production increased not only in value terms but also as a percentage of revenue. Exceeding revenue, cost of production rose primarily due to cost of raw materials. The company mostly operates in the local market, hence was unable to profit from currency depreciation. Given the fine counts range, the company must rely on imported raw material, the costs of which significantly rose due to the currency depreciation. Despite the support brought in by impairment loss/gain on investment in associated company, the damage had already been done with net margins reaching a negative 4 percent.

Topline continued to grow during FY19 at 17 percent. Cost of production, standing at almost 95 percent of the revenue, improved notably allowing gross margin to increase. With other costs remaining more or less unchanged, the improvement in gross margin still could not be translated into a better bottomline as finance cost that rose to more than double year on year, increased loss before taxation to a high of Rs95 million. However, this was offset by taxation, that allowed some respite, albeit net margin was still negative.

Quarterly results and outlook

After increasing for three consecutive years, during 9MFY20, the company saw its revenue falling by 11 percent year on year. Cost of production increased, exceeding revenue, leading to a gross loss. This was further aggravated by a high finance cost due to high interest rates, thus reducing net margin to its lowest seen in a decade.

With the company’s financials already in the negative, the impact of Covid-19 in terms of lower orders and demand along with a high finance cost, it will take time for recovery.