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Sunrays Textile Mills Limited (PSX: SUTM) was established as a public limited company in 1987. It is part of the Indus Group of Companies, under which there are several other companies, mostly in the textile sector and one in the energy and power sector. Sunrays Textile Mills business is that of trading, manufacturing and selling yarn, with its mill located in Dera Ghazi Khan Division, Punjab.

Shareholding pattern

The company is mostly under the ownership of the directors, CEO, their spouses and minor children, with around 87 percent of the shares held under this category. Of this, 35 percent is with Mr. Kashif Riaz, the CEO of the company. Close to 6 percent of the shares are with the individuals followed by around 5 percent held in mutual funds. The remaining about 2 percent is distributed with the rest of the categories.

Historical operational performance

Apart from the two years, FY15 and FY16, Sunrays Textile Mills’ topline has been rising. Profit margins bottomed out in FY16, before improving, and reaching the highest seen in five years in FY19.

The company’s revenue fell by a little over 13 percent in FY15. Export sales dominates the topline. However, in FY15, both export sales as well as local sales registered a decline. This can be attributed to the fall in prices in combination with a low demand. Given that over the time, the country had neither been able to diversify its export markets, nor focus on value addition, when demand for yarn fell, the spinning segment inevitably saw the biggest decline, which made up a significant portion of the total textile exports. Cost of production also jumped to 93 percent of topline, of which raw material expense claimed 75 percent of the total costs. With other costs in place, net profit margin more than halved.

Revenue fell by another almost 6 percent in FY16. The 21 percent drop in export sales lowered the overall revenue despite a doubling of local sales. As seen with other companies, finding a low demand and profit margin in the international market, a lot of the manufacturers turned towards the domestic market for sale of yarn. This eventually drove down the prices of yarn in the local market. Cost of production further climbed on to reach its highest level of 94 percent. In addition, last year’s other income was higher than usual due to realized gain on disposal of other financial assets, which halved this year. Thus, net profit margin reduced to its lowest at less than 1 percent during the year.

Sunrays Textile Mills saw its revenue improving during FY17 by a little over 10 percent. There was a negligible change in export sales during the year, however, local sales increased by 24 percent. With subdued demand and margins in the global market, the company along with many others in the sector turned to the domestic market as is evident by the higher sales. Cost of production reduced comparatively, although it remained above 90 percent of the revenue. Administrative expenses have also seen a consistent incline due to increase in salaries and wages expense. It must be noted that the minimum wage had been increased. However, this was collectively offset by the rise in revenue, the effect of which was reflected in the bottomline.

Sales revenue growth at beyond 16 percent in FY18 was the highest seen up till now. This was dominated by export sales that grew by more than 50 percent whereas local sales less than halved. This was due to improvement in yarn prices which compelled manufacturers to reroute to the global market. In addition, the rupee also devaluated against the USD which made the otherwise unfavourable exports, competitive. There was a significant improvement in the cost of production as it reached 87 percent of revenue, after consecutively hovering above 90 percent for the last three years. The effect of this was seen in the bottomline as despite a notable rise in finance costs owing to short-term borrowings, profit margins continued to increase.

At nearly 23 percent, Sunrays Textile Mills saw its highest growth in sales in FY19. This was largely driven by export sales, owing to the devaluation that made exports competitive in the international market, whereas domestic sales registered a relatively small incline. Cost of production also reduced to its lowest in the last five years, at 84 percent of revenue. Thus, despite a rise in finance costs due to high interest rates, the company managed to increase net margins to almost 8 percent.

Quarterly results and outlook

Continuing the growth trajectory, revenue increased during 9MFY20 as currency further devalued. There was a more than corresponding rise in cost of production. Since the country’s cotton production fails to meet the local demand, it must be imported. The devalued currency makes imports expensive, which raises raw material expense. This caused operating margins to reduce year on year. However, the significant decline in the finance cost allowed net margins to improve year on year.

Covid-19 has impacted business around the world; Sunrays Textile Mills that largely generates revenue from exports, has also been impacted with delays and cancellation of orders. However, the textile sector of the economy, although is the biggest contributor to the GDP of the country, has been deteriorating with a lack of focus towards value addition and diversifying export markets. It is also adversely affected due to lack of research and development towards improving cotton production.

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