Babri Cotton Mills Limited

Babri Cotton Mills Limited (PSX: BCML) was set up as a public limited company in 1970. It manufactures and sells yarn at its mills in Kohat.

Shareholding pattern

As at June 30, 2020, more than 56 percent of shares are held with the associated companies, undertakings, and related parties. Within this category, Bibojee Services (Pvt) Limited holds nearly 35 percent of the shares, followed by 16 percent in Janana De Malucho Textile Mills Limited. Close to 40 percent shares are with the local general public, while the directors, CEO, their spouses and minor children own less than 1 percent shares. The remaining about 4 percent shares is with the rest of the shareholder categories.

Historical operational performance

Both, the topline and profit margins of Babri Cotton Mills Limited have been fluctuating over the years, although the latter has generally followed a downward trend the past decade.

In FY17, the company saw topline rising by a little beyond 14 percent. Primarily the revenue for the company is generated through local sales of yarn, while “waste” sales make a nominal contribution in comparison. Cost of production consumed more than 95 percent of revenue, leaving little room for absorption of other costs. The entire sector generally faces the problems of power and labour costs that are high, more so in comparison to regional countries. This is made more volatile by the changes in the exchange rate against the US dollar. Thus, gross margin mostly remained flat, close to 3 percent, while the higher distribution expense coupled with little support from other income, kept the bottomline in the negative for the third consecutive year, at a loss of Rs 30 million.

Growth rate in topline was maintained at around 14 percent during FY18. However, this was offset by cost of production consuming more than 100 percent of revenue. Although the devalued currency deemed beneficial for exports, it also meant that imported raw materials became more expensive, as is seen by the high cost of production. Moreover, the company was holding large inventories of those counts of which prices fell unexpectedly. This led to a drastic fall in profit margins that was further aggravated by the presence of low cost yearn from India that put a downward pressure on prices. Thus, net margin declined to a negative 4.4 percent during the year.

Revenue continued to increase during FY19 at over 17 percent, crossing Rs 2 billion in sales. There was some curtailment in costs as cost of production lowered to 94 percent of revenue, although it still did consume a significant portion of revenue. While there was little change in other elements, it was the finance expense that increased notably to make up more than 5 percent of revenue. This was because the company obtained funds for its CAPEX program. This resulted in additions to plant and machinery but also added significantly to finance expense that led the company to incur a loss of Rs 39 million.

After rising consecutively for three years, revenue fell during FY20 by over 30 percent. This was largely due to the lower demand and halt in operations as a result of the Covid-19 pandemic. This led the company to operate at 57 percent capacity which meant that it was unable to cover its costs. This is evident from cost of production exceeding revenue by roughly Rs 118 million. Similar change was also seen in administrative expense which made a larger share in revenue at nearly 6 percent; finance expense also reached a high of 10 percent of revenue, driven by mark up on short term finances. With a continuously shrinking other income, the company incurred its highest loss of Rs 388 million.

Quarterly results and future outlook

During 1QFY21, topline more than halved year on year. This was largely due to operations staying closed during the quarter, with company making “sales of poor cotton”. The second quarter of FY21 also saw revenue more than halving year on year, however they had improved from the previous quarter, that is, 1QFY21. Similarly, 1HFY21 also saw lower topline year on year, where 1HFY20 revenue was close Rs1 billion while 1HFY21 revenue stood at a mere Rs 358 million in comparison.

After the closure due to the lockdown, the company was unable to resume operations due to losses, and instead leased its plant and machinery to its associated company Janana De Malucho Textile Mills Limited (PSX: JDMT). In fact, the merger with JDMT is in process. Essentially, the company’s production facilities have been closed since March 2020.

The company incurred losses in both the quarters with losses reaching unprecedented levels, to Rs 218 million for 1HFY21.

While the textile industry overall exhibited 7.79 percent in exports, however, imports also followed, growing by 5.72 percent. Despite this, the sector has been facing issues such as energy costs, raw material shortage, etc. that continue to plague the sector.