Kohinoor Mills Limited

Kohinoor Mills Limited (PSX: KML) was set up in 1987 under the Companies Ordinance, 1984. (now, Companies Act, 2017). The company has three major business divisions of weaving, dyeing and finishing, and energy at its manufacturing facility located in District Kasur.

Shareholding pattern

As at June 30, 2020, over 41 percent shares of the company are held by its directors, CEO, their spouses and minor children. Of this, more than 31 percent shares are owned by Mr. Aamir Fayyaz Sheikh, the CEO of the company. Another 40 percent of the shares are held under the category “shareholders holding 10% or more”. The local general public owns about 9 percent shares, followed by 6 percent in NIT & ICP; the remaining 4 percent shares are with the rest of the shareholder categories.

Historical operational performance

The topline of Kohinoor Mills has mostly been rising, whereas the profit margins have been fluctuating over the years.

During FY17, the company experienced one of the highest growth rates in revenue at over 24 percent, crossing Rs 10 billion in value terms. Note that export sales contribute a major part to the total revenue pie. During the year, export sales registered a 17.5 percent increase while local sales nearly doubled year on year. Despite this, gross margin reduced to over 13 percent. Within the divisions, the dyeing division saw a reduction in profit margins due to rising greige prices and a sluggish demand situation in the international market.

On the other hand, cost of production increased to make up over 86 percent of revenue, due to rising raw material costs. This is evident by raw material expense making a larger part of the total costs, at nearly 72 percent, compared to almost 67 percent in FY16. However, the reduction in finance expense, arising from certain adjustments made, helped to keep net margin more or less flat at over 1 percent.

Revenue growth was marginal at nearly 2 percent during FY18. While export sales increased by less than 1 percent, local sales registered an almost 8 percent incline. During the period, the company installed 84 high-speed air jet looms in the weaving division that became operational in the second half. The result from this increase in production capacity, that is, the inter-division sale was not factored in the financial statements, therefore keeping topline growth marginal. The dyeing division, on the other hand, saw rising costs in raw materials and utilities, in addition to slow demand that kept its profit margins in check. Thus, gross margin further reduced to 12 percent. However, net margin improved to over 2 percent on the back of other income. The latter picked up primarily through a net exchange gain.

Revenue growth was back in double digits at over 28 percent during FY19, nearing Rs 14 billion in value terms. Export and local sales witnessed an increase of almost 29 percent and 33.7 percent, respectively. Both the weaving and dyeing division saw an improved turnover combined with the benefit arising due to currency devaluation. The weaving division saw better results due to the installation of the new air jet looms, while the dyeing division also benefitted from additional machinery that increased production capacity by 20 percent. Better and new machinery also allowed for some cost savings reflected in cost of production that reduced to 85 percent. Coupled with other income sourced mostly from a net exchange gain, net margin also increased to over 5 percent.

After rising consecutively for five years, topline contracted in FY20 by 14 percent. Export sales and local sales saw declines of 11.5 percent and 23 percent. This was attributed to the outbreak of the Covid-19 pandemic that resulted in change in spending preferences towards basic necessities. This in turn, resulted in cancelled and delayed orders. Cost of production reduced marginally to 84 percent of revenue, raising gross margin to over 15 percent. However, this was not reflected in the net margin that fell to 3 percent due to the significant reduction in other income that was previously making considerable contributions to the bottomline. The reduction in other income was due to the absence of a net exchange gain primarily.

Quarterly results and future outlook

During 1QFY21, revenue was lower by 20 percent year on year. Although the company did post a profit for the period, it was considerably lower from the same period last year. This was due to the effects of the Covid-19 pandemic and the resultant lockdown, whereby demand had not yet fully recovered.

The second quarter of FY21 also saw a lower topline year on year; overall 1HFY21 was lower by nearly 18 percent year on year. The second quarter of FY21 saw a higher other income compared to the first quarter, therefore bottomline was better. However, collectively, 1HFY21 still witnessed lower margins year on year, despite the better other income, due to a higher cost of production, at nearly 86 percent.

Given that the company has undertaken BMR activities and added machinery that has help to increase its production capacity. With the government’s focus towards textile reforms, textile sector posts a positive outlook, although rising input costs pose a challenge, along with the need for consistent and implementation of policies.