Ideal Spinning Mills Limited

Ideal Spinning Mills Limited (PSX: IDSM) was set up by the Ideal Group in 1989 under the Companies Ordinance, 1984. It manufactures and sells yarn, cloth and hosiery products. Its manufacturing facility is located at Sheikhupura Road, Faisalabad.

Shareholding pattern

As at June 30, 2020, the directors, CEO, their spouses and adult children hold over 75 percent shares of the company. Of this, nearly 19 percent is owned by the CEO, Mr. Amjad Saeed, and almost 17 percent owned by one of the directors, Mr. Khizar Saeed. A little over 17 percent shares are held under the category of “individuals”, followed by 7 percent in “others”. The remaining 1 percent shares are with the rest of the shareholder categories.

Historical operational performance

With the exception of FY17, the topline of the company has mostly been rising, whereas profit margins have been on an incline after dipping in FY17.

During FY17, topline of Ideal Spinning Mills contracted by 7.4 percent. Yarn sales fell by 16 percent, while conversion income/cloth sale reduced by 13 percent. Segment-wise, it was the spinning segment that witnessed a decline in sales, incurring loss for another year, while the weaving segment saw its topline improving year on year by 48 percent, and profit before taxation also more than doubled in value terms year on year. There has been a recession in the spinning segment of the textile industry of the country, due to rising electricity tariffs, input costs and political instability. This is reflected in the cost of production consuming more than 95 percent of revenue during the year. Increases in administrative and finance expense caused a further dent in profitability causing the company to increase its loss for the year to Rs 117 million.

The company saw the highest growth in revenue in FY18 thus far, at over 23 percent; yarn sales increased by 9 percent while conversion income/cloth sale saw a growth of nearly 46 percent. Segment wise, the spinning division was able to post a profit, albeit nominal, for the year; weaving segment, on the other hand, although saw a rise in topline of over 42 percent, more than 90 percent of it was consumed by production cost and finance expense, combined. The socks division also contributed towards the topline, however, the division incurred a loss for the period. Overall, cost of production for the company was reduced to 90 percent that helped to regain some profitability as it posted a profit of Rs 5 million after incurring losses for three consecutive years.

Revenue in FY19 further climbed up, increasing by over 29 percent. Yarn and sock sales saw a 24 percent growth in sales, while conversion income/cloth sale saw a contraction of almost 7 percent. Looking at the segment division, all three divisions- spinning, weaving and socks, saw a growth in their revenues; the socks division was able to post a profit for the period, unlike FY18. Overall, the cost of production for the company reduced to 88 percent, that helped raise gross margin to its highest so far, at 11.6 percent. The increases in distribution and administration expenses were somewhat offset by the higher contribution made by other income. Thus, Ideal Spinning Mills posted a net margin of 1.7 percent- the highest so far. The increase in distribution expense was largely due to outward freight and handling and commission to selling agents.

While FY20 was a tough year for the businesses owing to the economic challenges in the first half and the outbreak of the Covid-19 in the second half, the company managed to increase its sales revenue by 11.7 percent during the year. Export sales have also been rising consistently over the years; local sales saw a rise of 10 percent, while yarn sales registered a 25.7 percent rise. Again, all three divisions saw a rise in topline, although spinning division was the only segment to post healthier profits year on year. Overall cost of production further went down to nearly 86 percent, bringing gross margin up to another high of 14 percent. The effect of this was also reflected in the net margin that also improved to its highest of 2.7 percent.

Quarterly results and future outlook

The first quarter of FY21 saw revenue increasing by 8 percent year on year as business activities resumed after the easing of lockdown. Owing to a lower cost of production during the period, profitability was also better year on year. The second quarter saw revenue higher year on year, as well as higher than 1QFY21. However, owing to a rise in distribution and finance expense, net margin was comparatively lower at 2 percent.

The third quarter saw better profitability owing to a higher topline, and improvement in costs. Net margin for 9MFY21 was recorded at 5.8 percent, compared to 2.9 percent seen in 9MFY20. With the company continuously expanding and enhancing its capacity, along with a rising topline, it is likely to see better profitability.