Bhanero Textile Mills Limited (PSX: BHAT) is part of Umer Group of Companies. Set up in 1982, the group has companies in various sectors: within textile there is spinning and weaving, power generation, manufacturing and retail of footwear, leather manufacturing, leather garments, dairy and construction activities.
Within the textile sector, the group has three companies, Bhanero Textile Mills Limited, Faisal Spinning Mills Limited, and Blessed Textile Mills Limited. Bhanero Textile Mills has three units; one at Kotri and two at Sheikhupura.
As at June 30, 2020, close to 48 percent shares are held with the associated companies, undertaking and related parties. Within this category, Admiral (Pvt) Limited is a major shareholder owing nearly 17 percent shares. The directors, CEO, their spouses and minor children hold another 47 percent shares in the company. The largest number of shares are held by Mrs. Samia Bilal at 11 percent. About 2 percent shares are held in each of the following- general public/individuals and insurance companies. The remaining about 1 percent shares is with the rest of the shareholder categories.
Historical operational performance
Bhanero Textile Mills has mostly seen a rising topline, with the exception of FY15 and FY16 when it contracted by nearly 9 percent and 10 percent, respectively. Profit margins rose until FY19 and declined recently in FY20.
After contracting for two consecutive years, revenue in FY17 increased slightly by 3 percent. Export sales witnessed a 10 percent rise, while local sales reduced by nearly 4 percent. Cost of production, on the other hand, reduced marginally to consume nearly 89 percent of revenue, compared to almost 90 percent in the previous year. The effect of higher revenue also reflected in the bottomline that grew to Rs 276 million, with net margin recorded at 4 percent, slightly higher from last year’s 3.3 percent. The minimal growth in profitability is due to a high cost of doing business, availability of cheaper alternatives adversely affecting demand, and high energy costs that makes Pakistani textile products uncompetitive in the global market.
By FY18, growth rate in revenue increased to a significant 18 percent. Export sales increased by 7 percent, while local sales grew by 24 percent. The company did benefit from currency devaluation despite a large part of revenue coming from local sales. This is due to exports of both yarn and fabric picked up. But cost of production increasing to over 89 percent of revenue, brought gross margin marginally down to 10.75 percent. However, bottomline was supported significantly by other income that brought in Rs 112 million through sale of land and machinery. As a result, net margin grew to almost 6 percent for the year- the highest seen since FY13.
FY19 saw a nearly 16 percent rise in revenue, that crossed Rs 9 billion in value terms. Both local sales and export sales registered a rise, by 19 percent and 9.5 percent, respectively. Within local sales, most of the increase was in yarn. Due to increasing competition in the international market, combined with Pakistan’s inability to compete with the regional peers, the industry players saw better margins in the local market. Cost of production, on the other hand, fell to 86 percent of revenue, allowing gross margin to improve to 13.8 percent- the highest seen since FY13. This also reflected in the higher bottomline year on year. Coupled with the contribution by other income of Rs 228 million, net margin grew to nearly 9 percent for the year- the highest seen. The increased other income largely came from interest income and gain on disposal of property, plant and equipment.
After growing consecutively for the last three years, revenue fell in FY20 by 4.5 percent. Exports declined by 10.5 percent, while local sales continued to increase, by 16 percent. Within local sales, majority of the increase was seen in sales of fabric. Cost of production, however, jumped to nearly 91 percent of revenue- one of the highest seen in the last eight years. As a result, gross margin reduced to 9 percent. In addition, to other income also gradually sliding down to its previous levels, net margin was recorded at 3.7 percent.
Quarterly results and future outlook
The first quarter of FY21 saw revenue higher by over 39 percent year on year despite facing issues of pest attacks in addition to long standing problems such as declining cotton areas, traditional methods for harvesting and lack of research. Costs as a share of revenue, although, were higher for 1QFY21, compared to the same period last year, therefore net margin was also marginally lower.
The second quarter saw higher revenue by 11 percent year on year but was lower than 1QFY21. While demand exists for the textile product and the sector is also operating at full capacity, the decline in cotton production poses as a significant hurdle, since the producers are forced to import to fulfil their raw material requirements. However, cost of production was better than 2QFY20, therefore, net margin improved to 13.3 percent for the quarter. The third quarter saw costs dropping further that allowed overall profitability for 9MFY21 to be notably higher at 10.4 percent compared to 3.9 percent in 9MFY20.
While the government has taken several measures to support the export-oriented sector, the major hurdle is the availability, or lack thereof, of raw material. Cotton production witnessed a slump of 37 percent due to traditional methods, climate changes and decreasing cultivation area.