Idrees Textile Mills Limited (PSX: IDRT) was established in 1990 as a public limited company, but unquoted, under the Companies Ordinance, 1984 (now Companies Act, 2017). Two years later, in 1992, it was listed on the then Karachi and Lahore Stock Exchange, which is now the Pakistan Stock Exchange. The company manufactures and sells yarn and fabric.
As at June 30, 2021, nearly 83 percent of the shares are owned by the directors, CFO, their spouses and minor children. Within this, Mr. S. M. Mansoor Allawala, the CEO of the company, is a major shareholder. About 16 percent of shares are held under the category of “individuals”, while the remaining roughly 1 percent of shares are within the rest of the shareholder categories.
Historical operational performance
Since FY18, Idrees Textile Mills has seen its topline rising, except for in FY20, when it contracted by 6.9 percent.
In FY18, revenue increased by 18 percent. The company attributes it to the increase in volumes that doubled year on year. In value terms, the exports grew from Rs 338 million in FY17, to Rs 666 million in FY18. The local yarn sales also registered an increase, by 5.9 percent, growing from Rs 1.8 billion to Rs 1.9 billion. Production cost, however, grew from consuming over 88 percent of revenue to nearly 92 percent of revenue, thereby reducing the gross margin to 8.2 percent. The rise in production cost is due to a rise in raw material expenses and fuel and energy expenses primarily. Raw material expense grew by a whopping 40 percent, while fuel and energy expense registered an almost 14 percent incline. As per the company’s annual report, the cost of electricity provided through RLNG had exceeded that supplied by WAPDA. So what was initially considered to be a benefit for the industry, is no longer that. In addition, the cost of borrowing due to the State Bank of Pakistan increasing the interest rate also increased the finance expense for the year. Thus, the net margin contracted to 2.7 percent, from 3.6 percent in the previous year.
Revenue registered a more than 20 percent rise in FY19, crossing Rs 3 billion in value terms. While both local and export yarn sales saw a rise, a major contribution was made by local sales that grew by 30 percent. Despite the inflationary pressure, a general economic slowdown that reduced demand, and currency devaluation, production cost as a percentage of revenue fell to 88.6 percent that allowed gross margin to improve to 11.4 percent. But this could not be translated to a higher bottomline, as finance expense made up 6 percent of revenue, a jump from last year’s almost 4 percent. This was due to a major increase in borrowing rate, from 6.5 percent at the beginning of the year, to 12.2 percent at the end of the year. This created a major dent in profitability as net margin fell to 0.9 percent, down from 2.7 percent in FY18. Net profit was also significantly low at Rs 32 million, compared to Rs 78 million in FY18.
In FY20, revenue contracted by 6.7 percent. This was due to an already slow and recovering economy at the start of the year that was adversely affected by the outbreak of the Covid-19 pandemic that resulted in halts in trade and production, cancellation of orders, and supply chain constraints. China, which is a major market for Pakistan’s textiles, saw the outbreak of the virus at the end of the second half of FY20, but the majority of the adverse effect on revenue for the company was concentrated in the months of March, April, and May. Production cost also made a larger share in revenue, at over 91 percent, while finance expense rose to over 7 percent of revenue. This was due to the rising borrowing rate that only came down towards the end of the year, as a relief measure by the State Bank for the businesses during Covid-19. Thus, finance expenses consumed a large part of revenue, eventually leading the company to incur a loss of Rs 103 million, with net margin recorded at a negative 3.2 percent.
Recent results and future outlook
In FY21, revenue recovered considerably, growing by over 23 percent and crossed Rs 4 billion in revenue. This was in part attributed to better yarn prices. Given the interruptions in trade due to Covid-19, export sales reduced during the year by 7.5 percent, whereas local sales picked up remarkably, registering a 40 percent raise. The improvement in revenue allowed gross margin to rise to 13.3 percent, which is the highest seen. The effect of the State Bank’s decision to lower the borrowing rate was more prominent in FY21, as finance expense fell to 4.3 percent of revenue, while in value terms it was recorded at Rs 171 million, versus Rs 241 million in FY20. Thus, the net margin was also recorded at the highest of 4 percent, with net profit standing at Rs 160 million, compared to the loss of Rs 103 million in the previous year.
The textile industry’s biggest challenge is the price and availability of raw materials. Due to the shortage of local crops, the country has to import, which exposes the industry to an exchange rate risk. With significant currency devaluation, the price of imported raw material increases the cost of production. This is also worsened by the increase in ocean freight.