Crescent Cotton Mills Limited (PSX: CCM) was established in 1959 under the provisions of the Companies Act, 1913 (now Companies Ordinance, 1984). The company manufactures and sells yarn and hosiery, in addition to dealing with the cloth. The company also has an embroidery unit.
As at June 30, 2021, 24.5 percent of shares are owned by the company’s directors, CEO, their spouses, and minor children. Within this category, the major shareholders are Mrs. Nazish Arshad, a director in the company, and Mst. Shireen Abid. Over 45 percent of shares are with the local general public, while close to 14 percent of shares are held in other companies. The executives’ category holds 7.7 percent shares while the remaining roughly 9 percent shares are with the rest of the shareholder categories.
Historical operational performance
Crescent Cotton has experienced a fluctuating topline over the years, whereas profit margins followed a downward trajectory, before improving in FY20 and onwards.
In FY18, revenue growth stood at an all-time high of nearly 53 percent, with the topline increasing from almost Rs4 billion in FY17 to Rs6 billion in FY18. This was chiefly due to the spinning unit that the company acquired that helped in higher sales. This is also evident from the increased installed capacity in FY18. But the higher sales did not do much for the profitability as the cost of production continued to consume roughly 96 percent of revenue. Combined with the reduction in other income that was contributing significantly to the bottomline in FY17, at Rs170 million, the net margin fell to less than 1 percent. The reduction in income came from a lower gain on sale of investments and re-measurement of fair value investment properties primarily.
Revenue growth in FY19 stood at over 21 percent that was contributed largely by local sales that registered an increase of 28.6 percent. Although the currency devalued during the period, textile exports of the country could not pick up as much since locally the industry faced problems of quality and production of cotton whereas globally, events such as the US-China trade war, Brexit, etc. had an adverse impact. Production cost was unchanged at 96 percent of revenue, keeping gross margin flat year on year. With a further drop in other income and an escalation in finance expense, due to a rise in short-term borrowings, the company incurred a loss of Rs91 million.
In FY20, the company witnessed the biggest contraction in revenue growth as it fell by 25.4 percent, with topline recorded at Rs5.5 billion, down from the previous year’s Rs7.4 billion. This was partly attributed to the outbreak of the Covid-19 pandemic in the second half of the year that resulted in lockdowns. This in turn led to a sudden halt in production of the majority of the industries across the globe, including China, where the virus first originated. As a result, supply chains were disrupted and prices increased. But it was the decline in cost of production, at 93.4 percent of revenue that allowed for some improvement in gross margin. The latter was recorded at 6.6 percent, the highest seen since FY15. This trickled down to the bottomline while a lower taxation expense also helped in improving profitability. Net margin stood at nearly 1 percent for the year.
In FY21 sales fell again, albeit marginally by 2 percent. This was due to the disposal of a spinning unit located at Hyderabad, Kotri that had stopped operations in the third quarter of FY20.
This can also be seen in the lower installed capacity for FY21. A sales breakdown reveals that while local sales reduced, export sales increased by 1.7 times, although it must be noted that export sales make a comparatively small share in the total revenue. Cost of production reduced to an all-time low of 86.6 percent that allowed gross margin to peak at 13.4 percent. Combined with a reduction in finance expense as interest rates were lowered, the net margin was also recorded at an all-time high of almost 6 percent. Bottomline too stood at the highest at Rs321 million.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by nearly 48 percent as the first quarter of FY21 had seen business activities only beginning to resume. Production cost made up almost 86 percent of revenue, compared to over 89 percent in 1QFY21 allowing the gross margin for 1QFY22 to be higher at 14 percent. Coupled with a reduction in finance expense as well, profitability improved to 7.3 percent for the period, versus 2.2 percent in the corresponding period last year.
Although the textile sector is performing decently, the challenges associated with rising cotton prices, currency devaluation, and supply chain disruptions due to shortage of containers, the sector is facing the need for higher working capital, and resultantly liquidity problems.