Elahi Cotton Mills Limited

Elahi Cotton Mills Limited (PSX: ELCM) was established as a public limited company in 1970, under the repealed Companies Act, 1913 (now the Companies Act, 2017). The company manufactures and sells yarn at its plant located in Tehsil Gujar Khan, District Rawalpindi.

Shareholding pattern

As at June 30, 2021, over 81 percent of shares are owned by the directors, CEO, their spouses, and minor children of which a major chunk of over 43 percent shares are held by Mr. Mahboob Elahi, the chairman of the company. Close to 12 percent of shares are held in joint-stock companies followed by nearly 7 percent by the local general public.

Historical operational performance

The company has mostly seen a growing topline except for in FY15, FY16, and fairly recently in FY20. Profit margins, on the other hand, have followed an upward trajectory in the last six years.

In FY17, the company posted revenue growth of 13 percent, after declining in the previous year by 1.7 percent. The majority of the company’s revenue comes from yarn sales. With the cost of production consuming nearly all of the revenue, at 99.4 percent, there was not much room for absorption of other costs. Thus, the company incurred another year of loss of Rs4 million.

In FY18, the company’s revenue witnessed a growth rate of 23 percent, with revenue recorded at Rs395 million. The rationale for the growth in revenue was an improvement in prices as well as an increase in production. But the cost of production consumed over 97 percent of revenue, keeping gross margins contained at single digits. However, at 2.8 it was higher than the previous year when it was less than 1 percent. With some support coming from other income, the company was able to post a net profit of Rs4 million that was the highest thus far. The company states that the accumulated loss has been reduced from Rs76 million to Rs69 million, but since current liabilities exceed current assets, the auditors cast doubt on the entity’s ability to continue as a going concern. However, the management does not intend to shut down operations.

Elahi Cotton Mills in FY19 posted an even higher revenue growth of over 27 percent, taking the topline to Rs503 million. This was attributed to better volumes and prices. But the company could not translate the higher topline into a higher profit as the cost of production consumed over 97 percent of revenue, keeping gross margins flat year on year. Net margin, on the other hand, fell to less than a percent as administrative expense and taxation were higher, whereas the accumulated loss was further reduced to Rs66 million.

In FY20 the company experienced the biggest contraction in revenue at 13.3 percent, reducing topline to Rs436 million. This was primarily due to the outbreak of Covid-19 that led to lockdowns. Resultantly, the company’s manufacturing plant remained shut between March 2020 to May 2020. In addition to a sudden disruption in production, demand for products was adversely impacted as well. Despite this, the company managed to improve profitability on the back of lower cost of production that fell to 95 percent of revenue, which is the lowest. This was due to a decrease in rates of raw material. Thus, the net margin reached a peak of 1.38 percent.

In FY21 the company’s revenue growth recovered as it posted a growth of 16.7 percent, with revenue clocking in at an all-time high of Rs509 million. This was attributed to higher production, compared to that seen in the last year as it was adversely impacted by the shutdown of the plant. Production cost increased slightly to almost 96 percent due to higher salaries, etc., therefore gross margin reduced to 4 percent. The company also had to keep one shift closed the entire year due to an electrical shutdown. Thus, the net margin was recorded at nearly 1 percent. The company’s accumulated loss continues to decrease, at Rs52 million.

Quarterly results and future outlook

The first quarter of FY22 saw revenue higher by 31 percent at Rs160 million. This can be attributed to a general pick-up in demand as business activities normalized. But the higher revenue could not be translated into higher profitability as the cost of production consumed over 96 percent of revenue due to an increase in salary and wages, raw material prices, electricity and stores, and spares. In the corresponding period last year, production cost stood at nearly 93 percent of revenue. The increase in costs, therefore, shrunk the net margin from 4 percent in 1QFY21 to 0.6 percent in 1QFY22.

With currency fluctuation and inflationary pressures that result in prices of inputs rising and an already high share of costs in revenue, the future profitability of the company seems rather uncertain.