Reliance Cotton Spinning Mills Limited

Reliance Cotton Spinning Mills Limited (PSX: RCML) was established in 1990 as a public limited company, under the Companies Ordinance, 1984 (now Companies Act, 2017). The company manufactures and sells yarn. Its mill is located in Sheikhupura, Punjab, with an installed capacity of 46,944 spindles.

Shareholding pattern

As at June 30- 2021, over 65 percents of the shares were owned by the associated companies, undertakings, and related parties. Within this category, a major shareholder is Sapphire Agencies (Pvt.) Limited. Over 16 percent of shares are held by the directors, CEO, their spouses, and minor children, of which a major shareholder is Mr. Yousuf Abdullah, one of the directors on the board. Close to 13 percent of shares are owned by the local general public, while the remaining over 5 percent of shares is owned by the rest of the shareholder categories.

Historical operational performance

For a large part of the decade, the company has been witnessing a growing topline, while profit margins, in the last six years, have been growing gradually, experiencing a slight decline in FY20.

Revenue in FY17 posted a growth of nearly 11 percent, after decreasing for the last two years. This was attributed to an increase in local sales of yarn and direct yarn exports. However, the majority of the revenue was generated through indirect yarn exports. Production cost was slightly lower at almost 89 percent, therefore, gross margin also remained close to 11 percent. But the decline in finance expense due to lower exchange loss, coupled with a higher other income, allowed net margin to increase to over 5 percent.

The company saw one of the biggest increases in revenue in FY18 by 23 percent, while in value terms, revenue stood at almost Rs 4.4 billion. While the overall exports from the textile sector registered a 9 percent growth partly due to the export package, currency devaluation also provided a further boost to exports as it made exports favorable in the global market. This is also seen in the 25 percent rise in combined export sales of the company that reached Rs 3.5 billion in FY18, from Rs 2.8 billion in FY17. As a result, the cost of production fell to 85.6 percent, from nearly 89 percent in the previous year, raising the gross margin to 14.4 percent. This is also reflected in the net margin that grew to 7.2 percent. The increase in net margin is relatively lower due to the reduction in other income.

In FY19, revenue growth stood at over 22 percent, with topline standing at Rs 5.4 billion. Much of this growth in revenue resulted from indirect export sales of yarn. The latter registered a 35 percent growth. The overall export sales of the company grew by 24.6 percent. Many companies within the sector benefited from currency devaluation that made exports favorable. But with production cost continuing to remain high, it did not necessarily translate into higher profitability. This is also the case with Reliance Cotton as production costs are reduced only marginally as a share in revenue, keeping gross margin more or less flat, at 15 percent. This also trickled down to a net margin that also grew only marginally to 7.3 percent.

Topline growth was a little lower, at 11 percent in FY20, with revenue recorded at almost Rs 6 billion. Direct export sales and local yarn sales registered a 34 percent and 29 percent growth, respectively, whereas production cost as a share in revenue was slightly down to 84.5 percent. Therefore, the gross margin hovered around 15 percent for the year. However, this did not reflect in the bottomline, as the net margin was recorded at 4.6 percent. This was due to all expenses increasing as a share of revenue, with finance expenses making up 5.7 percent of revenue. The latter can be attributed to the hike in interest rates nearly throughout the year.

Revenue growth stood at over 28 percent, with the topline recorded at Rs 7.7 billion for the year. Both export sales and local sales exhibited double-digit growth. Of the Rs 7.7 billion in net revenue, Rs 6 billion was contributed by export sales. A further division reveals that in-direct exports made Rs 4.2 billion of the total export sales. Production cost, as a share in revenue, went down considerably to 77 percent, allowing gross margin to improve to 22.9 percent. With all the expenses making a lower share in revenue, and finance expenses reducing significantly, net margin reached 15.6 percent, which is the highest seen since FY12.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by over 40 percent. With production cost at 68 percent of revenue, compared to 86 percent in the first quarter of FY21, profitability was significantly improved year on year. Finance expenses were also reduced further, allowing net margin to reach over 25 percent, compared to almost 7 percent in 1QFY21.

With revenue growing consistently, and production cost making a smaller share in revenue, profitability is certain to a certain degree. However, the challenges of the textile sector with respect to raw material availability, and prices in the international market remain.