Ellcot Spinning Mills Limited

Ellcot Spinning Mills Limited (PSX: ELSM) was set up under the repealed Companies Ordinance, 1984 (now Companies Act, 2017) as a public limited company. It is part of the Nagina Group of Companies. Its manufacturing facility is located in Kasur, Punjab where it manufactures and sells yarn.

Shareholding pattern

As at June 30, 2021, over 40 percent shares are owned by the directors, CEO, their spouses and minor children. Within this category, close to 13 percent shares are held by each of the following: Mr. Raza Ellahi Shaikh and Mr. Amin Ellahi Shaikh, both on the board of directors. Over 24 percent shares are held by the associated companies, undertakings and related parties, within which 6 percent shares are held by each of the following: Haroon Omer (Private) Limited, Monell (Private) Limited and Icaro (Private) Limited. About 21 percent shares are held in modarabas and mutual funds, followed by 12 percent in the local general public. The remaining roughly 2 percent shares are with the rest of the shareholder categories.

Historical operational performance

Ellcot Spinning Mills has mostly seen a growing topline with the exception of FY15, FY16 and fairly recently again in FY20. Profit margin in the last six years has followed an upward trajectory with a sharp incline observed in FY21.

Topline in FY18 registered a growth of over 14 percent to cross Rs 5 billion in value terms. In the last two years export sales had contracted significantly. In FY18, they returned to the previous levels to some extent, of Rs 1.1 billion. This is likely attributed to currency devaluation that made exports competitive in the global market. On the other hand, local sales fell by 5.7 percent, but it continued to make the larger share in total revenue. With cost of production reducing to near 93 percent of revenue, compared to 93.5 percent seen in FY17, gross margin also improved to 7.3 percent. This also trickled to the bottomline with a net margin of 2.3 percent, since operating expenses remained more or less similar as a share in revenue.

At 14 percent, growth momentum was maintained in FY19 with topline crossing Rs 6 billion. There was a marginal reduction in export sales of 1.3 percent attributed to a low demand in the international market due to US-China trade war. Local sales, however, benefitted from the better yarn prices that allowed it to increase by 19 percent. Cost of production fell to below 90 percent of revenue after four years, thus allowing gross margin to increase to 10 percent. while net margin also increased, to 3.2 percent, the increase was less pronounced due to the escalation in finance expense that consumed 4.5 percent of revenue, the highest seen.

Revenue in FY20 contracted by 3 percent; with export sales falling by over 24 percent. On the contrary, local sales picked up by 17 percent to reach Rs 5.8 billion. This is attributed to the outbreak of the Covid-19 pandemic that originated in China, and was first detected in Pakistan in the third quarter of FY20. This resulted in border closures and interruptions in manufacturing processes that affected supply chains, the effect of which is seen in contracting sales for majority of the companies. However, gross margin improved to 12.3 percent on the back of reduced costs that consumed nearly 88 percent of revenue. Increase in net margin was marginal at 3.7 percent due to a higher taxation.

Ellcot Spinning Mills posted the highest growth in revenue in FY21 by over 25 percent to reach Rs 7.7 billion in value terms. Export sales grew by 40 percent while local sales grew by 25 percent to reach Rs 7.2 billion. The increase in revenue is attributed to an improvement in prices as well as volumes since demand picked up when business activities resumed after a strict nationwide lockdown. Moreover, timely raw material procurement and supply of energy at competitive rates allowed cost of production to reduce to the lowest at almost 82 percent of revenue. Thus, gross margin reached a peak of 18 percent. With operating and finance expenses also reducing as a share in revenue, net margin also grew to an all-time high of 10.5 percent while net profit peaked at Rs 814 million.

Quarterly results and outlook

Revenue in the first quarter of FY22 was higher by 54 percent year on year. This is attributed to an improvement in prices as well as volumes. Demand for yarn had also increased. Consistent energy supply provided further boost that had a positive impact on exports. Cost of production fell to 77.6 percent of revenue compared to 91 percent in 1QFY21. Thus, net margin was recorded at 16.8 percent in 1QFY22 versus 2 percent in the same period last year.

Revenue was higher in the second quarter by almost 53 percent year on year. This was again attributed to growing demand, rising prices and volumes. Cost of production fell further to 73 percent of revenue, compared to almost 87 percent of revenue. Thus, profitability improved significantly at 16 percent in 2QFY22 compared to 6.7 percent in 2QFY21. Growing global demand has benefitted the textile sector of the country immensely in the first half, and is expected to maintain momentum. Additionally, the company has also managed to enhance capacity, and has procured raw material at reasonable prices that will ensure some profitability in the second half too.

The challenge is currency devaluation that can increase prices of raw cotton, polyester fiber, while transportation and shipping costs are also rising.