Colony Textile Mills Limited

Colony Textile Mills Limited (PSX: CTM) was established under the repealed Companies Ordinance, 1984 (now Companies Act, 2017) in 2011. It manufactures and sells yarn, fabric and garments, while also trading in real estate.

Shareholding pattern

As at June 30, 2021, over 48 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, majority of the shares are owned by Mr. Fareed Mughis Sheikh, the CEO of the company. Another almost 49 percent shares are held by the general public, while the remaining almost 3 percent shares are with the rest of the shareholder categories.

Historical operational performance

Colony Textile Mills has seen a growing topline over the years, except for in FY15, FY16 and FY20. Profit margins, on the other hand, have been fluctuating in the last six years, particularly.

In FY18, the company witnessed the largest revenue growth seen thus far at 22.5 percent to reach Rs 16.6 billion in value terms. Export sales grew by 46 percent while local sales were also higher by 19.6 percent. However, this increase did not translate into higher profitability as cost of production continued to consume more than 90 percent of revenue, allowing gross margin to increase only marginally to 7.6 percent. However, operating margin reduced due to a decrease in other income that was unusually high in the previous year. Moreover, a higher tax expense further shrunk profitability as net margin was recorded at less than 1 percent.

Revenue grew by an even higher over 39 percent in FY19, to cross Rs 23 billion in value terms. Local sales are a major contributor to the total revenue and it registered a growth of 37.8 percent. On the other hand, export sales also increased, by over 12 percent. Cost of production was above 90 percent of revenue for the seventh consecutive year, keeping gross margin close to 7.4 percent for the third consecutive year. While most other factors remained similar as a share in revenue, other income saw an unprecedented rise to reach Rs 2 billion coming primarily from “gain on restructuring from banking companies/financial institutions”. Despite a substantial rise in other expenses as a share in revenue, and taxation, the increase in other income was reflected in the bottomline that was recorded at an all-time high of Rs 1.4 billion with the highest net margin of 6.2 percent.

In FY20, revenue contracted by over 23 percent to fall to Rs 17.7 billion. Local sales decreased by 24.4 percent, while export sales observed a growth of 9.9 percent. With the revocation of zero-rated status for the textile industry, the players resisted the change and reduced their production. When this was resolved, the industry and country at large, was affected by the outbreak of the Covid-19 pandemic that led to strict lockdowns and halts in production processes. Thus, cost of production grew to nearly 95 percent of revenue, reducing gross margin to 5.3 percent. Moreover, net margin saw a greater impact as other income returned to its previous levels, with finance expense also escalating to over 5 percent of revenue due to rising borrowing rates. Eventually, the company incurred a loss again after three years, of Rs 375 million.

Topline recovered in FY21 as it posted the highest growth of almost 44 percent to cross Rs 25 billion in value terms. Export sales grew by over 7 percent, while local sales posted an increase of 50 percent to reach Rs 22.7 billion. This can be attributed somewhat to the rising yarn prices. But cost of production remained over 90 percent of revenue due to the company’s financial inability to procure raw materials at competitive prices in a timely fashion like its competitors, although at 91 percent, it was lower than that seen last year. Thus, gross margin was recorded at its highest of 8.75 percent. With little changes in operating expenses and a significant reduction in finance expense, the company posted a net margin of almost 3 percent.

Quarterly results and outlook

Revenue in the first quarter of FY22 was higher by almost 36 percent year on year as yarn prices and demand continue to remain high. However, cost of production continued to remain high year on year at over 93 percent, keeping gross margin in check. Net margin at 1.6 percent during the period was slightly better than 1 percent in the same period last year on the back of lower finance expense.

The second quarter also saw higher revenue year on year, at over 51 percent as demand sustained. But rising energy costs and raw material requirements, in addition to insufficient local crop caused cost of production to be significantly higher year on year at nearly 92 percent, versus almost 88 percent in same period last year. Moreover, the company also incurred an additional Rs 118 million in other expenses that reduced net margin to less than 1 percent compared to nearly 6 percent in 2QFY21. While demand continues to exist and the industry has also enhanced capacity in anticipation of future demand, the skyrocketing cost of inputs is the challenge for the company’s profitability.