Ideal Spinning Mills Limited (PSX: IDSM) was established under the Companies Ordinance, 1984 by the Ideal Group in 1989. The company manufactures and sells yarn, cloth and hosiery products at its manufacturing facility located at Sheikhupura, Faisalabad.
Shareholding pattern
As at June 30, 2021, over 73 percent shares are owned by the directors, CEO, their spouses and minor children within which a major shareholder is the CEO, Mr. Amjad Saeed who holds nearly 21 percent shares. Close to 20 percent shares are categorized under “individuals”, while the remaining roughly 7 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has mostly seen a growing topline with the exception of FY17 when it contracted by 7.4 percent. Profit margins, on the other hand, have been growing after FY18.
In FY18, revenue grew by over 23 percent, the highest seen thus far. This was contributed by a 9 percent rise in yarn sales whereas cloth income/conversion income grew by almost 46 percent. Segment-wise, the weaving division saw a growth of 42 percent, however, more than 90 percent of this was consumed by production cost and finance expense together. On the other hand, the spinning division posted a nominal profit while the socks division, although contributed to the topline, but incurred a loss. Overall, there was notable improvement in profitability as net profit was recorded at Rs 5 million as production cost fell to 90 percent, versus nearly 96 percent in FY17, compared to the losses incurred consecutively for the last three years.
At 29 percent, revenue grew by an even higher rate in FY19 with topline reaching Rs 3.5 billion in value terms. This was again contributed by yarn and sock sales that saw a 24 percent growth. On the other hand, conversion income/cloth sale fell by 7 percent. Division-wise, all the three segments witnessed a rise in revenues. Contrary to FY18, the socks division posted a profit in FY19. Production cost fell further to 88.4 percent of revenue that allowed gross margin to improve to 11.56 percent. This also trickled to the bottomline as net margin was recorded at 1.7 percent for the year.
Despite the tough economic situation that FY20 began with, and the outbreak of the Covid-19 pandemic in the second half of the year,the company managed to grow its topline by 11.7 percent. This was attributed to a steady growth in export sales, while local sales also registered a growth of 10 percent. In addition, yarn sales grew by 25.7 percent. Although all the three divisions posted increases in revenue, only the spinning division saw healthy profits. Cost of production fell to its lowest thus far at almost 86 percent of revenue, allowing gross margin to increase to 14 percent. Although net margin also increased to 2.7 percent, the increase was less pronounced due to administrative and distribution expenses making a larger share in revenue. With the outbreak of Covid-19, global supply chains have been disrupted, causing transport and freight expense to increase significantly.
Revenue in FY21 continued to grow, by 22 percent to reach an all-time high of Rs 4.8 billion in value terms. Local sales grew by 17.7 percent while export sales posted a growth of over 35 percent. Within the segments, all the three divisions witnessed increases in their revenues, but in terms of profitability, the spinning division saw an improvement in net margin while weaving division remained more or less flat and the socks division posted a loss as distribution and administrative expenses together consumed almost 18 percent of revenue after cost of production made up 81.6 percent of revenue. Cumulatively, cost of production for the company was lower year on year at 83.5 percent, allowing gross margin to peak at 16.5 percent. While administrative and distribution expense made a larger share in revenue, it was offset by a decrease in finance expense. Thus, net margin also reached a peak of 4.2 percent with a net profit of Rs 202 million.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by almost 28 percent year on year. Cost of production for the quarter was significantly lower year on year at 79.5 percent compared to over 85 percent in the same period last year. This can be attributed to a timely procurement of raw materials at competitive prices since raw material expense makes a significant portion of the total costs. This also trickled to the bottomline that received an additional support of Rs 11.6 million in other income. Thus, net margin was considerably better at 8 percent versus 3.9 percent in 1QFY21.
Revenue in the second quarter of FY22 was also higher year on year by 27 percent. Production cost continued to consume a smaller share in revenue at over 80 percent, compared to almost 86 percent in 2QFY21. This also translated into a higher bottomline with a net margin of 7.4 percent versus 2 percent in 2QFY21. The company managed to procure raw materials at competitive prices and it has also planned to import carding machines in the spinning division and looms in weaving section that will enable higher production to meet the growing demand.
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