J.A. Textile Mills Limited

J. A. Textile Mills Limited (PSX: JATM) was set up in 1987 under the Companies Ordinance, 1984. However, commercial production did not begin until 1992. Its spinning mill is located in Faisalabad. The company is present in both the local and export market and has a market capitalization of almost 120 million.

Shareholding pattern

As at June 30, 2021, close to 65 percent shares are held by the directors, CEO, their spouses and minor children. Within this, a major shareholder is Mr. Zahid Anwar, one of the directors of the company. The local general public owns over 34 percent shares while the remaining roughly 1 percent shares are owned by the rest of the shareholder categories.

Historical operational performance

The company has, more often than not, witnessed a declining topline except for in FY17 and FY18, while profit margins have been rising. They remained more or less stable between FY17 and FY20.

Growth momentum in revenue continued in FY18 as it nearly doubled year on year after growing by almost 2 times in FY17. With exports absent, majority of the growth was concentrated with the domestic sales. Within this, yarn sales and waste sales improved significantly. The spinning segment of the textile industry saw poor demand from the global markets; therefore, sales were redirected to the local market. Although it was lower year on year, cost of production was still high at nearly 98 of revenue. Majority of the increase in costs were associated with raw materials expense, salaries and wage expense and fuel expense that rose considerably. With a major portion of revenue consumed by production cost, there was little room for absorption of the other expenses. However, other income at Rs 26 million provided significant support to the bottomline that was recorded at Rs 31 million, compared to Rs 2 million in the previous year.

After growing for two years, revenue contracted in FY19 by almost 4 percent. While yarn sales declined, waste sales registered a growth. Cost of production was sustained at close to 98 percent, keeping gross margin hovering around 2 percent. Raw material expense is a major part of the total cost of production. In FY15, it made 64 percent of revenue that grew to more than 70 percent of revenue in FY19. A Gallup publication reveals that cotton crop production reduced in FY19, thus implying that the shortfall may have been imported. With currency devaluation, imported raw material expense rose further. With other income also reverting to its pre-FY17 level, the company posted a nominal profit.

In FY20, topline contracted by 15 percent thus falling below Rs 1 billion. While revenue from yarn sales remained more or less similar year on year, waste sales reduced by nearly 39 percent. In addition, sales tax was also deducted, that was not present in the previous year. Cost of production remained at 98 percent for the third consecutive period, whereas other income provided an additional Rs 17 million towards the bottomline that was recorded at a significant higher Rs 7 million for the year. The unusually higher other income came largely from “balances written back”.

Revenue recovered in FY21 as it posted a growth of over 63 percent, reaching Rs 1.5 billion in value terms. Majority of this growth was associated with yarn sales that increased by almost 63 percent. This can be attributed to the gradual resumption of business activities after the lockdown that was placed to curb the spread of the Covid-19 pandemic. Cost of production reduced to its lowest of 91.9 percent that allowed gross margin to increase significantly to over 8 percent. This also trickled to the bottomline that was recorded at an all-time high of Rs 90 million and a net margin of nearly 6 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 29 percent year on year as demand continued to grow after lockdowns eased. There was also some improvement in cost of production that allowed gross margin to be higher year on year at 7 percent, compared to 5.5 percent in 1QFY21. However, net margin was marginally lower due to a higher taxation expense in the current period.

Revenue in the second quarter was higher by over 44 percent year on year as prices as well as demand grew. However, cost of production was significantly higher at nearly 94 percent of revenue compared to 88 percent in the same period last year. While this adversely affected gross margin, net margin in fact was better in 2QFY22 at 4.5 percent versus 2.7 percent in 2QFY21 due to significant other income as well as a lower tax expense.

In the third quarter of FY22, revenue was again higher year on year, by nearly 29 percent however, cost of production consumed nearly all of the revenue, and thus the company incurred a loss of Rs 6.6 million compared to a net profit of almost Rs 8 million in 3QFY21. Cumulatively too, 9MFY22 saw lower profitability than 9MFY21. Although demand for the product exists, but the company faces extremely high costs that must be reduced to ensure profitability by procuring raw materials timely and adopting efficient production techniques.