Tata Textile Mills Limited

Tata Textile Mills Limited (PSX: TATM) was established in Pakistan in 1987 under the Companies Ordinance, 1984. It is a public limited company engaged in the manufacturing and sale of yarn. Its manufacturing facility is located in Muzaffargarh District in Punjab.

Shareholding pattern

As at June 30, 2021, close to 64 percent shares are held with the directors, CEO, their spouses and minor children. Within this category, a major shareholder is the CEO, Mr. Shahid Anwar Tata. Around 10 percent are held under NIT & ICP while the local general public owns 23 percent shares. The remaining roughly 3 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has more of then than not, seen a growing topline except for in FY15 and FY16 when it contracted by over 4 percent and 3 percent, respectively. Profit margins, on the other hand, have been fluctuating as they grew between FY16 and FY18, declined till FY20 before improving again in FY21.

Revenue growth in FY18 stood at its highest thus far at 20.5 percent with topline exceeding Rs 6 billion in value terms. The growth in revenue was mostly attributed to growth export sales that were boosted by currency devaluation that made exports favourable in the global market. Local sales, however, witnessed a decrease by 21 percent. The impact of currency devaluation is also seen in other income that grew on the back of a net exchange gain and rebate on export sales. The higher revenue also reflected in higher profitability as net margin grew to 4 percent compared to less than 1 percent in the previous year. Bottomline in FY18 was also considerably better at Rs 246 million.

As both export sales and local sales increased, total revenue posted a growth of over 11 percent in FY19. But this did not translate into higher profitability. While the drop in gross margin was minimal, operating and net margin fell significantly relative to previous year. Profitability in the previous year was primarily on the back of higher other income that nearly disappeared in the current period. Moreover, the trade war between US and China also had an effect on yarn prices that adversely impacted profit margins. Coupled with this was the rise in finance expense due to higher borrowing rates. Thus, net margin reverted to less than 1 percent during the year with bottomline down to Rs 33 million.

In FY20, topline remained more or less similar at Rs 6.7 billion. Although both, export sales and local sales grew, there was considerably higher sales tax incurred. Moreover, sales were also impacted in the last quarter of the period as Covid-19 pandemic led to strict lockdowns. With cost of production rising to almost 93 percent, gross margin was down to 7.4 percent. Net margin was further impacted due to a combination of higher other expenses and finance expense. The former consumed a higher share in revenue due to exchange losses on imported cotton while finance expense escalated as a result of rising interest rates. Thus, the company incurred an all-time high loss of Rs 329 million.

In FY21, topline grew by its highest at over 33 percent to reach close to Rs 9 billion as both local sales and export sales registered double-digit growths. This is a result of a surge in demand as lockdowns eased and business activities returned to normal. In addition, exports were backed by exports orders being redirected to Pakistan as Pakistan fared better than its regional competitors to contain the spread of Covid-19. Thus, gross margin reached an 8-year high of 16.8 percent. With a decline in other expenses and finance expense as a share in revenue, net margin climbed to 9.2 percent with bottomline also at its highest at Rs 824 million.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by almost 4 times year on year as the company merged with Island Textile Mills, Salfi Textile Mills and Tata Energy Limited. With higher revenue, profitability also improved as net margin was recorded at almost 13 percent for the period compared to 3 percent in the same period last year.

The second quarter also saw revenue higher by 4.5 times year on year. Coupled with this was the reduction in production cost as a share in revenue from 88.5 percent in 2QFY21 to 76.5 percent in the current period that resulted in marked improved profitability at 14 percent net margin versus 4.6 percent in corresponding period last year.

The third quarter saw similar results as topline was higher by almost 4 times year on year, while net margin was also significantly better at 19.3 percent compared to 11.7 percent in 3QFY21. The reduction in production of cotton, not only in Pakistan but also in countries like India that was expecting 36 million bales but the expectation has reduced to 32 million bales, has raised the prices of cotton. This has adversely affected the cost of production. Additionally, the quality has also deteriorated that has also increased cost- all of which cannot be passed on to the customer.