Reliance Weaving Mills Limited

Reliance Weaving Mills Limited (PSX: REWM) was established in 1990 under the Companies Ordinance, 1984 (now Companies Act, 2017). It is one of the companies under the Fatima Group. The latter has other companies under its umbrella such as Fatima Fertiliser, and Pakarab Fertilisers, to name a few. Reliance Weaving primarily manufactures and sells yarn and fabric.

Shareholding pattern

As at June 30, 2022, the directors, their spouses and minor children own 78 percent shares in the company. Within this category, roughly 25 percent shares are held by each of the following: Mr. Fazal Ahmed Sheikh, Mr. Faisal Ahmed Mukhtar and Mr. Fawad Ahmed Mukhtar. The local general public owns 16 percent shares, while the remaining about 6 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline since FY12, barring a few years. Profit margins, in the last six years, have largely been increasing, except for a slight dip in FY20.

In FY18, topline grew by nearly 23 percent that was the highest growth rate seen thus far. In value terms, topline inched closer to Rs 14 billion. Both export sales and local sales registered increases, by almost 44 percent and 6.3 percent, respectively. Increase in export sales was more dominant due to devaluation of local currency against US dollar, as well as export rebate by the government. Moreover, topline was also supported by increase in prices of yarn and fabric in both, domestic and export market, combined with an improvement in demand. With some decline in cost of production as a share in revenue, gross margin improved to 9.7 percent, from last year’s 8.7 percent. This also trickled to the net margin that was recorded at a higher 2.2 percent, compared to nearly 1 percent in FY17.

Revenue in FY19 was higher by over 19 percent to reach Rs 16.6 billion in value terms. This can be attributed to increase in price of yarn and fabric in domestic and export market by 25 percent. However, revenue from export sales fell by almost 9 percent, while local sales escalated by nearly 51 percent. With production cost again marginally lower at over 89 percent of revenue, gross margin improved slightly to 10.7 percent. Operating margin saw a higher increase from 7.8 percent in FY18, to 10.2 percent in FY19 as exchange gain elevated other income levels. Due to higher finance costs, that was a result of higher KIBOR rates and piled up inventory of cotton stock and yarn, net margin growth was marginal as it grew to 3 percent.

Topline growth subdued in FY20 as it was recorded at 4 percent. Sales breakdown reveals that the situation had reversed compared to that in the previous year, as export sales more than doubled year on year, becoming the major contributor to total revenue, whereas local sales shrunk as they were recorded at less than half year on year. Slow growth in sales was attributed to the impact of Covid-19 on demand, both domestic, as well as in the global arena. While gross margin continued to improve gradually, recorded at 11.9 percent, operating and net margin reduced to 8 percent and less than 1 percent, respectively due to a decrease in other income, coupled with an escalation in other expenses and finance expense. Both of these were impacted due to higher interest rates, and significant exchange loss on loans exposed to US dollar financing due to currency devaluation.

Reliance Weaving witnessed the biggest growth in revenue in FY21 at over 39 percent, crossing Rs 24 billion in value terms. This was largely attributed to an improvement in price and demand as business resumed after lockdowns eased that was put in place due to the Covid-19 pandemic. Yarn prices increased in response to high cotton price, but since the company had managed to procure raw material at competitive prices, it was able to improve profitability. In addition, with India facing a high number of Covid positive cases, export orders were redirected to Pakistan that also boosted the textile sector of the country. Coupled with this were the better yarn prices in local market, versus export market, that boosted local sales as reflected in local sales more than doubling year on year. Thus, gross margin and net margin reached a peak of 14.6 percent and 7.2 percent, respectively.

Recent results and future outlook

Topline continued its growth momentum in FY22 as it increased by almost 28 percent to reach an all-time high of Rs 30.7 billion in value terms. Export sales posted a growth of 39 percent, followed by 11.6 percent rise in local sales. Moreover, yarn prices also continued its upward trajectory, in both the local market and the international market. Thus, gross margin reached another high of 17.7 percent. But increase in net margin was less pronounced in comparison due to increase in operating and finance expenses as a share in revenue. The increase in expenses was associated with energy costs, increase in KIBOR and working capital, and ocean freight. Thus, net margin grew marginally to 8.6 percent which was still the highest seen, with bottomline also at a peak, at Rs 2.6 billion.

While FY21 and FY22 witnessed incredible increases in sales and profitability, due to pent-up demand, this is not expected to sustain as demand contracts amidst high inflation around the world. On the other hand, raw material prices are raising, while orders are decreasing that will force textile manufacturers to reduce production capacities. Additionally, the poor outlook on cotton production from USA and Pakistan will further adversely impact global cotton supply and prices.