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Zephyr Textiles Limited (PSX: ZTL) was incorporated in Pakistan as a private limited company in 1999 and was converted into a public limited company in 2004. The principal activity of the company is manufacturing, dyeing and trading of woven clothes including towels.

Pattern of Shareholding

As of June 30, 2023, ZTL has a total of 59.23 million shares outstanding which are held by 478 employees. Directors, CEO, their spouse and minor children have the majority stake of 72.26 percent in the company followed by local general public holding 19.65 percent shares of ZTL. Banks, DFIs and NBFIs account for 8.01 percent shares of the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a year-on-year decline in 2020, ZTL’s topline has been ascending during the period under consideration. Its bottomline slid in 2020 and 2022. ZTL’s margins which were descending until 2020 rebounded in 2021 to attain their optimum high values. In 2022, the margins contracted followed by a recovery in 2023. The detailed performance review of the period under consideration is given below.

In 2019 ZTL’s topline picked up by 19.73 percent year-on-year. This was on account of improvement in both local and export sales during the year. Cost of sales surged by 20.6 percent year-on-year in 2019 on account of higher inflation, Pak Rupee depreciation and energy tariff hike. Gross profit improved by 12.52 percent in 2019, however, GP margin slid from 10.9 percent in 2018 to 10.3 percent in 2019. Distribution expense mounted by 38.42 percent in 2019 mainly on account of higher freight charges as export sales grew by 43 percent in 2019. During the year, the capacity utilization of all of the company’s units i.e. greige fabric, towel as dyeing well as dyeing & processing unit increased on the back of improved demand in both local and international markets. This required additional resources, resulting in induction of 27 employees which took the total tally to 1128 employees as of June 30, 2019. As a consequence, administrative expense multiplied by 23.77 percent in 2019. Gain on disposal of fixed assets as well as other miscellaneous sources of income resulted in 26.72 percent rise in other income in 2019. Lower provisioning for WWF, tamed exchange loss as well as lesser loss on investments in fair value translated into 16.27 percent thinner other expense incurred by ZTL in 2019. Operating profit posted a paltry 2.03 percent growth in 2019; however, OP margin slipped from 6.8 percent in 2018 to 5.8 percent in 2019. Despite high discount rate, ZTL was able to cut down its finance cost by 8.6 percent in 2019 due to better working capital management. The company’s gearing ratio also inched down from 53 percent in 2018 to 51 percent in 2019. Net profit spiraled by 14.21 percent in 2019 to clock in at Rs.117.84 million with EPS of Rs.1.98 versus EPS of Rs.1.74 in 2018. NP margin slightly ticked down from 2.4 percent in 2018 to 2.3 percent in 2019.

In 2020, ZTL’s net sales tumbled by 15 percent. Both local and export sales underperformed during the year due to the eruption of COVID-19 in the last quarter of the year in which sales are usually at its peak. Underutilization of plant capacities led to poor absorption of fixed overheads which resulted in 23.3 percent decline in gross profit with GP margin dipping to 9.3 percent. Distribution expense slumped by 6.37 percent in 2020 due to lower freight charges. Number of employees grew to 1176 in 2020 due to robust demand before the outbreak of COVID-19. However, higher payroll expense was offset by no provisioning done for ECL, lower rent, rates and taxes as well downturn in repair & maintenance as well as fee & subscription charges. This resulted in 0.63 percent decline in administrative expense in 2020. Other income magnified by 697.32 percent in 2020 mainly on account of robust exchange gain earned during the year. However, it was largely offset by 128.22 percent higher other expense which was the result of loss incurred by ZTL on disposal of property, plant & equipment. Operating profit shrank by 32.42 percent in 2020 with OP margin sliding down to 4.6 percent. Finance charges further dropped by 15.75 percent in 2020 despite high discount rate for most part of the year. This was due to efficient working capital management. Despite rigorous efforts put forth by the management to cut down its cost and expenses, dejected demand took its toll on the net profit of ZTL which dropped by 53.26 percent year-on-year in 2020 to clock in at Rs.55.07 million with EPS of Rs.0.93 and NP margin of 1.3 percent.

ZTL registered staggering 41.67 percent year-on-year growth in its topline in 2021 due to vigorous flows of orders for basic textiles both from both local and export markets. The capacity utilization of all three units of ZTL increased in 2021. The company also started commercial dyeing of knit fabric for garment exporters during last year which started monetizing in 2021 as textile demand began to resume. ZTL also started exporting knitted fabrics which also added to the sales volume. Increased volumes, cost control measures such as installing solar power plant coupled with upward revision in pricing resulted in 101.02 percent taller gross profit recorded by the company in 2021 with GP margin attaining its highest value of 13.2 percent. Increased sales volume and ultimately higher freight charges drove distribution expense up by 60.6 percent in 2021. Administrative expense also ticked up by 5.98 percent in 2021 due to higher payroll expense and utility charges. Number of employees was reduced to 1068 in 2021. No exchange gain recorded by the company during the year pushed down its other income by 60.74 percent in 2021. Conversely, other expense mounted by 113 percent in 2021 on the back of higher profit related provisioning and exchange loss due to fluctuations of exchange rate and surge in the global prices of commodities. ZTL’s operating profit built up by 138.85 percent in 2021 with OP margin climbing up to 7.7 percent – the highest level during the period under consideration. Monetary easing as well as efficient utilization of financing lines resulted in 7.92 percent lower finance cost incurred by the company in 2021. ZTL’s gearing ratio also improved from 50.77 percent in 2020 to 46.94 percent in 2021. Net profit strengthened by 448.5 percent in 2021 to clock in at Rs.302.076 million with EPS of Rs.5.08 and NP margin of 4.9 percent.

The uphill journey of ZTL’s topline continued in 2022 with year-on-year growth recorded at 20.48 percent. This was on account of improved performance of both local and export sales. Hike in the prices of basic raw materials such as cotton, dyes, chemicals and packaging materials coupled with Pak Rupee depreciation as well as spike in energy tariff pushed gross profit down by 8.5 percent in 2022. GP margin slipped to 10 percent in 2022. Exorbitant prices of petroleum products inflated ocean freight charges resulting in 58.6 percent surge in distribution expense in 2022. Administrative expense also escalated by 9.87 percent in 2022 due to increase in number of employees to 1085 coupled with the adjustment of minimum wages in line with inflation. Other income multiplied by 633.41 percent in 2022 due to hefty exchange gain, profit on investments as well as gain on disposal of fixed assets. Other expense ticked down by 3.47 percent in 2022 due to lower profit related provisioning and no exchange loss incurred during the year due to superior export sales. ZTL recorded 24 percent slimmer operating profit in 2022 with OP margin of 4.9 percent. Consistent with previous years, finance cost kept dipping despite unprecedented level of discount rate. This was due to massive decline in long-term financing as the company paid long-term loans worth Rs.258.56 million during the year. Gearing ratio also marched down to 42.01 percent in 2022. Despite relentless efforts to restrain its expenses, ZTL’s net profit contracted by 39.69 percent year-on-year to clock in at Rs.182.17 million in 2022 with EPS of Rs.3.07 and NP margin of 2.5 percent.

ZTL’s net sales posted paltry 7.34 percent year-on-year uptick in 2023. This was due to weak performance in the local market due to prevailing political and economic uncertainty in the country. Conversely, export sales strengthened during the year particularly to the US and European market. The company has been gradually shifting its focus from greige fabric to value-added textile exports which enabled it to secure order with higher margins. As a result, ZTL’s gross profit enhanced by 41.31 percent in 2023 with GP margin attaining its highest level of 13.2 percent, last witnessed in 2021. Distribution expense plummeted by 21.59 percent in 2023 as volumetric sales shrank during the year. Administrative expense mounted by 17.66 percent in 2023 due to higher inflation as well as workforce expansion to 1218 employees. Other income posted 64.9 percent growth in 2023 on account of sizeable growth in exchange gain. However, the growth in other income was reversed by 485.98 percent higher other expense incurred by ZTL in 2023 due to higher profit related provisioning, provision for sales tax refund, provision for ECL as well as exchange loss & discounting factor. ZTL posted 55.84 percent higher operating profit in 2023 with OP margin flying up to 7.1 percent. Unlike previous year, where ZTL was able to keep a check on its finance cost, in 2023, finance cost soared by 92.93 percent. As per the directions of IMF, subsidized loans to export sector were withdrawn with discount rate clocking it at its historic high level. Gearing ratio, however, continued to slide in 2023 and stood at 36 percent as the company repaid its long-term loans worth Rs.183.30 million during the year. Net profit grew by 30.62 percent in 2023 to clock in at Rs.237.958 million with EPS of Rs.4 and NP margin of 3 percent.

Recent Performance (1HFY24)

ZTL’s topline grew by 8.57 percent year-on-year in 1HFY24. This was due to shift of company’s focus from local market to value-added export market. Due to better margins in the export market, the company’s cost of sales were conveniently absorbed resulting in 41.57 percent bigger gross profit recorded by ZTL in 1HFY24 with GP margin climbing from 11.3 percent in 1HFY23 to 14.7 percent in 1HFY24. Distribution expense dropped by 9.85 percent during 1HFY24 as the company is gradually acquiring the optimum potential of exports. Conversely, administrative expense hiked by 23.11 percent in 1HFY24 as a result of inflation. Other income mounted by 295.24 percent in 1HFY24 due to exchange gain as well as gain on sale of fabric looms that were being used for local fabric business which was discontinued by ZTL. Other expense ticked up by 10.24 percent in 1HFY24 on account of higher profit related provisioning made during the year. Operating profit expanded by 207.97 percent in 1HFY24 with OP margin clocking in at 11.6 percent versus 4.1 percent during the same period last year. Finance charges escalated by 85.76 percent in 1HFY24 due to high discount rate, increased working capital requirements and discontinuation on subsidized loans for export companies as per IMF directives. Prior year adjustments as well as deferred tax resulted in 5.57 percent lower tax expense for the period. Net profit increased by 1040.41 percent in 1HFY24 to clock in at Rs.270.049 million with EPS of Rs.4.54 versus EPS of Rs.0.4 during 1HFY23. NP margin also rose from 0.6 percent in 1HFY23 to 6.8 percent in 1HFY24.

Future Outlook

With ZTL aggressively targeting export market through its value-added textile products, its margins and profitability is highly expected to spiral in the coming times. The company is also expected to commence the operations of its knit garment unit by next financial year with the estimated capacity of 5000 garments per day. This may further strengthen ZTL’s foothold in the US and Europe market.

To minimize the impact of hiking energy tariff, the company increased the capacity of its solar power unit from 450 kwh to 950 kwh at its towel manufacturing unit with the installation of another solar power plant of 358 kwh at its weaving unit under process.

ZTL’s two-pronged strategy of expanding its topline and compressing its cost will help boost company’s margins and profitability in the approaching quarters.

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