Crescent Textile Mills Limited

Founded in 1950, Crescent Textile Mills Ltd (Crestex) is one of the oldest players in the industry. Six years into its formation, the company started exporting a majority of its products to the US, Europe, Middle East, and Japan. In 1997, Crestex became the first composite textile company of Pakistan to receive the ISO 9002 certification. The firm has a market capitalization of over Rs 1.1 billion and its shares are listed on all three stock exchanges in Pakistan.
Crestex manufactures made-ups, processed fabric, and yarn from raw cotton and synthetic fibre. It has 120,000 spindles, 1,568 TFO (Doubling & Twisting) spindles, and 240 air jet looms to change its own yarn into customer-specified cloth. Broadly, Crescent Textile Mills operates in three segments: spinning, weaving, and processing and home textile. Its associated company is Crescent Bahuman Limited - also involved in the manufacturing of textile products - in which it has a 33 percent stake.
PRIOR PERFORMANCE Crestex has followed a topsy-turvy growth trajectory, with ups and downs in its sales and gross profit. As of the year ended 2014, top line and gross profit fell by 6 percent and 8 percent year-on-year, respectively. As for the company's bottom line, it has seen far more volatility, with losses in the two consecutive years of FY11 and FY12 followed by a subsequent recovery.
In any case, Crestex's net margins remain abysmally low, reaching only as high as 3 percent and the most recent quarter showing only 2 percent. A peer textile company that is slightly larger than Crestex in terms of sales is Kohinoor Textile Mills (9MFY15 sales of around Rs 12 billion), which has net margins of 9 percent. Moreover, Crestex's exports have been on a decline - exports went from 69 percent of total sales in FY10 to 53 percent as of FY14.
RECENT PERFORMANCE For 9MFY15, Crescent Textile Mills' top line fell by 5 percent year-on-year, but also saw a 6 percent fall in cost of sales. Thus, gross and net margins stayed more or less flat year-on-year. The 6 percent increase in the bottom line was due to lower tax and an easier comparison with last year due to the loss from its associated company posted in the year ago.
According to the company's report, textile exports contracted mainly due to low value segments that limited the improvement in value-added exports. Moreover, top line growth was hampered because of ample supply but sluggish demand of yarn in the local market.
Falling commodity prices gave decent support to the value-added segments, and the decline in oil prices and cut in discount rate were also beneficial. However, local yarn and fabric sales fell by 11.60 percent and 66.27 percent year-on-year, respectively, due to weak international and local demand. This had an adverse impact on gross margins.
SEGMENT ANALYSIS A segment-wise analysis reveals a very interesting trend - from FY10 to FY14, processing and home textile sales have declined by 22 percent, but its gross profits have skyrocketed by well over 200 percent. Thus, this segment went from giving a low productivity of just 4 percent gross margin in FY10 to 15 percent as of FY14. And as of the most recent quarter, the figure stands at almost 17 percent.
On the other hand, sales of the spinning division have gone up over time, but profitability has declined massively; the spinning segment's gross profit has plummeted almost 50 percent from FY10 to FY14, while gross margins have gone from 19 percent to just 7 percent. For 9MFY15, too, the gross margin is at 7 percent. Meanwhile, Crestex's weaving segment, however, has always given low gross margins, ranging from 0 to 3 percent throughout the five-year period. From the trend, it seems the spinning and weaving segments have been losing profitability due to depressed cotton yarn prices. Conversely, this would boost the profitability of the value-added end.
OUTLOOK As has been mentioned time and again, the overvalued rupee is hurting textile exports, where demand for cotton and yarn remain depressed. One escape could be the value-added sector, which can give better margins. Bottlenecks remain on the production end, with persistent shortages of energy hurting production, not to mention profitability. Crescent Textile Mills would do well to keep the focus on the value-added end.

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The Crescent Textile Mills Ltd

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Rs  (Million)                        9MFY15    9MFY14        YoY

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Sales                                 8,866     9,364        -5%

Cost of Sales                         7,681     8,196        -6%

Gross Profit                          1,185     1,168         1%

GP Margin                               13%       12%  up 90 bps

Distribution Cost                       469       483        -3%

Administrative Expenses                 168       144        17%

Other Expenses                           24       31        -23%

Other Income                            143       247       -42%

Profit from Operations                  668       758       -12%

Finance Cost                            387       395        -2%

Share of Profit/(Loss) from Associate     5       -53      -109%

Profit Before Tax                       286       310        -8%

Tax                                     116       150       -23%

Net Profit                              170       160         6%

NP Margin                                 2%       2%  up 20 bps

EPS                                    3.24      3.25         0%

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