Kohinoor Mills Limited

With its facilities spread over 103 acres in the provincial capital Lahore, Kohinoor Mills Limited (PSX: KML) (not to be confused with Kohinoor Textile Mills Limited) was first incorporated in 1987 as a small weaving mill. Over time, it had expanded into the dyeing, hosiery, apparel, retail, and power generation businesses as well. Today, the company's market capitalisation is Rs 776 million.
However, with the passage of time, the company started selling off its loss-making businesses; Q Mart, a retail store in all types of merchandise, was a subsidiary company of Kohinoor. The company pulled out of the retail business in FY14. Similarly, it sold off its loss-making apparel and hosiery divisions in FY11. So today, Kohinoor Mills undertakes three businesses - weaving, processing, and power generation.
Kohinoor's weaving plant has 174 looms in operation that operate 365 days a year. The dyeing unit has a rated capacity of 30 million linear meters. Finally, the power-generation unit employs nine generators with an installed capacity of 300MWh.
PRIOR PERFORMANCE For FY15, Kohinoor Mills' top line seems to have shown little growth, growing by just two percent year-on-year to Rs 7.9 billion. The bottom line improved by 15 percent year-on-year, but net margins are still quite low. Sales and net profits were far higher in FY12 and seem to have peaked in FY13, but this was largely due to gains resulting from debt-restructuring. Similarly, net profit for FY15 included a net notional interest expense of Rs 135 million "due to restructuring of financial liabilities of the company in an earlier period," as per the Director's Report.
A segment analysis shows that dyeing is by far the most dominant of all segments; it accounts for 75 percent of Kohinoor's sales as of FY15. The majority of the weaving division's sales are predominantly inter-segment as they feed into the cost of sales of the dyeing division. Still, it accounts for the remainder of the sales. The power generation segment does not sell to the national grid and is used for keeping the other two segments operational; the last time the power-gene segment had any external sales was in FY11, and that too was short of Rs 8 million.
In terms of profitability, the weaving segment's gross margins have been significantly higher than the dominant dyeing segment. However, it seems to have lost steam over time, due to increasing competitiveness in the global market. The dyeing segment, on the other hand, has seen fluctuating profitability, but capacity expansion by the company in FY14 has driven up the performance.
In terms of market presence, it appears Kohinoor does not rely on the domestic market too heavily; as of FY15, domestic sales amounted to just over 16 percent of the company's top line. This reliance on exports has been detrimental to the company's growth and its margins, due to cut-throat competition in the sector, not to mention a volatile albeit overvalued Rupee-Dollar parity.
RECENT PERFORMANCE For the first quarter of FY16, Kohinoor Mills took off to a good start; sales were up by eight percent year-on-year and costs were kept in check, yielding a 10 percent improvement in gross profits. Net profit increased by 7 percent year-on-year.
As per the Director's Report, the weaving division reported comparatively lower margins owing to high international competition. However, better capacity utilisation was seen from the dyeing division, offsetting the negative impact. Most importantly though, costs were reduced significantly by a drastic reduction in the firm's fuel, oil, and power costs - it amounted to around 14 percent of cost of sales in 1QFY15 and stood at less than 10 percent for the recent quarter. Thus the fuel and energy situation was conducive owing to reduced furnace oil prices and easy availability of cheap biomass fuels, as per the Director's Report. The cost of yarn was also significantly lower year-on-year.
The first quarter of FY16 saw the first signs of rupee depreciation against the dollar in a long time. This would have helped Kohinoor boost its top line significantly, as it is a primarily export-oriented business.
OUTLOOK Cotton production is expected to be less than 11 million bales this season, meaning prices will be higher. For Kohinoor, that means higher costs, so margins might be thin in the near term.
More importantly, however, the management is considering various alternate fuel-based energy options. As per the latest Director's Report, Kohinoor has finalised a deal to install 30 TPH coal-fired boiler to reduce steam generation cost and to the impact of seasonality in bio-fuel availability. The boiler is expected to be operational in the last quarter of FY16.

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Kohinoor Mills Limited

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Rs (mn)                  1QFY16      1QFY15         YoY

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Net Sales                 2,162       2,005          8%

Cost of Sales             1,784       1,661          7%

Gross Profit                378         344         10%

GP Margin                   17%         17%   up 30 bps

Distribution Cost           121         109         11%

Administrative Cost          59          58          2%

Other Expenses               10          13        -23%

Other Income                  8          11        -27%

Finance Cost                110          94         17%

Profit Before Taxation       85          80          6%

Taxation                     21          20          5%

Profit After Tax             64          60          7%

NP Margin                    3%          3%   no change

EPS                        1.25        1.18          6%

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