Kohinoor Mills Limited (PSX: KML) was established in 1987 as a public limited company. It started its operations as a small weaving unit and today stands with three business divisions of dyeing and finishing, weaving and energy. Its textile manufacturing division involves “weaving, bleaching, dyeing, buying, selling and generally dealing with yarn, cloth and other goods and fabrics made from raw cotton and synthetic fiber and generate and supply electricity”.
Almost 40 percent shares of the company is in the ownership of the directors, CEO, their spouses and minor children. Of this nearly 59 percent is owned by Mr. Aamir Fayyaz Shiekh, the Chief Executive of the company. About 47 percent is distributed with the local general public while 6 percent is held with the NIT & ICP. The remaining around 8 percent is distributed between the rest of the categories as shown.
Historical operational performance
While topline mostly experienced a positive rate of growth, although at varying rates, profit margins have been rather fluctuating though the years.
In FY15, the company saw a marginal growth of 1.7 percent in its topline. The overall textile sector of the country did not witness growth as it faced competition from regional players such as China and India, especially in the non-value added segment of yarn and cloth. Despite receiving GSP+ status by the European Union, the economic downturn in the Western markets did not allow Pakistan to receive the full benefit.
A lower cost of manufacturing enhanced the gross margin; lower cost of manufacturing arose as a result of lower international oil price. Apart from the cost of raw material, the next major cost incurred is the cost of fuel, oil and power making up almost 11 percent of the total cost of manufacturing. With a stable currency rate which kept currency related loss aside, the benefit of lower cost and higher gross margin could be reflected in operating margins. Due to a change in accounting for finance expense, net margin remained flat.
Kohinoor Mills witnessed some growth in its topline as it increased by 8 percent during FY16. During FY16, the country’s textile exports continued to slide as it reached its lowest figure of $12.7 billion since FY09-10. However, Kohinoor Mills fared well as its topline witnessed a growth of 8 percent. A major part of the growth was brought in by the dyeing division as it saw higher sales and better capacity utilization. Since costs continued to make up roughly 83 percent of the revenue, as was seen last year, gross margin remained flat. However, the other income which lifted the operating margin last year was significantly lower in FY16 due to the absence of ‘gain on recognition of long-term financing at fair value’. Therefore, operating margin decreased while net margin remained flat.
In FY17, Kohinoor saw its highest growth rate in topline at almost 25 percent. The dyeing business division was again a major contributor as it achieved its sales targets. However, profitability was marred due to high prices of greige - a raw material. The higher sales brought igher costs which restricted the growth of profits. Cost of manufacturing made up 86 percent of the revenue as compared to last year’s 83 percent. This was due to increase in price of raw material, chemicals and fuel and power- all the three major components of cost witnessed a rise. Profitability was further driven down as other expenses saw some one-off expenses such as ‘impairment loss on operating fixed assets’ and ‘provision for slow moving, obsolete and damaged store items’.
Topline growth was once again marginal in FY18 at nearly 2 percent. The dyeing division saw a sluggish demand overseas. Coupled with this, the high cost of raw materials kept this segment from contributing significantly to the topline. The weaving segment, on the other hand, saw an increase in its capacity as 84 high speed air jet looms were installed during the year and became operational by the second half.
Costs went further up largely due to fuel and power, consuming 88 percent of the revenue, leaving little room for other expenses to be absorbed. Where a devalued currency made exports favourable, it made imports more costly. Despite the marginal growth in topline and higher cost of manufacturing, bottomline was maintained due to other income arising primarily from net exchange gain.
Kohinoor Mills saw its highest rate of growth in topline- at nearly 29 percent. This was primarily due to additional capacity that became operational in the second half of FY18 and continued during FY19. The company aims to replace another 68 looms which will optimize cost. Cost of manufacturing, as a percentage of revenue also decreased. However, a major boost in profit margins was brought about by the other income which increased by three times year on year. Of this 80 percent was a result of net exchange gain. Thus net margin reached its highest since FY14.
Quarterly results and future outlook
During the nine months ended in March 2020, topline declined marginally by a little over 1 percent; however costs allowed profit margins to improve. The raw materials consumed were lower year on year. Other income which kept margins positive, was absent in FY20, due to a relatively stable exchange rate which only increased in March 2020. The reduction in cost of manufacturing allowed margins to be maintained.
Over the years, the government has taken a number of steps to support the textile sector. However, with the recent development of Covid-19 which has brought the global economy to a halt, the company is operating at half capacity; about 60 to 65 percent of the exports are in Europe and the USA which have been significantly impacted by the pandemic. Thus, in the last quarter of FY20, a decline in topline seems likely as orders have been deferred.