Kohat Textile Mills Limited – BR Research

Kohat Textile Mills Limited (PSX: KOHTM) was established in 1967; it began commercial production three years later in 1970. Kohat Textile Mills is a subsidiary of the holding company, Saif Holding Limited. The first manufactures and sells yarn in the domestic market.

Shareholding model

As of June 30, 2020, nearly 78% of the shares were held by the associated company Saif Holdings Limited. Almost 11% of the shares are held by the local general public, followed by an additional 10% held in banks, DFIs and NBFIs. The directors, the CEO, their spouses and their minor children hold less than 1% of the shares of the company; the remaining shares, around 1%, belong to the rest of the shareholder categories.

Historical operational performance

Kohat Textile Mills’ profits have fluctuated over the years. On the other hand, profit margins fell through FY16, increased slightly through FY19 and slipped again in FY20.

After contracting by more than 7% in FY16, revenue growth stagnated in FY17, as it increased by less than 1%. This was due to the presence of cheaper textile imports, weak export demand and valuation of currencies which made the products uncompetitive in the world market. In the local market, too, demand for yarn has been slow, particularly in the second and final quarters of FY17. Despite this stagnation in turnover, the gross margin is improving thanks to cost control; the cost of production fell to nearly 92 percent of sales, bringing the gross margin to 8 percent, from 5.9 percent in FY16. An additional amount of Rs 11 million was also provided by other income; At the same time, financial charges were also reduced, which allowed the net margin to be increased to 1.6% for the period, compared to the loss of Rs 19 million during FY16.

In fiscal 2018, revenue growth also remained below 1%. Many textile companies present on the international market during the 2018 financial year benefited from the devaluation of the currency. Since Kohat Textile Mills is only present in the domestic market, it has not been able to generate income through export sales. However, despite a stable turnover, the gross margin improved to 9.6%, on the basis of a better product mix and a reduction in costs; production cost reduced to represent 90% of turnover. While this was reflected in the operating margin, the net margin, on the other hand, was reduced due to lower financial and tax charges. The first was due to a rise in interest rates. Thus, the net margin fell to 0.45% for the year.

The company experienced one of the highest revenue growths during the 2019 financial year at 32%, with a turnover reaching nearly Rs 3 billion. This was attributed to a better selling price. The cost of production fell slightly to 89.5%, bringing the gross margin to 10.4%. While most of the other factors have remained similar as a percentage of income, financial expenditure has increased dramatically to consume almost 4 percent of income. This is explained by the increase in financing rates. However, this was offset by higher revenues, so the net margin also increased to 2.3%, compared to less than one percent in FY18.

Sales contracted again during FY20, by more than 12%. This was due to the outbreak of the Covid-19 pandemic which resulted in a lockdown causing production to stop abruptly. The company operated at 67 percent capacity, significantly lower than the 100 percent last year. Along with lower revenues, production costs also took a larger share to nearly 92 percent, bringing the gross margin down to 8 percent. Overall operating expenses also made a smaller share in revenues; financial charges also consumed nearly 7% of income, due to higher borrowing costs which only fell towards the end of fiscal year 21. Thus, the company suffered a loss of Rs 65 million .

Quarterly results and future outlook

The first quarter of FY21 saw revenue increase 41% year-over-year as the lockdown eased and business operations gradually resumed. While the gross margin and operating margin were lower at 1QFY21 than at 1QFY20, the net margin was better at 1.24%, due to significantly lower finance charges as the government lowered the borrowing rate for relieve businesses during Covid-19.

The second quarter of fiscal 21 saw revenue increase 13.5% year-over-year. Production costs during the current period have dropped significantly to almost 83% of revenue, as well as financial expenses which have decreased by less than half year on year in value. This has significantly improved profit margins significantly compared to the same period last year. In fiscal year 1HFY21, capacity also increased by 9% and the plant operated at full capacity.

The third quarter of FY21 also saw a year-over-year revenue increase of over 43%. Cost of production significantly reduced to 77 percent. This allowed the gross margin to rise to almost 23 percent. This was also reflected in the net result, with a net margin recorded at 12.6%. Cumulatively too, the turnover was 31.4% higher while the net margin was 9 times higher in terms of value.

In order to reduce dependence on natural gas and the evolution of natural gas policy, the company is increasingly relying on solar energy. It will also help reduce energy costs. In addition, with the removal of regulatory duties on importing yarn, the company will face increased competition in the local yarn market.

© Copyright Business Recorder, 2021

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