The flagship company of the prolific Sapphire Group, Sapphire Textile Mills Limited (PSX: SAPT) is a household name in the textile category. Incorporated as a public limited company in 1969, the company today boasts a market capitalisation north of Rs 31.6 billion. The vertically integrated textile unit manufactures cotton yarn, fabric, and home textile products (and more recently, power generation). It holds more than 10 percent share in the listed textile composite sector's sales.
Sapphire's manufacturing units are in Sindh and Punjab. The company has seven subsidiaries, of which three - Sapphire Home, Sapphire Tech, and Sapphire Solar - are soon to be sold off.
Stock Price and Pattern of Shareholding
SAPT stock largely remains within the company's owners, while the next chunk is with its associates and undertakings. Of these, the most notable are Sapphire Agencies and Amer Tex. Others include Sapphire Holding Limited, Salman Ismail (SMC-PRIVATE) Limited, Galaxy Agencies (Pvt) Limited, and Sapphire Power Generation Limited.
Despite its high profile, Sapphire stock isn't too hotly traded in Pakistan. With less than five percent of its shares in the market, the ticker makes a rare appearance on the exchange. However, trading activity increased from October, when the company announced its full-year results and a dividend of Rs 14 per share.
Prior Performance
Sapphire Textile Mills has seen erratic top line growth. The last couple of years have been particularly unkind to the company and so the six-year CAGR now stands at a negligible 0.13 percent, in spite of the enormous growth levels seen in FY13 and FY14. Among the reasons for the declining top line was a lower sales price of goods manufactured by the company in FY15, while the cotton crunch and higher input costs were cited as the main reasons by the company in FY16.
Interestingly enough, Sapphire's net profit has lately been dictated by its 'other income,' which amounted to as much as 80 percent of the bottom line in FY16, and approximately 50 percent of it in the two years before that. The firm thus has been capitalising on its subsidiaries and investments.
Particularly in FY16, the company mentions in its annual report that overall profitability improved due to the investments in its subsidiaries, Sapphire Wind Power Company Limited and Sapphire Retail Limited; Sapphire Wind commenced commercial operations of its 53MW wind power station in November 2015, and Sapphire Retail operates the Sapphire clothing brand, which has taken Pakistan by storm and is expanding its share in the domestic market.
A segment analysis shows that the spinning sector accounts for the lion's share of the company's revenues (48%), followed by weaving (25%) and processing (22%). However, this has not always been the case; as recently as FY15, spinning contributed around 57 percent to the top line, while processing was just 16 percent. Go further back and the change becomes even more drastic - the spinning segment made up almost 70 percent of sales back in FY11, while processing was a little over eight percent. This shift towards the value-added end has been the right move, as the margins from processing are generally higher.
Sapphire is a predominantly export-oriented company, though its exports as a percentage of total sales have declined from around 80 percent over the last several years to 73 percent as of FY16. An analysis of the exports reveals that yarn and fabric exports have been freefalling for the past two years, while the processing and home textile segment has been gradually improving. Again, this serves to highlight the company's enhanced emphasis on its value-added segment.
Recent Performance
For the first quarter ended FY17, Sapphire Textile Mills has under whelmed investors. Although the top line growth was eight percent over last year, the escalating costs pushed down the gross profit by three percent, and the bottom line fell by five percent year-on-year.
According to the Director's Report, there was pressure on costs, which included energy, wages and salaries, and various government taxes. Although there was a significant increase in administrative expenses, this was offset by lower other operating expenses. Meanwhile, the company's other income remained flat year-on-year, and so the net profit ended up declining.
Outlook
The downward spiral of the industry continues in spite of restoration of zero-rating on exports and provision of electricity and RLNG. However, going forward, Sapphire Textile might weather the storm. The company has invested heavily in value additions. Moreover, its newly inaugurated power plant has a 20-year agreement with the NTDC, while the Sapphire clothing brand continues to build momentum in the domestic market.
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