Prosperity Weaving Mills Limited (PSX: PRWM) was established as a public limited company in 1991. It is one of the companies in the Nagina Group of Companies. The principal business of the company is to manufacture and sell woven cloth.
Shareholding pattern
At almost 54 percent, the company is largely held by the directors, CEO, their spouses, and minor children. Mr. Shahzada Ellahi Shaikh, Mr. Shaukat Ellahi Shaikh and Mr. Shafqat Ellahi Shaikh, all three on the board of directors, each hold roughly equal percentage of shareholding of around 11.5 percent. A little over 30 percent is held under the category of associated companies, undertakings, and related parties. Within this, majority is held by Ellahi International (Pvt) Limited. Close to 14 percent is distributed with the local public.
Historical operational performance
For three years in a row- FY14 to FY16, the company saw a negative growth in its topline. During this period and a little after, profit margins remained nearly flat before exhibiting and incline in FY19.
Prosperity Weaving Mills saw a decline in its topline for the second consecutive time in FY15. The year saw falling fabric prices in both international markets as well the domestic market; this is evidenced by an almost 10 percent decline in export sales. Domestic sales, however, was greater than last year. In addition to falling prices, demand was also relatively low, keeping margins further. With a decline in revenue and costs remaining intact, cost of production was seen at its highest thus far- at 94.5 percent of revenue. With little contribution from other income towards the bottomline, net margin reduced to 1 percent.
Demand failed to pick up during FY16 as revenue fell by another 10 percent. Export sales nearly halved; the sales, instead were directed towards the domestic market as the country could not compete against regional peers in the global arena owing to the former’s relatively higher cost of production. However, revenue still could not be increased as domestic market saw a lot of manufacturers turning away from exports and selling in the local market. Therefore, margins could not be increased to a large extent. There was a slight decline in cost of production which reduced to 93 percent of revenue, keeping profit margins flat between FY15 and FY16.
Some recovery was seen in FY17 as revenue grew by close to 12 percent. This was due to continued efforts to sell in the domestic market. However, this increase could not do much to raise profit margins as cost of production reached another high to claim nearly 95 percent of the revenue. Most of the increase in cost of production was associated with raw material expense. Although it made a small part of the topline, other income contributed comparatively greater than that seen in the previous years. This was generated through gain on sale of short-term investments, dividend income and Workers’ Welfare Fund. Thus, net margin increased only marginally.
The company managed to increase revenue by almost 7 percent in FY18. The company continued to sell primarily in the local market. Despite the higher revenue, profit margins remained stagnant for the fourth time consecutively. This is due to cost of production persisting at above 90 percent level; in FY18, cost of production made up a significant 94 percent of revenue, dominated by raw material. The country has failed to fulfil its local cotton demand, thereby compelling manufacturers to look towards expensive imported cotton. A higher finance cost due to increase in discount rates and rupee financing also did not allow for profits to improve.
In FY19, Prosperity Weaving Mills registered a 14.5 percent increase in its revenue driven by local sales. There was an improvement in sales price as well as volumes. Global fabric demand, on the other hand, was adversely impacted by the US-China trade war. The higher revenue kept cost of production as a percentage of revenue lower- at 90 percent; this level was not seen in the last five years. The rising interest rates further increased the finance expense, however the rise in revenue offset the impact, allowing net margin to reach 3 percent.
Quarterly results and outlook
During the period 9MFY20, net revenue fell by 10 percent year on year. This was attributed to “lower production due to reduction in looms”. Cost of production lowered marginally to consume 90 percent of the revenue, allowing gross margins to improve. With a higher other income and lower finance expense, the latter a result of cheaper foreign currency borrowings, there was a positive effect on the bottomline.
When the pandemic hit Pakistan, the country almost immediately went into a lockdown, keeping businesses shut and orders delayed and cancelled. The company does not expect a positive financial performance for the last quarter.
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