Prosperity Weaving Mills Limited

Prosperity Weaving Mills Limited (PSX: PRWM) was set up in 1991 as a public limited company and is a part of the Nagina Group of Companies. The company manufactures and sells woven cloth.

Shareholding pattern

As at June 30, 2021, over 53 percent shares are held by the directors, CEO, their spouses and minor children. Of this, roughly 11 percent shares are owned by each of the following: Shahzada Ellahi Shaikh, Shaukat Ellahi Shaikh and Shafqat Ellahi Shaikh. Another 30 percent shares are held under the associated companies, undertakings and related parties. Within this, over 20 percent shares are held by Ellahi International (Pvt) Limited. The local general public holds over 15 percent shares whereas the remaining less than one percent shares are with the rest of the shareholder categories.

Historical operational performance

Prosperity Weaving Mills has witnessed a fluctuating topline since FY12, with profit margins moving downward until FY19, before improving again in FY21.

In FY18, revenue increased by 6.7 percent, crossing Rs 6 billion. Unlike the previous years, local sales made a large part of the revenue whereas export sales registered a 24.5 percent decrease. However, cost of production continued to consume over 94 percent of revenue keeping gross margin more or less stable at close to six percent. Raw material expense made a significant portion of the total production cost. Since the local cotton production could not fulfil the demand of the industry, the manufacturers had to resort to pricier imported cotton. The effect also trickled down to the bottomline, with net margin recorded at a lower almost one percent.

The company witnessed double-digit growth in revenue in FY19, at 14.5 percent, crossing Rs 7 billion in value terms due to an improvement in sales price as well as sales volumes. Although both local sales and export sales saw a rise, it was the local sales again, that made a large portion of the total revenue pie. Moreover, the US-China trade war had a negative impact on the global fabric demand. On the other hand, the higher revenue was reflected in the higher gross margin that was recorded at nearly 10 percent. This also trickled down to the bottomline, with net margin recorded at almost three percent for the year.

After growing for three years consecutively, revenue in FY20 witnessed a contraction by over 15 percent- the highest ever. This was due to a combination of factors. The company was already seeing a lower production due to lower number of looms working, while the outbreak of the Covid-19 pandemic further worsened the situation as lockdowns were imposed and mills had to be shut. Production cost, as a percentage of revenue increased marginally to 91 percent, from 90 percent in the previous year. As a result, gross margin declined to 8.8 percent. With some decrease in finance expense due to “reduction in KIBOR rates and conversion of long-term debt into concessional LTFF loans. Thus, net margin also fell only marginally to 2.6 percent.

Prosperity Weaving Mills saw the largest growth in revenue in FY21 by over 35 percent with local sales growing by 12.7 percent and export sales more than doubling year on year in value terms. The growth in revenue was attributed to better volumes and prices. The company installed 36 high speed looms while demand also picked up, especially from the value-added sector. The latter helped to improve profit margins as reflected in the gross margin that was recorded at an all-time high of 14.3 percent. In value terms, distribution expense surged due to the rise in ocean freight, but as a share in revenue, there was only a marginal rise. Thus, net margin was also recorded at an all-time high of 7.9 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by almost 49 percent year on year. This was due to sustained demand coming from the value-added sector. The higher revenue allowed gross margins to improve to 11 percent for the period. Moreover, the industry received consistent energy supply that also aided in encouraging exports as otherwise, the higher energy costs rendered exports from the country unfavorable due to high costs. With a decrease in operating expenses as well, net margin also improved to 6.3 percent compared to 3.3 percent in the same period last year.

There have been several positives in the industry such as a rising demand coming from the value-added sector such as home textiles, garments, and the local fashion segment. The textile tariff has also been extended by the Ministry of Energy (Power division) till June 30, 2022, although the company believes that a longer-term decision in required. On the other hand, the local cotton production is expected to be 8.5 million bales which is notably higher from previous year’s 5.7 million bales. Yet the country would have to import due to demand exceeding local production. With the ongoing inflationary pressure, future profitability can be uncertain but the company is looking towards risk aversion strategies.

The company itself is installing further 26 new looms that will by completed by the third quarter. In addition, it is also setting up a second solar power project of 226.6 KW that is expected to be completed in FY22.