Saritow Spinning Mills Limited

Saritow Spinning Mills Limited (PSX: SSML) is part of the Saigol group of companies. The company was set up in 1987 as a public limited company under the Companies Ordinance, 1984. It manufactures and sells yarn, at its facility located in Punjab.

Shareholding pattern

As at June 30, 2021, over 51 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, majority shares are owned by the chairman of the company, Mr. M. Naseem Saigol. Nearly 42 percent shares are held by the general public, while another over 4 percent shares are with NIT & ICP. The remaining about 2 percent shares is with the rest of the shareholder categories.

Historical operational performance

Saritow Spinning Mills has seen a fluctuating topline over the years, with profit margins in the last five years growing until FY19. In FY20 they decreased, before rising again in FY21.

Revenue in FY17 stood at nearly 19 percent, nearing Rs 3 billion. This was due to higher yarn prices for a large part of the year. Yarn prices declined towards the end of the year. With cost of production reducing to almost 95 percent of revenue, from last year’s over 98 percent, gross margin increased to 5.5 percent. With little changes in other factors, the company posted a profit of Rs 13 million, compared to the loss incurred in the previous two years.

In FY18, revenue growth was relatively marginal at 2 percent, due to yarn prices remaining more or less subdued for majority of the year. The prices only improved in the last quarter of the year that allowed for some improvement in revenue. Cost of production, on the other hand, remained stable at around 94 percent of revenue, that kept gross margins also flat at close to 6 percent. This also trickled down to the bottomline with net margin also flat at less than 1 percent for the year.

In FY19, the company witnessed revenue growth of close to 17 percent, with topline crossing Rs 3.5 billion. This was due to “running appropriate yarn counts at the right time”. Moreover, cost of production stood at 92.6 percent of revenue that allowed gross margin to improve marginally to 7.4 percent. With most other elements of the financial statements remaining more or less similar as a share in revenue, net margin also improved slightly to 1.5 percent.

Topline in FY20 contracted by almost 20 percent. This was predominantly attributed to the outbreak of the Covid-19 pandemic that resulted in halt in business activities for two months, with supply chains also brought to a halt. The fall in revenue also reflected in the lower profit margin that fell to 4.4 percent. Due to interest rates remaining high for a large part of the year, finance cost made up almost 4 percent of revenue. Coupled with other operating expenses, the company incurred a loss of Rs 58 million.

The company witnessed an all-time high revenue growth in FY21 of almost 30 percent, with topline crossing Rs 3.5 billion once again. This was attributed to “running appropriate yarn counts at right time”. The higher revenue led gross margin to reach to 10.4 percent- a level last seen in FY13. With reduction in expenses as a share in revenue, particularly the finance expense due to lower interest rates, net margin was recorded at the highest seen in eight years, at 4.8 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was marginally higher by almost 5 percent. Cost of production, on the other hand, was slightly lower at 90.4 percent of revenue compared to 93.5 percent in the same period last year. As a result, there was some improvement in gross margin at 9.6 percent, versus 6.5 percent. Moreover, finance cost reduced notably Rs 20 million in the same period last year to Rs 9 million in 1QFY22. Therefore, profitability improved several times in value terms, to 5.6 percent, compared to 1 percent in 1QFY21.

The major challenge for the industry, and the company, alike, is the availability and price of cotton. The continuous decline in local production forces industry players to procure imported cotton, that raises the cost of raw materials with any movement in exchange rates. The company states that as the price of cotton increases all over the globe, the price of manmade fibers also increases year on year.

Moreover, the procurement of imported cotton has also become a challenge due to shipping crises. The unavailability of cargo ships has delayed cotton shipments, with cargo piled up at transit ports like Singapore, waiting to be lifted. The unavailability of cargo ships has also affected exporters as cargo is awaiting shipment which has resulted in a decrease in local yarn sales.