Kohinoor Mills Limited

Kohinoor Mills Limited (PSX: KML) was set up in 1987 under the Companies Ordinance, 1984 (now Companies Act, 2017). The company operates in the textile industry undertaking functions such as weaving, bleaching, dyeing, buying, selling, and trading yarn, cloth and fabric made from raw cotton. The company also generates and supplies electricity.

Shareholding pattern

As of June 30, 2021, over 42 percent shares are held by the directors, CEO, their spouses, and minor children within which amajor shareholder is the CEO, Mr. Aamir Fayyaz Sheikh.Another almost 41 percent shares are categorized under ‘shareholders holding 10 percent or more’. The local general public owns 8 percent shares followed by 6 percent held in NIT & ICP. The remaining over 3 percent shares is with the rest of the shareholder categories.

Historical operational performance

The company has seen a growing topline except for FY14 and FY20, while profit margins have been fluctuating.

In FY18, revenue grew marginally by 2 percent reaching Rs 11 billion in value terms. Export sales also grew marginally by less than 1 percent while local sales posted a growth of 8 percent. The reason for a marginal topline growth is that the company installed eighty-four high-speed air jet looms that increased production capacity in the second half when it became operational. However, the resultant inter-division sale was not accounted for in the financial statements. Coupled with this was the low profit margin from the dyeing division that caused gross margin to fall to 12 percent. The dyeing division saw rising cost of materials in addition to a low demand. However, net margin was higher year on year at 2.2 percent due to a substantial increase in other income that came from a net exchange gain while other expenses also less than halved year on year.

Revenue growth bounced back in FY19 as it grew by 28.5 percent reaching close to Rs 14 billion in value terms. Both local sales and export sales grew, by 33.7 percent and 29 percent, respectively. The weaving division and dyeing division saw better turnover while currency devaluation also provided additional benefit. The former was due to installation of machinery that enhanced production as well as efficiency reflected in the lower cost of production at 85.6 percent of revenue. This caused gross margin to incline to 14.4 percent. Other income continued to increase significantly due to a net exchange gain that allowed net margin to reach a 5-year high of over 5 percent.

In FY20, revenue contracted by 14 percent to reach Rs 12 billion in value terms. While export sales fell by 11.5 percent, local sales registered a fall of 23 percent. The decrease was attributed to the outbreak of the Covid-19 pandemic that skewed consumer expenses towards necessities. With border closures, orders were either cancelled or delayed. Despite the loss in revenue, gross margin improved to 15.56 percent on the back of reduced cost of production to over 84 percent of revenue. But net margin was lower year on year at 3 percent due to other income shrinking in the absence of a net exchange gain.

Topline recovered in FY21 as it grew by over 10 percent to reach an all-time high of Rs 13 billion. While export sales growth was marginal at less than 1 percent, local sales grew by over 51 percent. However, note that export sales were still the major contributor to the total revenue pie. While the weaving division saw better performance on the back of BMR activities that enhanced production, the dyeing division improved as business returned to normalcy a year after the outbreak of Covid-19. But owing to the higher cost of production resulting from an increase in gas prices, gross margin reduced to nearly 13 percent. While net margin also reduced, to 2 percent, the year-on-year decrease was not as significant due to considerable support coming from other income. The latter, in turn, resulted from a combination of credit balances and accrued mark-up written back, and gain on sale of property, plant and equipment.

Quarterly results and outlook

Revenue in the first quarter of FY22 was higher by over 71 percent year on year. This was again attributed to BMR activities that improved production as well as retail businesses resuming activities after the vaccinations were rolled out and business returned to normal. Combined with this was the decrease in cost of production as a share in revenue that allowed net margin to improve to 5.2 percent versus 1.6 percent in 1QFY21.

The second quarter revenue was also higher year on year by 46.6 percent whereas cost of production was lower at almost 84 percent. However, net margin was only marginally higher at 3.8 percent versus 3.4 percent in 2QFY22 due to increases in operating expenses and a decline in other income. While undertaking BMR activities to increase production and efficiency and targeting new markets has allowed the company to increase topline, a newly developed challenge is the security situation in Eastern Europe that can affect the company’s customers from that region, and hence the company as well.