Mehmood Textile Mills Limited

Mehmood Textile Mills Limited (PSX: MEHT) was established in 1970 as a public limited company under the Companies Act, 1913 (now Companies Act, 2017). The company manufactures and sells yarn and grey cloth, as well as generates electricity. Its manufacturing facility is located in Punjab.

Shareholding pattern

As at June 30, 2022, over 29 percent shares are held by the directors, CEO, their spouses and minor children. Mr. Khawaja Muhammad Younus, one of the directors, is a major shareholder within this category. The local general public owns close to 64 percent shares, followed by 6.5 percent held in joint stock companies. The remaining less than 1 percent share is with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline over the years, while profit margins in the last six years have followed an upward trajectory, with rapid growth observed between FY20 onwards.

In FY18, topline grew by over 15 percent to reach Rs 18 billion in value terms. This was a result of an increase in both, export sales and local sales that grew by 16 percent and 12.4 percent, respectively. The rise in exports was encouraged by currency depreciation that made them more favourable in the global arena. With production cost remaining close to 93 percent, gross margin remained more or less flat at around 7 percent. But the high mark-up rates increased the finance expense that consumed over 4 percent of revenue. Thus, net margin was recorded at a slightly lower 1 percent, compared to 2 percent in the previous year.

At 34 percent, revenue growth in FY19 stood at the highest seen since FY11. It crossed Rs 24 billion in value terms, as local sales registered a growth of 30.5 percent, while export sales witnessed a rise of 35 percent. As production cost fell to over 89 percent, gross margin increased to 10.5 percent for the year. Net margin, grew to 3 percent as it received significant support from share of profit from associates. The incline in net margin was contained relative to the rise in gross margin due to considerably lower share of other income that kept operating margin from exhibiting a substantial increase.

Revenue in FY20 saw a marginal growth rate at less than 1 percent. Despite some increase seen in local and export sales, the growth in overall net revenue was restricted due to a whopping sales tax figure of Rs 2.4 billion, compared to Rs 2.4 million in the previous year. On the other hand, cost of production grew to consume over 91 percent of revenue, thereby reducing gross margin to 8.6 percent for the year. However, operating margin did not decline to a similar extent as gross margin, as other expenses reduced to Rs 25 million, from last year’s exorbitant Rs 776 million. The latter was due to significant unrealized loss on re-measurement of short-term investments at fair value. But net margin was lower year on year at less than 1 percent due to considerably lower contribution by share of profit from associates at Rs 549 million, compared to Rs 1.24 billion seen in FY19.

A year into the Covid-19 pandemic, topline recovered in FY21 as it grew by 14 percent to reach close to Rs 28 billion in value terms. While local sales grew by 63.6 percent, growth in export sales was relatively subdued at 3.6 percent. Growth was concentrated in local sales due to border closures associated with Covid-19 pandemic, as well as lack of cargo vessels that delayed shipments. With production cost going down to over 86 percent of revenue, gross margin was recorded at 13.65 percent. This was the highest seen since FY13. This also trickled down to the net margin that was recorded at 4.8 percent as finance expense reduced to consume 4.5 percent of revenue. The latter can be attributed to a decline in interest rates as the government aimed to provide support to businesses during the pandemic.

Recent results and future outlook

Topline witnessed the second highest growth in FY22 by 46.6 percent. In value terms it stood close to Rs 41 billion. Net export sales grew by over 43 percent, while net local sales grew by 62.5 percent. The company’s apparel division began operations that contributed an additional Rs 498 million in export sales and Rs 215 million in local sales. Production cost fell to nearly 82 percent of revenue, a level last neared more than a decade ago, in FY10. Thus, gross margin improved to 18 percent. But due to a combination of increase in operating expenses and decline in other income, net margin grew, albeit by a lesser extent to 7.76 percent. However, bottomline in value terms stood at an all-time high of over Rs 3 billion.

When the world was still recovering from the effects of Covid-19 pandemic, the Ukraine-Russia war provided further uncertainty as oil prices spiraled upwards in international commodity markets. On the domestic front, the twin deficits, political instability and depletion of foreign reserves further impacted business activities. In addition, the textile industry that is frequently facing a cotton shortage is expected to face similar concerns due to the aftermath of floods. However, the company has nearly secured its raw material needs for the next year.