Reliance Cotton Spinning Mills Limited

Reliance Cotton Spinn-ing Mills Limited (PSX: RCML) was set up as a public limited company in 1990 under the Companies Ordinance, 1984 (now Companies Act, 2017). The company manufactures and sells yarn at its mill located in Sheikhupura, Punjab with an installed capacity of 57,600 spindles.

Shareholding pattern

As at June 30, 2022, over 65 percent shares are held with the associated companies, undertakings and related parties. Within this category, the major shareholders are ATMZ Company (Private) Limited, Channel Holdings (Private) Limited, and Resource Corporation (Private) Limited. The local general public owns close to 21 percent shares, followed by 8.4 percent held by the directors, CEO, their spouses and minor children. Within this, Mr. Yousuf Abdullah, one of the directors, is a major shareholder. The remaining roughly 5 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline with the exception of a few years. Profit margins, in the last six years, have been more or less stable between FY17 and FY20 after which they propelled upwards until FY22.

In FY18, revenue was higher by 23 percent to reach nearly Rs 4.4 billion in value terms. While the export package provided the growth impetus that resulted in textile exports overall to increase by 9 percent, currency devaluation furthered the momentum. This is also reflected in the company’s total exports that grew by 25 percent to reach Rs 3.5 billion for the year, compared to Rs 2.8 billion in the previous year. With cost of production down to 85.6 percent of revenue, gross margin increased to 14.4 percent. Net margin also followed as it was recorded at 7.2 percent. The increase in net margin was not as pronounced due to a reduction in other income and a rise in other expenses as a share in revenue.

Growth momentum continued in FY19 as revenue increased by 22 percent to cross Rs 5 billion in value terms. This was largely contributed by indirect exports of yarn as it witnessed a growth of 35 percent whereas the overall exports of the company rose by 24.6 percent. The rise in exports was an industry-wide phenomenon as currency devaluation made exports favourable in the global market. Cost of production reduced marginally to nearly 85 percent of revenue, increasing gross margin to a similar extent to reach 15 percent. With an escalation in finance expense, net margin increased by an even smaller difference as it was recorded at 7.3 percent.

In FY20, revenue growth was relatively subdued at 11.3 percent to reach almost Rs 6 billion in value terms. Direct export sales grew by 34 percent, while local sales of yarn registered a growth of 29 percent. With cost of production reduced negligibly at 84.5 percent, gross margin also increased marginally to 15.5 percent. Coupled with a rise in operating expenses as well as finance expense as a share in revenue, net margin fell to 4.6 percent for the year. The higher interest rates caused finance expense to claim 5.7 percent of revenue.

Topline growth bounced back in FY21 as it was recorded at 28.3 percent to reach Rs 7.7 billion in value terms. Export sales contributed majority of the revenue as is revealed by a sales breakdown whereby export sales contributed Rs 6 billion. Within this, indirect sales stood at Rs 4.2 billion. Gross margin escalated to nearly 23 percent as cost of production went down to 77 percent- the lowest seen since FY12. This also reflected in the net margin that stood at the highest seen thus far at 15.6 percent. In addition, net margin was supported by considerably lower finance expense.

Recent results and future outlook

In FY22, the company witnessed the highest topline growth seen since FY13, at over 48 percent, with revenue reaching an all-time high of Rs 11.4 billion. Yarn export sales were again the major contributor to revenue as it stood at Rs 10 billion in value terms. With cost of production at an all-time low of 67.4 percent of revenue, gross margin reached a peak of 32.5 percent. Although other expenses increased as a share in revenue, it was offset by the decrease in operating expenses and finance expenses. Thus, net margin also peaked, at over 24 percent. In addition, bottomline stood at its highest of almost Rs 2.8 billion.

Except for the years when the company saw its topline contracting, Reliance Cotton has seen double-digit revenue growth primarily supported by export sales. Despite the onset of Covid-19 pandemic that led to border closures, the company has managed to maintain its growth momentum as earnings per shareholder has improved significantly, in the last two years particularly. But with the ongoing political and economic scenario on the domestic and global front with the Ukraine-Russia war, rising global commodity prices, demand reduction, inflationary pressures, political uncertainty within the country, and the crop damage due to floods, the slowdown in economic growth is expected to impact future profitability.