Towellers Limited

Towellers Limited (PSX: TOWL) was established in 1973 as a private limited company. It was later converted into a public limited company in 1994 under the Companies Act, 1913 (now Companies Act, 2017). The company manufactures and exports textile make ups, garments and towels.

Shareholding pattern

As at June 30, 2022, over 84 percent shares are held by the directors, CEO and sponsors. Within this category Humza Shaikh Obaid is a major shareholder. The local general public owns nearly 8 percent shares, while the remaining roughly 8 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has been experiencing a fluctuating topline over the years, while profit margins, in the last six years particularly, followed an upward trajectory between FY17 and FY19. There was a slight dip in FY20 after which they have remained fairly stable.

In FY19, the company posted the highest revenue growth rate seen thus far, at close to 48 percent reaching nearly Rs 4 billion in value terms. This was largely attributed to a growth in exports that saw a 20 percent increase, without considering the effect of currency devaluation. In addition to exchange rate benefits, exports were also encouraged by export rebate. With production cost falling to 77.6 percent of revenue, compared to 85 percent in the previous year, gross margin improved significantly to 22.4 percent, from last year’s almost 15 percent. However, the increase in net margin was less pronounced due to considerable other income recorded in the previous year, that was absent in the current period. Thus, net margin stood at a marginally higher 10.47 percent. However, if the impact of other income were to be disregarded in FY18, there was a significant improvement in profitability in FY19.

Topline contracted marginally in FY20, by almost 2 percent. This was attributed to the outbreak of the Covid-19 pandemic that led to strict lockdowns. As a result, not only were the sales impacted, but there were also production losses. However, currency devaluation prevented a major loss in revenue. Moreover, as lockdowns eased in Europe and USA, the company was able to improve its exports. On the other hand, profitability was adversely impacted by the higher cost of production that consumed 81.4 percent of revenue. Gross margin was recorded at 18.6 percent whereas net margin reduced to 7.3 percent.

Revenue in FY21 grew by an impressive 38.4 percent to reach Rs 5.2 billion in value terms. This was attributed to resumption of business activities as lockdowns eased, and trade resumed. This also led to an increase in demand that was pent-up due to the pandemic. The textile sector overall, of the country also benefitted from the fact that the regional competitors were severely hit by the pandemic, while Pakistan saw business resuming in contrast. Therefore, export orders were also redirected to Pakistan. With production cost again below 80 percent of revenue, gross margin increased to 21.3 percent. Combined with a reduction in operating expenses as well, as a share in revenue, net margin peaked at 10.65 percent.

Topline nearly doubled in FY22 year on year, to reach an all-time high of Rs 10.2 billion in value terms. The sector continued to benefit from increasing demand as well as exchange rate that is also reflected in the unprecedented growth in revenue for the company. With a marginal incline in production cost, gross margin was lower only slightly to 20.4 percent. This also trickled to the net margin hat was also slightly lower at 10.38 percent. But in value terms, bottomline stood at an all-time high of Rs 1 billion, while operating profit also reached a peak of Rs 1.2 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY23 was higher by almost 30 percent year on year. The period saw significant upward revision in topline compared to the same time last year. This can be attributed somewhat to currency devaluation that encourages exports. It must be noted that the company earns a major chunk of its revenue from export sales. During the period, the company witnessed cost of production falling to 69 percent of revenue, compared to over 81 percent in the corresponding period last year. This elevated gross margin to almost 31 percent, compared to nearly 19 percent seen in the previous year. Coupled with significantly higher other income of Rs 47 million, versus Rs 7 million seen in 1QFY22, net margin was also considerably better at 24.4 percent, compared to 10.4 percent in the same period last year.

Given the global economic condition, such unprecedented increase in sales and profitability is unlikely in the future with reduction in demand and high inflation that is crippling purchasing power of the consumers. In addition, the lower cotton crop production from US and Pakistan is also expected affect global supply that will hamper production. Coupled with the country grappling with the aftermath of floods, it further dampens the future economic outlook.