Fazal Cloth Mills Limited (PSX: FZCM) was incorporated in Pakistan as a public limited company in 1966. The principal activity of the company is the manufacturing and sale of yarn and fabric.
Pattern of Shareholding
As of June 30, 2024, FZCM has a total of 30 million shares outstanding which are held by 1400 shareholders. Associated companies, undertakings, and related parties have the majority stake of 66.6 percent in the company followed by its directors, CEO, their spouse, and minor children accounting for 22.65 percent shares. Around 5.9 percent of FZCM’s shares are held by NIT & ICP and 4.02 percent by the local general public. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-24)
FZCM’s topline has been expanding over the period under consideration, however, its bottom line contracted in 2020, 2022, and 2023. In 2020, the company posted a net loss. Its margins which registered a noticeable growth in 2019 dropped in 2020 followed by a sound recovery in 2021. In 2022, gross margin enhanced while operating and net margins dipped. FZCM’s margin posted a drastic decline in 2023. This was followed by an even weaker gross margin in 2024, conversely, operating and net margins ticked up during the year. The detailed performance review of the period under consideration is given below.
In 2019, FZCM posted 16.15 percent year-on-year growth in its topline. This was the result of an increase in the prices and sales volume. Pak Rupee depreciation also played a pivotal role in driving up the company’s export revenue. Cost of sales grew by a lesser margin of 12.11 percent during the year due to the availability of electricity and gas at regionally competitive rates. This resulted in 58.35 percent higher gross profit in 2019 with GP margin jumping up from 8.74 percent in 2018 to 11.92 percent in 2019. Selling & distribution expenses slumped by 20.82 percent in 2019 due to lower commissions, surcharges, and insurance paid on export sales. Administrative expenses grew by 8.76 percent in 2019 due to higher payroll expenses, vehicle running & maintenance charges, repair & maintenance charges, and depreciation expenses incurred during the year. Other expenses mounted by 78.63 percent in 2019 on the back of higher profit-related provisioning, loss on disposal of fixed assets, unrealized loss on the revaluation of investment at FVTPL, and allowance booked for the impairment of trade debts. The effect of other expenses was completely wiped off by 26.56 percent higher other income recorded by FZCM in 2019 on account of exchange gain and markup earned on advances to associated undertakings. Operating profit strengthened by 64.73 percent in 2019 with OP margin climbing up from 8.26 percent in 2018 to 11.72 percent in 2019. Finance costs mounted by 65.59 percent in 2019 due to higher discount rates and increased borrowings. FZCM’s gearing ratio grew from 47 percent in 2018 to 51 percent in 2019. Net profit picked up by 24.89 percent in 2019 to clock in at Rs.1515.50 million with EPS of Rs.50.52 versus EPS of Rs.40.45 recorded in 2018. NP margin also improved from 3.88 percent in 2018 to 4.17 percent in 2019.
In 2020, FZCM’s topline grew by 9.28 percent. The company’s local and export sales volume considerably declined during the year due to COVID-19. Pak Rupee depreciation, however, resulted in greater export sales in Rupee terms. Cost of sales grew by 9.82 percent in 2020, resulting in a 5.3 percent higher gross profit recorded during the year. GP margin slightly ticked down to 11.5 percent in 2020. Selling & distribution expenses mounted by 71.26 percent in 2020 due to considerably higher commissions paid on both local and export sales. Administrative expenses ticked up by 12.65 percent in 2020 due to higher payroll expenses on account of inflation as well as expansion in the workforce from 4627 employees in 2019 to 4897 employees in 2019. Other expenses mounted by 175.42 percent in 2020 due to higher exchange losses incurred during the year. Other income showed no significant movement in 2020. Operating profit tapered off by 8.72 percent in 2020 with OP margin falling down to 9.79 percent. Finance cost grew by 55.46 percent in 2020 due to higher discount rates for most part of the year and increased borrowings which resulted in a gearing ratio of 53 percent. FZCM recorded a net loss of Rs.569.496 million in 2020 with a loss per share of Rs.18.98.
In 2021, FZCM registered a topline growth of 31.27 percent. This was predominantly the result of improved international demand for textile products after COVID-19 coupled with a rebound in local and international prices. The cost of sales grew by 25.53 percent due to the availability of energy at regionally competitive rates and the company’s ability to procure raw materials at reasonable rates amid high commodity prices. Gross profit strengthened by 75.5 percent in 2021 with GP margin attaining a new high level of 15.36 percent. Selling & distribution expenses slid by 2.78 percent in 2021 due to lower export commissions incurred during the year. An increase in a number of employees to 5705 in 2021 coupled with inflationary pressure resulted in 16.82 percent higher administrative expenses in 2021. Higher profit-related provisioning and present value adjustment of long-term loans resulted in 8.76 percent higher other expenses in 2021. Other income fell by 5.91 percent in 2021 due to a lower markup on advance to the associated undertaking, Fatima Energy Limited, and no gain recorded on the disposal of equity instruments of the associate. During the year, the company discontinued equity accounting on its investment in Fatima Energy Limited and recognized a gain of Rs.216.80 million as the difference between the carrying amount and the fair market value of the investment. The company recorded a 90.49 percent higher operating profit in 2021 with OP margin climbing up to 14.2 percent – the highest level recorded during the period under consideration. Finance costs shrank by 39 percent in 2021 due to monetary easing and reduced borrowings on account of the improved liquidity position of the company. The gearing ratio fell to 40 percent in 2021. FZCM recorded the highest ever net profit of Rs.5431.76 million in 2021 with EPS of Rs.181.06 and NP margin of 10.42 percent.
FZCM’s topline mounted by 25.46 percent in 2022. This was primarily the result of the unabated decline in the value of local currency which rendered higher export sales in Rupee terms. Cost of sales grew by 22.91 percent in 2022, resulting in 39.51 percent higher gross profit and the highest ever GP margin of 17.1 percent. Selling & distribution expenses surged by 59.27 percent in 2022 due to higher commissions paid on both local and export sales and elevated export development surcharge incurred during the year. Administrative expenses escalated by 28.94 percent in 2022 due to higher payroll expenses as the number of employees increased to 6934 in 2022. 161.60 percent higher other expenses incurred during 2022 were the result of higher profit-related provisioning, exchange loss, sales tax receivable written off, and loss allowance booked on long-term markup accrued. Other income slid by 12.91 percent in 2022 due to no exchange gain, no notional gain on discounting of GIDC payable, and lower mark-up on advances to Fatima Energy Limited. Operating profit grew by 19.14 percent in 2022, however, OP margin slipped to 13.5 percent. A higher discount rate coupled with increased borrowings resulted in a 62.85 percent higher finance cost in 2022. This resulted in a gearing ratio of 46 percent in 2022. The imposition of super tax also proved to be detrimental for FZCM in 2022 squeezing its bottom line by 15.12 percent. Net profit stood at Rs.4610.26 million in 2022 with EPS of Rs.153.68 and NP margin of 7.05 percent.
In 2023, FZCM posted a topline growth of 18.79 percent. Despite the global economic slowdown, the company’s sales volume slightly improved during the year. However, elevated prices of raw materials due to the Russia-Ukraine crisis coupled with the Pak Rupee depreciation and heightened energy tariff took its toll on the gross profit of the company which diluted by 9.69 percent year-on-year in 2023. GP margin drastically fell to 12.98 percent in 2023. Selling & distribution expenses incurred during the year were 16 percent less when compared to the last year due to lower sales commissions and lower export development surcharge. Administrative costs will be multiplied by 18.15 percent in 2023, primarily due to higher payroll expenses due to inflation. Other expenses mounted by 49.22 percent in 2023 due to a whopping exchange loss incurred during the year. Other income dipped by 33.39 percent in 2023 as the company earned no mark-up income on advances and recorded no gain on the re-measurement of short-term investment. FZCM recorded 24.4 percent thinner operating profit in 2023 with OP margin slipping to 8.58 percent. Finance cost magnified by 73.62 percent in 2023 due to an unprecedented level of discount rate and increased outstanding liabilities which resulted in the gearing ratio amounting to 51 percent. The company’s bottom line contracted by 87.29 percent in 2023 to clock in at Rs.586.094 million with EPS of Rs.19.54 and NP margin of 0.75 percent.
FZCM’s topline registered a 25.05 percent rebound in 2024. This was on the back of improved sales volume of yarn. Conversely, the sales volume of fabric dropped during the year. The surge in the prices of raw materials as well as well as towering energy tariffs pushed the cost of sales up by 27.41 percent in 2024. This resulted in the GP margin further dropping to 11.34 percent in 2024, despite a 9.23 percent uptick in gross profit in absolute terms. Selling & distribution expenses surged by 12.58 percent in 2024 due to higher export development surcharge, higher commission on local sales, and higher salaries of marketing staff. Administrative expense also multiplied by 26.79 percent in 2024 primarily due to higher payroll expense This was despite the fact that the company streamlined its workforce to 6538 employees in 2024 from 6927 employees in the previous year. The company recorded 93.33 percent less other expenses in 2024 due to no exchange loss incurred during the year. The effect of other expenses was completely wiped off by 345.45 percent higher than other income recorded during the year. This was the result of exchange gain, gain on de-recognition of markup upon conversion into preference shares, reversal of loss allowance booked against long-term advances, gain on re-measurement of short-term investment, and as well as a higher dividend received from Fatima Fertilizer Limited. Operating profit improved by 67.39 percent in 2024 with OP margin rising up to 11.49 percent which was even bigger than the GP margin for the year – thanks to hefty other income. Finance cost surged by 64.3 percent in 2024 due to a higher discount rate while outstanding liabilities ticked down resulting in a gearing ratio of 46 percent. Net profit registered impressive growth of 204.61 percent in 2024 to clock in at Rs.1785.286 million with EPS of Rs.59.51 and NP margin of 1.84 percent.
Future Outlook
Pakistan has kicked off FY25 on a positive note with significant improvement in macroeconomic indicators setting the tone for a resilient future. This will improve the demand of textile products both in the local and export markets. Stability in the value of local currency and a decline in inflation will reduce the cost of the company. Monetary easing will also pave the way for a thinner financial cost. All these factors will result in improved sales revenue and a healthier bottom line and margins.
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