Fazal Cloth Mills Limited

Part of the enormous Fazal Group, Fazal Cloth Mills Limited (KSE: FZCM) is one of the big players in Pakistan's textile industry. Founded in 1966, its market capitalisation is now well north of Rs 4.4 billion, making it a giant name in spinning and weaving.
The company owns and operates five spinning units comprising over 190,000 spindles and over 220 Airjet Looms. All its units have captive gas-fired power generation of 30MW. Fazal Cloth produces 6,000 tons of a variety of yarns and almost four million yards of fabric on a monthly basis. These include industrial fabrics, canvas, interior fabrics, and bull denim, to name a few. Fazal Cloth provides employment to more than 5,300 people and its annual sales are well north of $20 million, most of which (used to) come from exports.
Prior Performance Fazal Cloth has managed to grow its top line adequately over the five-year period from FY10 to FY14. In terms of margins, the growth was decent enough, with a little hiccup in between; in 2010, cotton prices began climbing and peaked to a multi-year high in March 2011, making this a bad year for the company in terms of margins. However, the subsequent years were much better as cotton prices plummeted. Unfortunately then, FY14 proved disappointing due to a weak performance by the weaving segment.
The firm currently operates in two segments - spinning and weaving. The weaving segment appears to be a novel addition to the company, as the company's yearly report records FY12 as its first year of production. Nevertheless, this segment seems to have taken off and its production is increasingly annually like clockwork.
More importantly though, the weaving segment - being value-added - fetches far better margins. Although it had a bumpy start and made huge losses to the company in FY12, the segment has quickly caught up and outdone the spinning segment in terms of profitability. Its sales growth has also been quite impressive; in just two years, weaving segment's sales doubled to over Rs 5.2 billion, and it accounted for 19 percent of the company's total sales.
In terms of exports, however, both segments have been losing their share, despite the increases in their production and sales figures. This has naturally been due to the loss of competitiveness thanks to numerous factors - a high cost of doing business compared to regional competitors like India, Turkey, and Bangladesh, and an overvalued Rupee.
Recent Performance For the full year ended FY15, Fazal Cloth's numbers tell the same story as almost every other textile company operating in Pakistan: a plummeting bottom line. The company managed to improve sales by 7 percent year-on-year and kept its core costs largely in check, thus the change in gross profits was nominal. However, higher distribution and administrative expenses and a far lower other operating income spelled out a 42 percent year-on-year decline in the company's bottom line.
The company's net margin has fallen from 4 percent to a meager 2 percent. It seems the lower yarn prices have caught up with the company. Although cotton and fuel prices were also at multi-year lows during the period under review, the decline in yarn prices seems to have more than offset this.
As for the weaving segment, not much can be said in the absence of the Director's Report. However, it may be the case that the demand for greige fabric is still tepid, as was reported in last year's Director's Report.
Moreover, it may be the case that the margins for weaving segment were being hurt because of the high cost of producing yarn; Fazal Cloth's weaving segment mostly uses the yarn produced from the spinning segment, so its inter segment cost is extremely high. This yarn is in all probability more expensive than that available in the international market. Thus, the segment is unable to compete and the infection from one segment spills over into the other.
Outlook There seems to be no relief on the horizon for the textile industry - APTMA has observed black day and voluntarily shut down mills. Moreover, Some 30 percent of the textile industry capacity in all six major sub-sectors is almost closed. The government has shelved the textile relief package and the cost of doing business continues to render the textile companies uncompetitive. Furthermore, Indian yarn is being dumped into Pakistan and this is further hurting the spinners.

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Fazal Cloth Mills Limited

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Rs (Million)                 FY15      FY14       YoY

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Net Sales                  25,419    23,780        7%

Cost of Sales              23,010    21,360        8%

Gross Profit                2,409     2,420        0%

GP Margin                      9%       10%      down

                                               70 bps

Distribution Cost             300       260       15%

Administrative Expenses       251       247        2%

Other Operating Expenses       74        82      -10%

Other Operating Income         16       274      -94%

Finance Cost                1,275     1,282       -1%

Taxation                      164        55      198%

Profit After Tax              511       878      -42%

NP Margin                      2%        4%      down

                                              170 bps

EPS                         17.02     29.26      -42%

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