Kohinoor Mills Limited

Kohinoor Mills Limited (PSX:KML) was incorporated in 1987 as a weaving mill. In the past 32 years the company has evolved into a vertically integrated textile company- also known as a textile composite. The company is engaged with three business areas namely weaving, dyeing and finishing and energy. It is manufacturing and selling over 70 million meters of grey, white and dyed fabrics to fashion brands and retailers around the globe. Some of the more popular clients include the likes of Zara, Levi's, Ralph Lauren, American Eagle and Next.

Turnover is mainly concentrated with export, comprising of about 80 percent of total sales-predominantly with Asia. The magnitude of the company is reflected by its vastlabor force of 1960 employees and a 5-year average annual turnover north of Rs10 billion.

The flagship division Kohinoor Weaving commissioned operations with a 48-loom project on a green field site in 1988, currently there are 258 high-speed air jet looms. It produces over 40 million meters of grey fabric annually. The produce is partially consumed by the dyeing division while the rest is exported to clients in Europe, Asia, Russia and Africa.

Dyeing division came into the mix in 2002 after a decision by the company to move up the apparel value chain and compete with processing mills in Europe where manufacturing costs were under pressure. The division has capacity to produce 4 million meters of dyed, white and print fabric every month using cutting edge European machinery from Bennenger and Monforts.

The need for mills to receive uninterrupted energy supply to compete in the international market began to surface in the early 2000s. For this reason, the company set up an independent power plant with an installed capacity of about 30 mega-watts electricity and 30 ton per hour steam which can be produced on a variety of fuels such as gas, furnace oil, coal and biomass depending on price and seasonal availability.

Shareholding pattern

The ownership of the company is largely concentrated with Directors/Chief Executive Officer and their spouse and the general public, accounting for 38.8 percent and 46.9 percent shares respectively. The rest of the pie is divided amongst NIT & ICP having a stake of 6 percent followed by Banks and DFIs with 0.4 percent and mutual funds with 0.2 percent.

Current performance

The top-line remained on the upward trajectory as revenues clocked at Rs13.9 billion for the year ended june-19. The company witnessed its highest ever point in sales although this is no anomaly compared to industry leaders. Sales mix towards export saw a meager drop in its share (From 80 percent to 79 percent), in fact a declining pattern can be seen as the company directs sales towards domestic markets. This can be attributed to companies fetching lower prices on export versus domestic. During FY19 domestic sales improved by 35 percent while export increased by 27 percent.

The gross margin for FY19 was recorded at 14 percent compared to 12 percent in the corresponding period. Making a comparison with the five-year average of 15 percent paints a rather sticky picture for the gross margins. The improvement in margin from the last period is due to a mixed impact from the rise in volumetric sales and rising prices. Also, being an export-oriented company, devaluation of rupee had its fare share in jacking up the top-line and hence the margins.

Finance cost for the year increased by 27 percent during the year on the back of SBP policy rate more than doubling. Adding to the cost burden, taxes for the year in absolute terms increased by 4 times that of last year. Despite the impediments, the company managed to post a 5 percent net profit margin above the five-year average of 2 percent.

The company stood financial sound for the year as mirrored by the performance, profitability and liquidity ratios, all suggestive of an improvement compared to last year. Weather the impetus will pick up or fades dependent largely on forces within the company as well as externally.

Future outlook

The textile industry is operating in a highly inflationary environment making it difficult to sustain operations going forward. The company is positioned to face headwinds from the external environment in the form of high costs to finance (assuming high interest rates persist), raw material costs (as cotton crop suffers with low yield), energy and fuel (given high oil prices continue) and taxes. A pragmatic approach would be to mitigate the impact of the rising costs while boosting productivity internally.

Segment wise, in weaving the company should continue to focus on balancing modernization and rebalancing. The company already benefited during the year and the management is of the view this will enable the company to cater for the increased market demand and will result in a positive impact on the bottom line in the coming period as well.

For the dyeing segment, the company increased its production capacity by 20 percent and also saw fruitful results. But going forward if the demand does not increase in tandem with the increased production, it will result in piling up inventories. Nonetheless, no serious threat stems from the operations of the company. On the other hand, industry forces will likely test the resilience of the company in the next year or so. The company should be able to tackle these challenges given the perks arising from being sizeable- which especially helps with acquiring financing. Moreover, the diversification in the export market will help the company to retune the mix based on the current business environment.