Zahidjee Textile Mills Limited

Zahidjee Textile Mills Limited (PSX: ZAHID) was established in 1990 as a public limited company under the Companies Ordinance, 1984 (now, Companies Act, 2017).

The company exports value added fabrics along with textile made-ups. It also is engaged in the business of manufacturing and selling yarn. It has two business divisions; spinning and weaving. Its spinning division has two units located in Faisalabad, and weaving division has one unit also in Faisalabad.

Shareholding pattern

The company is largely owned by the directors, CEO, their spouses and minor children as they collectively own more than 95 percent of the company. Of this, Mr. Muhammad Zahid, the CEO of Zahidjee Textile Mills, owns the most shares at 83 percent, while a little over 12 percent is with Mr. Ahmad Zahid, one of the directors on the company’s board. About 3 percent is distributed with the local general public while 1 percent is held in joint stock companies.

Historical operational performance

Zahidjee Textile Mills have consistently seen positive growth in its topline since FY12; that too, a double digit growth for the most part. Profit margins have also mostly been on an increasing trend, specifically since FY15.

In FY15, Zahidjee Textile Mills saw topline growing at 11.5 percent, a relatively subdued growth rate compared to that seen previously, and in the future. The increase in sales was attributed to building capacity in the spinning division. The company installed a new spinning unit of 24,912 spindles; it became operational by the start of the second quarter of FY15. Looking at the costs, they increased by more than the proportional increase in sales, consuming more than 91 percent of the revenue. This was largely due to higher raw material consumption, and a depreciation charge. This lowered the gross margins, while a decline in other income reduced operating margins. Other income was abnormally high in FY14 due to a one-off ‘reversal of impairment loss’.

Textile sector slowed down during FY16, owing to lack of demand from one of its major export markets; the latter shifted its demand to a regional competitor due to better prices. The effect of this was seen on the financials of a majority of the textile companies. Zahidjee was no exception. It saw its lowest growth rate in topline during FY16, at less than 1 percent. However, a marginal decrease in cost of production kept the gross margins in check. This was possible as furnace oil prices reduced, hence in-house generation proved more profitable than WAPDA. Dividend income raised the operating margins, the effect of both the factors (other income and reduced costs) was seen on the bottomline which improved to 4.6 percent.

The company regained its growth momentum during FY17 as it grew its topline by nearly 19 percent. This was again attributed to an increase in capacity in the spinning division; production increased from 160 bags per day to 180 bags per day. However, this was mostly absorbed in the local market, as export sales actually declined. This could have been due to the fact that they found better margins in the domestic market. Costs reduced across the board which helped to lift gross and operating margins; net margin, however was marred by taxation expense due to ‘increase in deferred tax liability due to addition in plant and machinery’.

While topline registered a nearly 30 percent incline in topline, profit margins mostly remained flat during FY18. The increase in sales was attributed to a further increase in capacity as additional 17,472 spindles were installed. Capacity building helped the company to translate this demand to higher revenue, as both local sales and export sales picked up. However, the increase in revenue saw a corresponding increase in costs as well, which kept margins flat. Keeping other costs in control, the company was able to lift net margin only slightly.

In FY19, Zahidjee Textile Mills saw another year of significant growth in its topline at a little over 30 percent. This was a result of materialisation of previous investments made in plant and machinery and achieving efficiency over time which reduced per unit cost. Cost of production also remained unchanged, reducing only marginally. The effect of this was seen in bottomline, as despite rising finance cost, net margins almost doubled year on year. Finance cost increased due to high interest rates which increased the mark up paid on short term borrowings.

Quarterly results and future outlook

The company maintained its topline growth during 9MFY20, as it grew by 14 percent year on year, while costs increased by less than a corresponding change, allowing margins to increase. Other costs also moved by a small percentage thus allowing the company to reach its highest operating and net margin. Due to the ongoing pandemic, the company had to halt operations entirely at the end of the third quarter and beginning of the last quarter. This may give rise to increase in per unit cost as production may have been affected. The company observes that if conditions persist, it would surely be difficult to maintain profitability.

While currency devaluation did favour export potential, it also increased the cost of imported raw material, while the high cost of doing business remains. In addition, Covid-19 has made matters worse, as it will take time to recover from the loss of reduced business activity.