Tata Textile Mills Limited

Tata Textile Mills Limited (PSX: TATM) was established in 1987 under the Companies Ordinance, 1984. Around four years later, in 1991, a spinning unit of 19,200 spindles was set up for the manufacture of cotton yarn. Presently, the company has a unit in District Muzaffargarh, in Punjab. Tata Textile Mills is part of the Tata Pakistan group of industries which has companies in the energy and food and beverages sector as well.

Shareholding pattern

Tata Textile Mills is majorly owned by the directors, CEO, their spouses and minor children with a shareholding of 62 percent. Of this, Mr. Anwar Ahmed Tata, the director and chairman of the company owns nearly 48 percent of the shares. The general public holds close to 23 percent of the total shares, followed by 10 percent in mutual funds; the latter includes CDC- Trustee National Investment (Unit) Trust.

Historical operational performance

The profit margins of the company reduced gradually to hit the lowest in FY16, before increasing again till FY18, and once again reducing in FY19. Topline, although increasing mostly, saw a brief period of negative growth in FY15 and FY16.

During FY15, topline declined by almost 4.5 percent. This decline was seen largely coming from a more than 10 percent decline in export sales. The overall share of Pakistan in the global textile trade has shrunk, and has been replaced by regional competitors such as Sri Lanka, Bangladesh, Indonesia and Vietnam. This trend was reflected in the company’s revenues as well.

Costs, on the other hand, made up 91 percent of the revenue. This was primarily driven by raw material cost which made up nearly 76 percent of the total cost of production. This implies that any drastic change in raw material expenses could significantly affect the company’s profitability. Finance cost and other income, both reduced notably; finance cost reduced due to lower interest expense on short term borrowings, while other income reduced due to absence of net exchange gain which drove other income up in FY14.

Revenue further fell in FY16, by a little over 3 percent mostly coming from export sales. Local sales, on the other hand, rather doubled year on year. With exports becoming uncompetitive in the global market, quite a few of the yarn manufacturers turned towards the local market for better margins. There was also a decline in yarn prices, due to a situation of over-supply which affected revenue for this segment. The over valuation of the Pakistani Rupee also rendered exports uncompetitive. Cost of production further increased, consuming 95 percent of the revenue owing to a rise in energy expense and increase in minimum wages. Thus, net profit margins reduced to its lowest of a negative almost 4 percent.

There was a marginal incline in revenue as it increased by 2 percent in FY17. Again, local sales were responsible for this growth as export sales had reduced by 25 percent. According to the company’s report for the year and for the previous year, Pakistan had the highest minimum wage requirement in the region. In addition, energy tariffs were also comparatively higher, thus making cost of doing business high in Pakistan. This is reflected in the about 90 percent consumption of cost of production of the topline. While most other factors were unchanged, other income brought some support to the bottomline, as the former increased to Rs 65 million; this came from a net exchange gain, rebate on export sales and workers’ welfare fund. Thus, profit margin rose to a positive almost 1 percent.

Tata Textile Mills, like most other textile mills, saw a significant increase in its revenue in FY18 as it grew by 20.5 percent. This was largely attributed to the currency devaluation as is also reflected in the other income which is driven by a net exchange gain and rebate on export sales. Cost of production also went down from 93 percent in FY17 to 89 percent of revenue in FY18. Thus, profit margins improved; however, that is not to say that the problems the industry has been facing had been resolved.

Although Tata Textile Mills saw an increase in revenue for FY19 by 11 percent, it was not translated into an improved bottomline, despite other costs as a percentage of revenue also being lower; with the exception of finance cost. In FY18, profitability was largely lifted by other income, which was absent in FY19. Major reasons attributed for the decline in profitability were the US-China trade war which adversely impacted yarn prices and currency devaluation which led to increase in cost of imported yarn. Finance cost also rose to 4 percent of the revenue due to increase in discount rate from 6.75 percent to 13.75 percent. Thus, net profit margin reduced to 0.5 percent.

Quarterly result and future outlook

During 9MFY20, Tata Textile witnessed a 17 percent increase in its topline year on year, with a marginal growth in cost of production. Most of the increase came from local sales. While most other factors remained more or less similar, finance cost, at Rs 300 million pushed the company to incur a loss for the period compared to a profit of Rs 33 million in the corresponding period last year.

The mills had been closed down as per the government’s directives due to the pandemic which has largely brought trade to a halt. The future cannot be ascertained, however, the impact on financials would certainly be adverse.