Ellcot Spinning Mills Limited

Ellcot Spinning Mills Limited (PSX: ELSM) was established as a public limited company under the repealed Companies Ordinance, 1984 (now Companies Act, 2017). It is part of the larger Nagina Group of Companies and is essentially engaged in the business of manufacturing and selling yarn.

Shareholding pattern

With almost 34 percent shares, the directors, CEO, their spouses, and minor children, hold the highest percentage of shares. Of this, Mr. Raza Ellahi Shaikh and Mr. Amin Ellahi Shaikh each hold almost 13 percent shares in the company. About 24 percent is held under the category of associated companies, undertakings, and related parties. Of this 6 percent is held by each of the following- Haroon Omer (Pvt) Limited, Monell (Pvt) Limited and Icaro (Pvt) Limited. This is closely followed by 20 percent held in modarabas and mutual funds and 19 percent with the local general public.

Historical operational performance

While revenue fell for two years consecutively in FY15 and FY16, profit margins started bottoming out from FY13, remained flat from FY15 to FY18 before gaining some traction in FY19.

Ellcot Spinning Mills saw its highest decline in revenue during FY15 at 20 percent as well as the lowest net profit in almost a decade. This was primarily attributed to a lower unit selling price. The textile sector saw a major slump during this time owing to depressed demand from its major export market, China. Due to lack of diversification in export markets and competitiveness in the global market, the spinning segment faced a significant decline within the sector. Cost of production also increased notably to consume almost 94 percent of the revenue. This more than halved the gross profit in value terms. With most other costs remaining intact, net margin reduced five folds.

Topline reduced further by almost 8 percent in FY16, as depressed demand continued to persist. With a lot of manufacturers that were previously focused on export sales turned towards the domestic market, which was already facing the menace of presence of cheaper imported yarn. Cost of production also was undeterred at 94 percent, reducing gross margins. Other income, although nearly doubled in value terms, however it did not contribute significantly to the revenue. Net margin could increase only marginally with a slight decline in finance cost.

Some recovery was seen in FY17 as the company’s revenues returned to its previous growth levels of around roughly 15 percent. This was largely driven by local sales, whereas export sales fell way below the Rs 1 billion mark. However, cost of production continued to claim around 94 percent revenue, not allowing a major improvement in profit margins. Other income has been gradually growing consecutively for four years, however its contribution to revenue was still relatively negligible. Thus, net margin remained flat for yet another year.

The company sales revenue grew by 14 percent in FY18. This was again dominated by local sales; however, export sales also grew owing to the currency devaluation. Local sales picked up due to better sales volumes as well as selling rates. There was marginal decline in cost of production as a percentage of revenue- at 93 percent due to higher sales. Finance cost, on the other hand, escalated by almost doubling year on year. This was due to “higher deployment of funds in stock in trade resulting in more working capital lines utilization”. However, the noteworthy improvement in topline reflected in the net margins.

Ellcot Spinning Mills’ revenues witnessed another year of growth during FY19 at 14 percent. Local sales were still the dominant revenue driver due to better prices- with yarn sales nearing Rs 5 billion. Cost of production was kept in check as it did not rise with rising revenue; rather it reduced to below 90 percent of revenue for the first time in the last half of the decade. Due to higher interest rates, finance cost saw a sharp increase, however, the increase in revenue offset the increase in costs, allowing net margin to reach 3 percent. Other income also continued to increase to nearly make up 1 percent of the revenue.

Quarterly results and outlook

During the period 9MFY20, topline increased marginally by about 2 percent whereas the 3QFY20 saw topline declining. While sales volume declined, sales price improved keeping overall growth in revenue marginal. Cost of sales declined, to reach 88 percent of the revenue; this reduction is commendable as the company had previously been losing 90 percent of the revenue to the cost of production. Other income also contributed to the profit margins, whereas cheaper foreign currency borrowings lowered the finance expense considerably year on year. Thus, net margin increased to 5 percent.

At the end of FY19 the company had been expecting neutral financial performance in the face of changing government policies in combination with encouraging product demand. However, Covid-19 wreaked havoc as orders were cancelled and delayed, production was halted as a lockdown was in place, which completely changed the expectations for FY20 results.