Fazal Cloth Mills Limited

Fazal Cloth Mills Limited (PSX: FZCM) was set up under the Companies Act, 1913 (now, Companies Act, 2018) in 1966 as a public limited company. It manufactures and sells yarn and fabric. Currently, it has seven spinning units with all of its units having a captive gas fired power generation with a capacity of 38.72 MW.

Shareholding pattern

As at June 30, 2020, about 18 percent of the shares of Fazal Cloth Mills Limited are owned by its directors, CEO, their spouses and minor children collectively. Of this nearly 7 percent shares are held by Mr. Faisal Ahmed, a director of the company. About 24 percent shares are held under an associated company- Fazal Holdings Private Limited, and another 10 percent by Mr. Rehman Naseem, a director of FZCM. A little over 36 percent shares are with the associated companies, undertakings and related parties. Within this category the prominent shareholders are Mr. Fawad Ahmed Mukhtar and Mr. Fazal Ahmed Sheikh holding 8 percent and nearly 7 percent shares, respectively. The remaining about 11 percent of the total shares of the company are with the rest of the shareholder categories.

Historical operational performance

Fazal Cloth Mills Limited has witnessed a growing topline for a large part of the decade, except for in FY16 and more recently in FY20 when its net revenue contracted.

During FY17, the company saw one of its largest growth rates in revenue, at nearly 28 percent. This was due to increased volumes and better volumes; rather, in terms of value, sales at Rs 26 billion were the highest seen thus far. However, cost of production exceeded 93 percent of revenue- also the highest seen in the decade. This was attributed to increase in prices of raw materials and energy costs per unit. This caused a marginal decline in gross and operating margins, while net margin rose slightly to 1.5 percent as collectively expenses made a smaller share in revenue while other income, sourced from dividends and ‘reversal of provision of WWF’, increased.

Revenue was higher by almost 19 percent during FY18; again, this was attributed to better prices and volumes. Both, local sales and export sales saw increase of 4.5 percent and 50 percent, respectively. “GoP support by way of duty drawback on exports to zero rate the same” in addition to currency devaluation contributed positively to the company’s profitability. On the other hand, cost of production was marginally lower, at 91 percent, that kept gross margin contained in single digit, however, it was better year on year. This also trickled down to the bottomline that crossed the Rs 1 billion mark with net margin standing at close to 4 percent.

Fazal Cloth Mills continued its growth momentum as its topline grew by 16 percent during FY19; sales exceeded Rs 36 billion for the year. Net local sales registered a 53 percent increase while export sales fell by 36 percent. On the other hand, cost of production dropped to below 90 percent of revenue after a period of four consecutive years. According to the company’s report, electricity and gas tariff was available at regionally competitive rates. While this improved gross and operating margins, net margin could only rise marginally, to 4 percent, due to a rise in finance expense that made up more than 5 percent of revenue. This was due to an increase in working capital requirements due to increase in raw material prices and increase in KIBOR.

Revenue contracted by 5 percent in FY20; net local sales fell by almost 17 percent while export sales increased by 24.6 percent. The lower sales were partly attributed to the Covid-19 pandemic that resulted in a nationwide lockdown. While cost of production remained the same year on year as its share in revenue, keeping gross margin flat, other expense and finance expense went up notably that brought net margin down to slightly over 1 percent, and bottomline at Rs 401 million was recorded at one of its lowest. Apart from higher KIBOR, increase in finance expense was due to higher long-term loans, while other expense increased primarily due to exchange loss of Rs 376 million.

Quarterly results and future outlook

During 1QFY21, revenue was higher by more than 43 percent year on year. However, it was offset by a higher cost of production. It is perceived that with the outbreak of the pandemic and hence lesser traveling, the expenses were diverted towards purchasing manufactured goods. During the second quarter too, revenue was higher by over 15 percent year on year, while 1HFY21 exhibited similar trend- an incline of 26 percent. The second quarter of FY21 saw significant other income and more than a 40 percent reduction in finance expense, that took net margin to 7 percent compared to less than 1 percent in 1HFY20. With demand for textiles remaining strong, the profitability of the company may continue given it has a bottomline of nearly Rs 2 billion for half yearly statements.