Masood Textile Mills Limited

Masood Textile Mills Limited (PSX: MSOT) is a public limited company that was set up under the Companies Act, 1913. The company manufactures and sells cotton/synthetic fiber yarn, knitted /dyed fabrics and garments. All of its manufacturing units are located in Faisalabad with two liaison offices in Lahore and Karachi.

Shareholding pattern

As at June 30, 2020, a vast majority of the shares of Masood Textile Mills Limited, at over 41 percent are held under the category of “shareholders holding 10% or more”. Within this category, Mrs. Nazia Nazir holds nearly 73 percent of the shares. Close to 26 percent shares are owned by its associated companies, undertakings and related parties; this category solely includes Shanghai Challenge Textile Co. Limited. About 11 percent are held under “others” while directors, CEO, their spouses and minor children hold a little over 2 percent shares; some 9 percent held by the local general public the remaining around 11 percent shares are with the rest of the shareholder categories.

Historical operational performance

Masood Textile Mills has witnessed a growing topline, albeit at varying rates for the last decade, except for FY16 and more recently in FY20. Profit margins have remained relatively stable, and only significantly dipped in FY20.

After reducing by 13 percent in FY16, revenue remained nearly flat during FY17 as it increased marginally by less than 1 percent. Majority of the sales revenue is contributed by the export sales. Given the increased cost of production regionally, Pakistan’s textile sector has over the years lost its footing. Cost of production for the company in FY17 made up more than 85 percent of revenue, that was roughly at the same level previous year. However, bottomline and net margin improved slightly from 3 percent in FY16 to near 4 percent in FY17, owing to an overall reduction in expenses, particularly the finance expense. One of the issues the company faces, as well as the industry, is delayed sales tax refund payments.

The company regained growth momentum in FY18 as its topline grew by almost 32 percent. However, a large part of this gain was due to rupee depreciation as it made exports more favorable in the global market. Given that the company’s primary source of revenue are the export sales, Masood Textiles was able to post a healthy growth in its export sales revenue- about 29 percent; local sales also almost doubled, however, it made up nearly 6 percent of total revenue. But the higher revenue could not be translated into higher profitability as cost of production rose to nearly 88 percent of revenue. Moreover, despite the notable rise in revenue, profit margin remained nearly flat at 3.6 percent, due to increase in distribution expense; this was driven by salaries expense, commission to selling agents and outward freight and distribution expense, collectively.

Topline of Masood Textiles continued to increase during FY19, at almost 11 percent. Overall, for the industry, value added exports like knitwear increased volumetrically by 10.7 percent and readymade garments by 34.6 percent. For the company, however, the cost of production recorded at nearly 89 percent of revenue, continued to eat away gross margin. While other expenses collectively also registered increases, the unprecedented incline in other income helped to raise profitability, although only marginally; in value terms, other income increased to over Rs 2.3 billion primarily due to a net exchange gain.

In FY20 the company saw the highest contraction in revenue, by 16.2 percent. With the outbreak of the Covid-19 pandemic, global trade was severely affected. Textile sector, which made up large part of Pakistan’s exports, and has the largest weight in Large Scale Manufacturing (LSM) contracted by 11 percent. Owing to the global economy entering a recession and a halt in trade, there were cancellation and delay in orders that adversely affected the company’s financials. With the revenue declining, but expenses in place, along with other income nearly disappearing in comparison to the level seen in the last two years particularly, the company posted a loss for the first time, of over Rs 4 billion.

Quarterly results and future outlook

During 1QFY21, revenue was lower by almost 24 percent, owing to a gradual reopening of economy as restrictions eased down after a strict lock down was placed in March 2020. The company incurred a loss in the first quarter as revenue was lower, while costs were intact, in addition to little support from other income. Second quarter of FY21 was slightly better as year-on-year 2QFY21 saw revenue improving by 4 percent. However, apprehensions regarding the second wave of Coronavirus hitting remained. But support from other income helped to improve the margins quarter on quarter. Compared to same period last year, on the other hand, the company saw a near halving of profitability in 1HFY21, with net margin at negative almost 1 percent in 1HFY21 compared to 3.3 percent in 1HFY20. With the Covid-19 vaccine in sight, the improvement in economic indicators, revival in the textile sector and the low interest rate environment at least in the short term, provide hope for a rebound in the company’s profitability in the second half.