Suraj Cotton Mills Limited

Suraj Cotton Mills Limited (PSX: SURC) was set up in 1984 as a public limited company under the Companies Act 1913. It manufactures, sells and trades yarn, cloth and processes cloth. It has four spinning and weaving units altogether in Karachi, Shahkot in Punjab and Raiwind.

Shareholding pattern

As at June 30, 2020, over 47 percent shares are held by the associated companies, undertakings and related parties. Within this, 44 percent shares are owned by Crescent Powertec Limited. About 29 percent shares are held by the directors, CEO, their spouses and minor children. Of this, Mr. Adil Bashir, a director of the company, owns 7 percent, Mr. Ahsan Bashir, another director, owns close to 6 percent and 4.6 percent by Mr. Khalid Bashir, the Chairman. Close to 14 percent shares are with the general public while the remaining 10 percent shares are with the rest of the shareholder categories.

Historical operational performance

Suraj Cotton Mills has, for the large part, witnessed a growing topline barring a few years, while profit margins have been fluctuating over the years.

During FY17, revenue growth stood at nearly 8 percent. This increase primarily came from higher local sales, whereas export sales revenue actually declined by over 22 percent, reducing the company’s share in the export market. Moreover, demand from China, a major export market for Pakistan, was also lower, while the country also faced intense competition from regional players such as Vietnam and India. Cost of production, on the other hand, increased to over 93 percent, up from 91 percent in FY16, reducing gross margin to 6 percent. However, net margin increased marginally, to 6 percent, due to significant contribution coming from other income, around Rs 383 million.

In FY18, the company experienced one of the highest growth rates in revenue, at over 33 percent. While export sales halved year on year, local sales revenue increased by 40 percent. Lower demand in one of the country’s primary export market, China, compelled the local manufacturers, including Suraj Cotton to shift its focus to the domestic market. Cost of production lowered slightly to 92 percent that improved gross margin to 8 percent.

However, net margin was lower year on year, at 5 percent, due to other income nearly disappearing in comparison to the level seen in FY17. From making over 4 percent of revenue in FY17, it fell to less than 1 percent during FY18. This was due to fall in net gain on short term investments. Towards the end of FY18, the country saw general elections, that brought uncertainty to some degree, that adversely affected the business environment as well the performance of the country’s stock exchange market, that is reflected in the company’s lower income.

Revenue growth was fairly impressive during FY19, as it grew by nearly 26 percent. While export sales revenue continued to decline, local sales revenue continued to dominate the total revenue pie. Cost of production fell below the 90 percent mark, at 88 percent. With higher revenue, and lower costs, gross margin was recorded at over 11 percent. Although costs increased in absolute terms due to increase in “commodity price of cotton and fuel”; however, its share in revenue was lower during the year. With other elements remaining relatively unchanged, the effect was reflected in net margin as well, that was recorded at 6 percent for the year.

After three consecutive years of a growing topline, revenue contracted during FY20, by almost 8 percent. Export sales revenue reached an all time low of Rs 225 million, while local sales revenue reduced by nearly 7 percent. This was largely a result of the lock down that was placed due to the outbreak of the Covid-19 pandemic. Cost of production reduced marginally, hovering around 89 percent; this kept gross margin flat, whereas a major fall in net margin was prevented due to notable support coming from other income. The latter was sourced primarily from dividend income. Thus, net margin was maintained at close to 6 percent.

Quarterly results and future outlook

During the first quarter of FY21, there was an 18 percent increment in revenue year on year as business activities resumed after the lock down. With notable support coming through other income and a reduction in finance expenses due to cut in policy rate by the State Bank of Pakistan (SBP), the company posted a profit for the quarter of Rs 373 million compared to Rs 260 million in the same period last year.

By the second quarter revenue was even higher, both from the previous quarter, that is, 1QFY21, as well as year on year. With demand picking up globally as well, the textile sector of the country is receiving notable orders. However, it is the availability of raw cotton that is posing as a risk since local production is not sufficient to meet the growing demand. On the other hand, the second quarter saw a reduction in costs as well, that helped to improve profit margins overall, with 1HFY21 recording a net margin of 10.7 percent, higher than 7.6 percent in 1HFY20. Moreover, the company is also looking to expand its capacity as it has begun construction for another weaving unit.