Crescent Cotton Mills Limited

Crescent Cotton Mills Limited (PSX: CCM) was set up in 1959 under the Companies Act, 1913 (now Companies Ordinance, 1984). The company manufactures and sells yarn and hosiery items.

Shareholding pattern

As at June 30, 2020, about 28 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, a major shareholder is Ms. Nazish Arshad, one of the directors of the company and also a member of the Human Resource and Remuneration Committee. Some 49 percent shares are held by the local general public, followed by 9 percent in “other companies”; close to 8 percent in banks, DFIs, NBFCs, etc. The remaining roughly 6 percent shares are with the rest of the shareholder categories.

Historical operational performance

The topline of Crescent Cotton has been fluctuating over the years, whereas profit margins dropped in FY14/FY15 and have been more or less stable since then, improving slightly only until recently in FY20.

After decline for the last two years, topline increased by a little over 15 percent during FY17. This was primarily due to increases in local sales of yarn, while export sales of both, yarn and cloth fell during the year. With sluggish demand in the international market, particularly China, a lot of the yarn manufacturers shifted their focus to the domestic market. On the other hand, cost of production made a larger share in revenue for the fourth consecutive period. The overall textile sector had largely failed to modernize; coupled with this a poor cotton crop, creating shortage of raw material and having to resort to imports, added to costs, as is evident from costs consuming nearly 97 percent of revenue, leaving little room for absorption of other costs. Thus, gross margin reduced to 3 percent, while the bottomline was supported from other income sourced from gain on sale of investment.

Revenue during FY18 nearly doubled year on year, growing at almost 53 percent. This was mostly attributed to the company acquiring a spinning unit that added to the company’s sales and costs. However, as a share of revenue, there was not much change as costs continued to make up 96 percent of revenue, keeping profit margins low. With other income also falling year on year, the company posted a profit of Rs 6 million. Generally, the textile sector had been marred by inconsistent and largely poor quality of cotton crop; an increase in prices of Polyester Staple Fiber (PSF) that is blended with cotton, wage rate increase and energy woes has led the country’s textile sector to lose market share in the international market to other competitive players such as India and Vietnam.

The company’s topline continued to grow in FY19 by a little over 21 percent. Again, most of this incline was seen in local sales that also made the highest contribution to the total revenue pie. Despite the currency devaluation that made exports favourable, the country’s textile exports continued to contract; locally, problems with quality and production of cotton served as a deterrent, while the global market and economy was affected by the events of US-China war, Brexit, etc. With cost of production unmoved at 96 percent of revenue, gross margin remained more less flat, while finance expense and reduction in other income led the company to post a loss of Rs 91 million. The former was due to rise in short term borrowings.

Revenue contracted by over 25 percent during FY20 after increasing for four consecutive years. This was more pronounced in the second half as Covid-19 hit the world, bringing the economy to an abrupt halt. With manufacturing facilities shutting down in China causing supply disruptions, prices also spiked. Moreover, orders were cancelled and delayed as retail stores also remained shut. However, the decline in cost of production, to 93 percent of revenue, allowed for some improvement in gross margins that was recorded at 6.6 percent. This also trickled down to the bottomline as the company posted a net profit of Rs 42 million.

Quarterly results and future outlook

Revenue during the first quarter of FY21 was lower by 32 percent. Apart from the adverse effects of Covid-19, the company also faced a challenge due to the rising cotton prices, that in turn, was a result of cotton crop shortage. This is also evident from the high cost of production for the quarter at 89 percent. Moreover, given the loss incurred by the spinning unit located at Kotri, Hyderabad, the board of directors approved the disposal of assets of the spinning unit during the period.

The second quarter of FY21 saw slightly better revenue from 1QFY21, however it was lower year on year. This was due to the fact that the spinning unit at Kotri was not operational for the entire first half of FY21. Despite this, due to a lower cost of production, both, from 1QFY21 as well as the same period last year, profitability has improved, with Rs 127 million recorded in net margin for 1HFY21 compared to Rs 49 million in 1HFY20.

While the demand for textiles has been generated, and the industry players foreseeing the higher demand, the sector faces a setback in raw material since the local production fails to meet demand, forcing it to source imported cotton. Thus, it seems necessary for some improvement and action to be taken for better seeds as well as technology.