Elahi Cotton Mills Limited

Elahi Cotton Mills Limited (PSX: ELCM) was set up in 1970 as a public limited company, under the repealed Companies Act, 1913 (now the Companies Act, 2017). The company manufactures and sells yarn, primarily operating in the domestic market.

Shareholding pattern

As at June 30, 2020, over 81 percent of the shares were held by the directors, CEO, their spouses and minor children, making them the key shareholders of the company. Within this, 43 percent of the total shares are concentrated with Mr. Mahboob Elahi, the chairman of the company. Over 15 percent each, were owned by Mr. Mahfooz Elahi and Mr. Mahmood Elahi, the CEO and a director, respectively. Close to 12 percent were held in joint stock companies, followed by almost 7 percent in local general public.

Historical operational performance

Growth rate in topline has been mostly been inconsistent, and profit margins have also followed suit.

During FY17, topline growth stood at 13 percent; the company’s majority of the sales revenue is generated through yarn sales, while “waste” sales make a nominal contribution. However, Elahi Cotton Mills has consistently seen a cost of production that consumes more than 95 percent of revenue, keeping the company barely afloat in terms of profitability. A large part of the cost of production constitutes raw material costs that increased during the year, according to the company’s annual report. Moreover, it also faced an electricity shut down that forced the company to shut down one of its shifts, causing a lower capacity utilization. Thus, it incurred a loss of Rs4 million, roughly.

In FY18, the company witnessed its highest growth rates in topline thus far, at 23 percent. This was attributed to increase in production, as well as better prices for the final product. However, cost of production remained undeterred at above 95 percent, although it was slightly lower, as a share in revenue, year on year. This helped to improve gross margin from less than 1 percent in FY17, to nearly 3 percent in FY18. With some support coming from other income, and other costs remaining same, posted a profit of Rs 4 million. So, while the accumulated loss, as per the company, has reduced from over Rs 76 million to Rs 69 million, the fact that the company’s current liabilities exceed current assets, the auditors placed doubt for Elahi Cotton’s ability to continue as going concern, whereas the management had no intention of halting operations.

Revenue growth rate reached another high of over 27 percent in FY19, with topline recorded at Rs 503 million; this was attributed to better volumes and prices. With cost of production as a percentage of revenue remaining unchanged at 97.2 percent, gross margin was also stable year on year. With other income making lower contribution and a slight increase in administrative expense, net margin reduced to less than 1 percent. The increase electricity shutdowns have also kept the company from utilizing its full capacity. However, during the year, it managed to reduce its accumulated losses to Rs 66 million, down from Rs 69 million in FY18.

As with several other sectors and companies, Elahi Cotton also witnessed a notable contraction in its revenue during FY20- at over 13 percent. This was largely due to a strict lock down in place which led the company to remain shut from towards the end of March 2020, until May 2020. This not only led to a disruption in production, but demand was also affected as the pandemic caused a halt in global trade, too. On the other hand, for the first time since FY11, cost of production fell to 95 percent of revenue. This was due to a decline in raw material rates. This also meant that the company recorded its highest net margin, at 1.4 percent.

Quarterly results and future outlook

Revenue was higher by 6 percent year on year during 1QFY21. Profitability was also better year on year owing to better prices of final products, coupled with decline in raw material costs. This is also evident by the decline in cost of production as a percentage of revenue; close to 93 percent of revenue during 1QFY21, compared to over 96 percent in 1QFY20.

Revenue during the second quarter of FY21 was higher quarter on quarter but lower by 8.5 percent year on year. Cumulatively too, 1HFY21 revenue was lower by almost 2 percent. However, the company managed to curtail its costs as cost of production as a percentage of revenue stood at 92 percent for 1HFY21, while the same was 96.5 percent in 1HFY20. Therefore, the company posted a profit of Rs 11 million for 1HFY21, compared to Rs 1 million in 1HFY20.

The company foresees an increasing trend in raw material prices therefore, it expects profitability for the future to be lower than that seen in 2QFY21. Given that FY20 and 1HFY21, both saw some reduction in costs, the company may be able to post higher profits than seen historically. However, the shortage in the domestic cotton crop will also play a significant role in future profitability.