Shadman Cotton Mills Limited

Shadman Cotton Mills Limited (PSX: SHCM) was set up in 1979 as a public limited company. It has a ring-spinning unit and an apparel stitching unit located in Sheikhupura, Pakistan, each with a capacity of 10 million kgs of ring spun yarn and 100,000 woven bottom wear per month, respectively. The company also has two power generation plants with a capacity of 5MW that not only fulfills its in-house energy needs, but also provides to the government.

Shareholding pattern

As at June 30, 2020, a little over 75 percent shares of the company were concentrated with its directors, CEO, their spouses and minor children. Of this, Mr. Shahid Mazhar, the CEO, owned 58 percent. Some 24 percent were recorded under “individuals”, while the remaining categories held an insignificant portion as shown in the table.

Historical operational performance

Shadman Cotton Mills has seen a declining topline for a large part of almost a decade, while profit margins have been rather inconsistent.

During FY17, the company witnessed a contracting topline for the fourth consecutive year, at nearly 42 percent. Shadman Cotton Mills largely earns from local sales of yarn; export sales during the year made 15 percent of the total revenue. Year on year, export sales were stable, however, it was the local sales of yarn that halved. Therefore, its effect on total revenue was quite pronounced. The company claims that its mills were closed down, particularly the second half of FY17, in order to avoid losses; this, coupled with low prices of yarn in the low market, due to oversupply, kept gross margins at a negative 16.7 percent. With costs added, this further fell to a negative 20 percent as net margin for the year.

During FY18, revenue increased for the first time since FY13, by over 32 percent. This was attributed to some recovery seen in local sales of yarn that reached Rs 486 million, compared to last year’s Rs 324 million. The textile sector of Pakistan has experienced slow demand due to high cost of production that deem it unfavorable in the export arena. Moreover, demand has also been slow from one of the sector’s primary export market, China. Locally, prices followed a downward trend after the season. With the company unable to cover its cost or production and the support from other income, present in previous years, was comparably low in FY18, net loss elevated to Rs 147 million (FY17: Rs 84 million).

In FY19, topline contracted again by 21 percent. Local sales of yarn nearly halved year on year while export sales also feel further down to Rs 42 million, compared to Rs 53 million in FY18. Although the company made sales in fabric that fetched Rs 89 million, which was not present last year, it was insufficient to raise the overall revenue. On the other hand, for the first time since FY14 the company was able to cover its cost of production, due to lower raw material expenses. In addition, with other income coming from “old liabilities written back”, Shadman Cotton Mills posted a net profit of Rs 13 million.

Revenue in FY20 more than halved, reducing by 74 percent; local gross sales of yarn fell to Rs 123 million, while fabric, waste, and raw material sales disappeared entirely. Export sales of yarn were also nil, however, a new division of apparel that became functional at the start of the second half of FY20 contributed Rs 3.5 million in exports revenue. But soon a strict lockdown due to the outbreak of Covid-19 pandemic, forced the company to shut down its operations. This wreaked havoc for the company as gross margin fell to its lowest of a negative 22 percent. This was supported by other income that led to the company posting a nominal net profit of Rs 1 million for the year.

Quarterly results and future outlook

Revenue contracted drastically in the first quarter of FY21, from roughly Rs 55 million in 1QFY20, to Rs 6 million in 1QFY21. This was due to the closure related with the Covid-19 pandemic, as operations were shut, and trade and orders were subdued. Therefore, the company was unable to cover its costs, and incurred one of the highest negative gross margins.

While revenue was better in the second quarter at Rs 15 million, it was lower by 61 percent from the same period last year. Yet, the first quarter saw lower loss due to higher other income. Cumulatively too, revenue for 1HFY21 stood at Rs 21 million compared to Rs 94 million in 1HFY20.

Demand has gradually recovered, both in the domestic market as well as in the international market, with the local textile sector receiving several export orders. Moreover, the company also started its apparel division and plans to focus on it. However, owing to initial high cost of production and high prices of fabric, the division is incurring a loss. But with demand recovery in sight, the company may turn its new venture profitable.