Reliance Cotton Spinning Mills Limited

Reliance Cotton Spinning Mills Limited (PSX: RCML) was set up as a public limited company in 1990 under the Companies Ordinance, 1984 (now Companies Act, 2017). The company manufactures and sells yarn at its manufacturing unit located in Sheikhupura, Punjab. It has an installed capacity of 45,984 spindles as of June 2020.

Shareholding pattern

As at June 30, 2020, a major chunk of the shares, over 65 percent, are held by associated companies, undertakings and related parties. Within this category, a major shareholder is Sapphire Agencies (Pvt) Limited that holds 22.5 percent of the total shares of the company. the directors, CEO, their spouses and minor children own 16 percent shares in the company. Of this, about 5.7 percent of total shares are held by Mr. Yousuf Abdullah, a director of the company. Close to 13 percent are owned by local individuals. The remaining 5 percent shares are with the rest of the shareholder categories.

Historical operational performance

Reliance Cotton has mostly seen a rising topline, with the exception of a few years; profit margins dipped in FY12 after which they have been relatively stable, rising slightly after FY17, until FY19.

After declining for two consecutive years, revenue rose by nearly 11 percent during FY17. Of the Rs 3.5 billion in net sales, Rs 1.9 billion sales, that is, over 54 percent sales are generated through indirect export sales of yarn. This had actually declined year on year, whereas local sales of yarn had picked up, in addition to direct yarn exports. Overall exports made a larger contribution to the total revenue. With a marginal decline in cost of production, gross profit mostly remained flat year on year; however, operating and net margin picked up due to decline in finance expense owing to a lower exchange loss during the year, and other income rising notably as a result of “provision for WWF no more required- written back” and dividend income. Thus, net margin improved to over 5 percent.

Topline registered a 23 percent incline during FY18, the highest seen since FY14. The overall textile exports increased by 9 percent. This was in part aided by the export package announced by the government, and the devaluation of PKR that made exports favorable. This is evident by combined export sales revenue for the company increasing by 25 percent, to reach Rs 3.5 billion for the year. Cost of production, as a percentage of revenue, fell to over 85 percent, compared to nearly 89 percent in FY17. This increased gross margin to 14.4 percent; the effect of this also trickled down to the net margin that was recorded at 7 percent, although it was slightly diluted due to comparatively lower other income. The net margin at 7 percent was the highest seen since FY12.

Revenue growth rate remained stable at around 22 percent during FY19, with sales crossing Rs 5 billion. Most of this increase was brought about by indirect export sales of yarn that grew by close to 35 percent year on year. The currency devaluation helped several companies in the sector to improve revenue, particularly those present in the export market. However, the high cost of production within the country, relative to the regional competitors restricted the industry players to improve significantly. Similarly, Reliance Cotton’s cost of production remained unchanged at close to 85 percent of revenue keeping gross margin more or less flat. Finance cost, however, increased to make up 4 percent of revenue, due to short term borrowings. Despite this, the company continued to improve its net margin to over 7 percent.

Growth rate of revenue during FY20 was slightly lower, double-digit, nonetheless, at 11 percent. This was due to an increase in combination of direct export sales, and local yarn sales, by 34 percent and 29 percent, respectively. Cost of production was down to 84 percent, taking gross margin to a high of 15.5 percent. However, with nearly all the expenses inclining, combined with finance expense making nearly 6 percent of revenue, net margin fell to 4.6 percent, from 7.3 percent in FY19. The policy rate did not come down until the pandemic hit the country in the third quarter of FY20.

Quarterly results and future outlook

Revenue increased by 27 percent in 1QFY21 year on year. This was also higher than that seen in the second quarter of FY21, as trade and business gradually opened up after the strict lock downs placed by several countries due the outbreak of the Covid-19 pandemic.

Cumulatively too, in 1HFY21, revenue was higher by nearly 11 percent. However, the second quarter saw a greater decrease in cost of production, therefore, profitability was better in the second quarter. The first half of FY21 saw a net margin of 8 percent compared to almost 6 percent in 1HFY20. The lower share of finance expense also contributed to better profitability of the period. Given the declining of policy rate by the State Bank of Pakistan in March 2020, the company had expected the finance burden to be lower in FY21.

However, the shortage of local production of cotton, aggravated by the revised production even lower than last year creates a major hurdle for the textile sector overall. In light of this, the company has procured raw materials sufficient for its needs for the entire year, thereby expecting profitability to sustain.