Shams Textile Mills Limited

Shams Textile Mills Limited (PSX: STML) was set up in 1968. It is a public limited company incorporated under the Companies Act, 1913 (now, Companies Act, 2017).

The company manufactures, sells, and trades yarn; it also trades cloth. The products are used for denim, woven fabric, and knit wear.

The first plant was established in Chiniot for spinning, weaving, dyeing and finishing. It expanded its capacity by adding another plant at Sheikhupura, and yet another expansion by adding a specialized unit that started commercial production in 2006.

Shareholding pattern

As at June 30, 2020, nearly 34 percent shares are held under the associated companies, undertakings and related parties. Of this, Crescent Powertec Limited owns close to 20 percent shares. The directors, CEO, their spouses and minor children own about 25 percent shares; within this, Mr. Khalid Bashir, the CEO of the company owns 10.4 percent. The local general public has close to 24 percent shares; 12 percent in NIT & ICP. The remaining 5 percent shares are with the rest of the category shareholders.

Historical operational performance

Shams Textile has experienced a fluctuating topline, while profit margins have gradually been declining after FY18.

During FY17, net revenue increased by over 18 percent after declining for three consecutive years. Most of this growth was seen in local sales that grew from Rs 1.7 billion in FY16 to Rs 2.6 billion in FY17. On the other hand, export sales contracted by 36.4 percent due to low demand and also because of the inability to keep up with the increasing competitiveness in the international market. Cost of production reduced slightly to 96.5 percent of revenue, compared to over 98 percent in the previous year. This was achieved as the company “converted one unit to produce fine yarn only”. Thus, gross margin also improved to 3.5 percent from nearly 2 percent in FY16. The effect also trickled down to the bottomline, that was although negative, at a loss of Rs 50 million, the loss was significantly lower than that in the previous year.

In FY18, the company witnessed the highest growth in topline by 41 percent. Both export and local sales grew by over 74 percent and nearly 32 percent, respectively. The improvement in export sales was most likely due to the currency devaluation that made exports competitive in the international market. Cost of production, on the other hand, reduced for the second time consecutively, to 94 percent of revenue. Moreover, administrative and distribution expenses also made a relatively smaller share in revenue, coupled with a rise in other income that came from multiple sources: net exchange gain, gain on sale of investment, excise duty payable written back, and reversal of provision for workers welfare fund. Together, these factors allowed profit margins to improve for the year, with net profit at Rs 101 million.

FY19 saw revenue increasing by nearly 13 percent; export sales reverted to previous levels- below Rs 1 billion mark, as cost of business rose, making products uncompetitive in the global arena. Moreover, the US-China trade war had an impact on demand from China for Pakistan textile exports, since China is a significant export market for the country. Local sales, on the other hand, continued to incline, crossing the Rs 4 billion mark. The inflationary pressures after the general elections in the country, along with high interest rates also led to an increase in cost of doing business; cost of production made up nearly 96 percent of revenue. With other income also reducing to near Rs 20 million level, profitability shrunk to 0.8 percent for the year.

In FY20, the company saw revenue contracting by over 21 percent. Both local and export sales fell, by 23 percent and 9.8 percent. Most of this was associated with the lock down that was imposed towards the end of FY20 in order to contain the spread of the Covid-19 pandemic. As a result, operations were brought to a halt that increased the fixed cost. Moreover, costs also increased due to expensive raw materials, that was, in turn, due to the adverse exchange rate parity. Thus, cost of production made up nearly 98 percent of revenue, leading the company to incur the highest loss of Rs 140 million.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 57 percent year on year. This allowed profitability to pick up as net profit for the quarter was recorded at Rs 13 million, compared to Rs 0.5 million seen in the same period last year. the second quarter of FY21 saw revenue higher, both year on year as well as the previous quarter. This was likely due to some level of normalcy returning in trade and business activities. Combined with an additional Rs 8 million brought in through other income, the company achieved a net margin of 1.7 percent, compared to a loss of Rs 41.7 million in 2QFY20.

The third quarter saw an even higher revenue. Coupled with a drop in production cost to less than 90 percent of revenue, net margin jumped to 8.6 percent for the period. Cumulatively too, topline was 30 percent higher year on year, while the company posted a net margin of 4.4 percent for 9MFY21 compared to a negative 1.6 percent in 9MFY20.

Raw material, its quality and prices are one of the major determinants for sales and profitability for the company. Some improvement in end product prices, made up for the high costs to a certain extent. While measures must be taken to improve the local cotton crop, the ongoing third wave of Covid-19 brings uncertainty with respect to how the year ends.