Kohat Textile Mills Limited

Kohat Textile Mills Limited (PSX: KOHTM) was set up in in 1967; it started commercial production three years later in 1970. Kohat Textile Mills is a subsidiary company of the holding company, Saif Holding Limited. The former manufactures and sells yarn in the domestic market.

Shareholding pattern

As at June 30, 2020, nearly 78 percent shares are owned by the associated company- Saif Holdings Limited. Close to 11 percent shares are owned by the local general public followed by another 10 percent held in banks, DFIs, NBFIs. The directors, CEO, their spouses and minor children own less than 1 percent shares in the company; the remaining about 1 percent shares are with the rest of the shareholder categories.

Historical operational performance

Kohat Textile Mills earnings have been fluctuating over the years. On the other hand, profit margins fell until FY16, slightly gained until FY19 and slid again in FY20.

After contracting by over 7 percent in FY16, revenue growth was stagnant in FY17 as it grew by less than 1 percent. This was due to the presence of cheaper textile imports, slow demand in exports and currency valuation that made products uncompetitive in the global market. In the local market too, demand for yarn was slow, particularly in the second and last quarters of FY17. Despite this stagnancy in revenue, gross margin improved on the back of cost controls; cost of production fell to nearly 92 percent of revenue, raising gross margin to 8 percent, from 5.9 percent in FY16. An additional Rs 11 million was also brought in through other income; along with this, finance expense also reduced that helped to raise net margin to 1.6 percent for the period, compared to the loss of Rs 19 million in FY16.

In FY18 too revenue growth remained at less than 1 percent. A lot of the textile companies present in the international market in FY18 benefitted from the currency devaluation. Since Kohat Textile Mills is present in the domestic market only, it could not raise revenue through export sales. However, despite revenue remaining flat, gross margin improved to 9.6 percent, on the basis of better product mix and cost reduction; cost of production reduced to make up 90 percent of revenue. While this reflected in the operating margin, net margin, on the other hand, reduced due to an incline in finance and tax expense. The former was due to a rise in interest rates. Thus, net margin fell to 0.45 percent for the year.

The company witnessed one of the highest revenue growths in FY19 at 32 percent, with topline reaching almost Rs 3 billion. This was attributed to a better sales price. Cost of production went down marginally to 89.5 percent, raising gross margin to 10.4 percent. while most other factors remained similar as a percentage of revenue, finance expense went up considerably to consume nearly 4 percent of revenue. This was a result of higher financing rates. However, this was offset by the rise in revenue, thus net margin also increased to 2.3 percent, from less than one percent in FY18.

Revenue contracted again in FY20, by over 12 percent. This was due to the outbreak of the Covid-19 pandemic that resulted in a lock down causing production to halt abruptly. The company operated at a 67 percent capacity, significantly lower than the 100 percent seen last year. With lower revenue, cost of production also made a larger share at nearly 92 percent, bringing gross margin down to 8 percent. Overall operating expenses also made a nigger share in revenue; finance expense also consumed nearly 7 percent of revenue, due to higher borrowing costs that went down only towards the end of FY21. Thus, the company incurred a loss of Rs 65 million.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 41 percent year on year as the lockdown eased and business activities resumed gradually. While gross and operating margin was lower in 1QFY21 than that in 1QFY20, net margin was better at 1.24 percent, due to the significantly lower finance expense as the government lowered the borrowing rate to provide relief to the businesses during Covid-19.

The second quarter of FY21 saw revenue higher by 13.5 percent year on year. Cost of production in the current period significantly went down to nearly 83 percent of revenue, along with finance expense that less than halved year on year in value terms. This largely allowed profit margins to be notably improved than the same period last year. During 1HFY21, capacity also increased by 9 percent, and the plant operated at full capacity.

The third quarter of FY21 also saw higher revenue year on year, by over 43 percent. Cost of production reduced significantly to 77 percent. This allowed gross margin to jump to nearly 23 percent. This also tricked down to the bottomline, with net margin recorded at 12.6 percent. Cumulatively too, topline was 31.4 percent higher while net margin was 9 times higher in value terms.

In order to reduce dependency on natural gas and the changing policy in its regard, the company is relying increasingly on solar energy. This will also help to reduce energy costs. Moreover, with removal of regulatory duty on import of yarn, the company will face more competition in the local yarn market.