Bannu Woollen Mills Limited

Bannu Woollen Mills Limited (PSX: BNWM) was established in 1960 as a public limited company under the Companies Act, 1913 (now Companies Ordinance, 1984). The company essentially manufactures and sells woolen yarn, cloth, and blankets.

Shareholding pattern

As at June 30, 2021, about 34 percent of the shares were owned by the associated companies, undertakings, and related parties. Within this category, a major shareholder is M/S Bibojee Services (Pvt) Limited. Over 51 percent shares are with the local general public, followed by 5 percent held by the directors, CEO, their spouses, and minor children. Of this, the majority of shares are held by Mrs. Shahnaz Sajjad Ahmed, the CEO of the company. The remaining 9 percent share is with the rest of the shareholder categories.

Historical operational performance

Since FY13, the company has witnessed a fluctuating topline. On the other hand, while gross and operating margin has largely remained flat, the net margin has been unstable, with a major drop seen in FY20.

After contracting for two consecutive years, the topline in FY17 increased by 5.7 percent. The majority of the revenue for the company is brought in by sales of fabrics and blankets that have been manufactured by the company itself, while the fabric lawn purchased for resale makes a small contribution to the total revenue. Production cost, during the year, reduced to almost 67 percent of revenue which helped to improve gross margin to 33 percent but operating and the net margin did not see the same effect, as distribution expense made a larger share in revenue, coupled with a drop in other income. Distribution expense was higher due to higher expenditure on advertising, while other income that came majorly from PLS accounts, reduced considerably. Thus, the net margin reduced to 8.6 percent, compared to the 10 percent seen in FY16.

Revenue in FY18 grew by 5.8 percent, although production for the year was lower by 2.77 percent. This was due to the lower production of blazer cloth by over 43 percent year on year. A sales breakdown reveals that sales revenue from fabrics and blankets increased; fabric lawn purchased for resale also increased its contribution to revenue from Rs 6.4 million in FY17 to Rs 23 million in FY18. Production cost, on the other hand, increased marginally to over 67 percent, reducing the gross margin to 32.5 percent. Operating margin, however, improved year on year as a result of a major reduction in administrative expenses; this was due to a lower salary expense. Net margin further jumped to 36.7 percent for the year due to Rs 339 million brought in by a share of profit from associated companies.

Revenue in FY19 dropped by 18.3 percent. The majority of this drop was seen in fabric and blankets due to lower demand from the market. This was due to the fact that the period of winters has reduced, along with its severity, therefore the inventory of finished goods was rising, creating higher working capital requirements. As a result, the board of directors had reduced two production shifts that would resume later in January 2020. Moreover, the company also reduced its production workforce to curtail costs. However, production costs jumped to 75.6 percent of revenue during FY19. This can be attributed to the currency depreciation that made imported raw materials pricier. With almost zero, relative to that seen in FY18, support coming from a share of profit from associated companies, the company incurred a loss for the first time, of Rs 17 million.

In FY20, revenue more than halved, recorded at Rs 329 million, versus Rs 685 million seen in FY19. Sales revenue from fabrics and blankets shrunk to Rs 398 million, from Rs 782 million in FY19; on the other hand, sales of fabric lawn nearly disappeared as Covid-19 reduced demand, disrupted supply chains, and resulted in strict lockdowns. In March of 2020, the board allowed one of the production shifts to resume, of the two that were suspended “to fulfill production orders of mills’ dealers”. While production cost made a lower share in revenue, allowing the company to post a gross margin of 32.8 percent, the increase in finance cost due to a sharp rise in interest rates and a loss from associated companies, led the company to post a loss of Rs 109 million for the period.

Recent results and future outlook

Revenue recovered somewhat in FY21 as it was recorded at Rs 699 million. The first quarter saw significant improvement in topline year on year on the back of better volumes and sales mix. Finance expense was also contained during the period as the State Bank of Pakistan reduced the interest rate. The second quarter also saw a similar trend except for the slight increase in production cost due to an increase in prices of imported wool. The third-quarter revenue was better, year on year, but in comparison to the revenue of the first and second quarters it was lower at Rs 58 million; 3QFY21 recorded a loss, as a result. Overall FY21 saw a rise in production cost at 72.8 percent of revenue, but the reduction in finance expense and support from profit from associated companies supported the bottomline. Thus, it posted a net margin of 13.7 percent.

As revenue has recovered and the economy overall has also been relatively better than what it was when Covid-19 was rampant, financial performance can be expected to improve. Although the company is still exposed to the exchange rate risk as the currency continues to fluctuate, depreciating, for the most part, the price for imported wool itself is following a declining trend.