Mehmood Textile Mills Limited

Mehmood Textile Mills Limited (PSX: MEHT) was set up as a public limited company in 1970 under the Companies Act, 1913 (now the Companies Act, 2017). The company manufactures and sells yarn and grey cloth, in addition to generating electricity. The company’s manufacturing facility is located in Punjab.

Shareholding pattern

As at June 30, 2021, over 29 percent shares are owned by the directors, CEO, their spouses and minor children. Within this, Khawaja Muhammad Younus owns majority of the shares. The local general public has over 63 percent shares, whereas 4 percent are held in joint stock companies. The remaining about 3 percent shares is with the rest of the shareholder categories.

Historical operational performance

Mehmood Textile Mills has mostly seen a growing topline, with the exception of FY12 and FY15. Profit margins, on the other hand, in the last six years particularly have been more or less stable, before increasing in FY21.

In FY18, at over 15 percent, the company saw the biggest growth in revenue seen in the last five years, crossing Rs18 billion in value terms. Both export sales and local sales registered an increase by nearly 16 percent and 12.4 percent, respectively. The growth in exports can be attributed to the currency depreciation that made exports favourable in the international market. Production cost was only marginally lower at nearly 93 percent, which kept gross margin relatively stable at 7 percent. While this growth also transferred to the operating margin, net margin however, was lower year on year, at a little over 1 percent, due to the escalation finance expense that made over 4 percent of revenue. This was due to high mark-up rates.

Revenue growth was recorded at one of the highest at over 34 percent, crossing Rs24 billion in value terms. While export sales witnessed a growth of 35 percent, local sales also followed with an increase of 30.5 percent. Production cost fell to its lowest seen in the last five years, at over 89 percent of revenue, allowing gross margin to increase to 10.5 percent. However, operating margin grew only marginally due to the drop in other income coupled with a jump in other expenses. But net margin received significant support from share of profit from associates that stood at over Rs 1 billion for the year. Thus, net margin for the year was 3.1 percent.

In FY20 the company witnessed a marginal growth of less than 1 percent owing to the fall in business activity resulting from the Covid-19 pandemic. Although there was some growth seen in both export sales and local sales, it was offset by the exorbitant sales tax that was recorded at Rs 2.4 billion versus Rs2.4 million in FY19. Cost of production reverted to consuming more than 90 percent of revenue, bringing gross margin down to 8.6 percent. The decline in other expenses contained the drop in operating margin, keeping it flat at close to 5 percent. Other expense was unusually high in FY19 due to unrealized loss on remeasurement of short-term investments at fair value, that was absent in FY20. But net margin fell to less 1 percent due to profit from associates halving year on year in value terms.

The company was back on its growth momentum as revenue grew by 14 percent, nearing Rs28 billion. Both local sales and export sales grew, by 63.6 percent and 3.6 percent, respectively. Majority of the growth was concentrated with local sales most likely due to border closures and lack of cargo vessels that caused delay and avoidance of export sales. Cost of production reduced notably to over 86 percent of revenue, permitting gross margin to increase to 13.6 percent- a level last seen in FY11. On the other hand, expenses made a larger share of revenue, except for finance expense that reduced to 4.5 percent, from over 6 percent seen in the last two years. Thus, net margin rose to 4.8 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 stood higher by over 33 percent year on year, at Rs 8.6 billion. This can be attributed to the recovery in demand as opposed to the slow growth seen in 1QFY21 when production and businesses had only started to open up after easing of lock downs. Cost of production was also significantly lower year on year at nearly 81 percent of revenue, compared to 93.6 percent seen in 1QFY21. The improvement in gross margin trickled down to net margin despite increases in expenses as a share in revenue. Net margin at 10.6 percent in 1QFY22 versus less than 1 percent in 1QFY21 also found support from a lower finance expense and share of profit from associates. The latter was nil in 1QFY21.

With upward revisions in interest rates, the company’s finance expense can be significantly affected, as it has consistently and historically remained close to 3 percent of revenue or higher. Moreover, the company has also set up an apparel unit with a capacity of 10,000 units per day. In addition, the industry as a whole has seen an improvement in exports, particularly from value-added textiles.