Bhanero Textile Mills Limited

Bhanero Textile Mills Limited (PSX: BHAT) was set up as a public limited company in 1980 under the repealed Companies Ordinance, 1984 (now, Companies Act, 2017). It is part of the Umer Group of companies. Bhanero Textile manufactures and sells yarn and fabric. It has three manufacturing units- one at Kotri and two at Sheikhupura.

Shareholding pattern

As of June 30, 2021, over 47 percent shares were held in each of the following categories: directors, CEO, their spouses, and minor children, and associated companies, undertaking and related parties. In the former category, Mrs Samia Bilal is a major shareholder, while in the latter category, close to 17 percent shares are owned by Admiral (Private) Limited. The remaining roughly five percent shares are with the rest of the shareholder categories.

Historical operational performance

Since FY12, the company has mostly seen a growing topline with the exception of FY15, FY16 and more recently in FY20. Profit margins grew slightly between FY16 and FY19 before declining in FY29, only to rise sharply, again in FY21.

At 18 percent, the company witnessed the biggest growth in revenue in FY18. This was largely due to local sales that registered a growth rate of 24 percent, while export sales grew by seven percent. The company primarily earns from local sales, while export sales make a smaller share in the total revenue pie. Despite local sales being a major part of revenue, the company benefitted from currency devaluation as export sales of yarn and fabric picked up. But cost of production grew marginally as a share in revenue, leading gross margin to reduce to 10.75 percent. However, it received support from other income that was unusually high at Rs 112 million due to a one-off event of sale of land and machinery. Thus, net margin was recorded at almost six percent- the highest seen since FY14.

Revenue growth in FY19 stood at almost 16 percent crossing Rs 9 billion in value terms. Local sales posted a growth of 19 percent while export sales grew by 9.5 percent. The local sales were dominated by yarn sales. The company has a prominent presence in the local market due to intense competition in the international market in addition to Pakistan’s high cost of production that renders Pakistani products unfavourable in the global arena. Cost of production for the company reduced to 86 percent of revenue, gross margin reached a five-year high of 13.8 percent. This also reflected in the bottomline that was further supported by other income of Rs 228 million. This was earned through interest income and gain on disposal of property, plant and equipment. Thus, net margin reached the highest thus far of 8.9 percent.

Topline contracted by 4.5 percent in FY20 with exports declining by 10.5 percent, while local sales continued to grow by 16 percent. Fabric sales dominated the total local sales. The decline in export sales can be attributed to the outbreak of the Covid-19 pandemic that affected sales in the last quarter of FY20 for a majority of the companies. As Covid-19 led to border closures and halts in trade, there were delays and cancellation of orders and shipments while supply chains were also disrupted. For Bhanero Textiles, cost of production increased to nearly 91 percent of revenue bringing gross margin down to 9.2 percent. This also reflected in the net margin that was down to 3.7 percent for the year.

Revenue bounced back in FY21 as it posted one of the biggest increases at over 36 percent, reaching an all-time high of over Rs 12 billion. Local sales increased by a whopping 48.5 percent while export sales grew by 9.4 percent. This can be attributed to business activities returning to some normalcy as lockdown restrictions eased and trade resumed somewhat. The higher revenue was reflected in the gross margin that peaked at 22.5 percent. With finance expense also reducing to less than one percent of revenue owing to lower interest rates, compared with two percent seen in FY20, net margin also reached an all-time high of 15.2 percent, with net profit nearing Rs 2 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 14.6 percent year on year as pent-up demand continued to grow. Moreover, cost of production reduced significantly as a share in revenue that made room for profitability despite the constraints the industry faces such as decreasing cotton production and other factors such as pest attacks, climate change, etc. With notable higher income as well, net margin stood at 17.5 percent for the quarter versus 3.33 percent in 1QFY21.

The second quarter saw revenue grow by nearly 49 percent year on year. This can be attributed to the increase in the country’s local cotton production that grew by 44 percent. Exports for the industry also posted a growth of 26 percent during 1HFY22. The company is also in the process of installation of new machines that will enhance production. Cost of production was again lower year on year for 2QFY22 at almost 77 percent of revenue. Thus, net margin was higher at 19.5 percent versus 13.3 percent in 2QFY21. While cotton production has been fairly reasonable for 1HFY22, it is not expected to continue for the second half due to poor quality and gas supply issues. Thus, production is expected to be adversely impacted.