Shams Textile Mills Limited

Shams Textile Mills Limited (PSX: STML) is a public limited company established in 1968 under the Companies Act, 1913 (now, Companies Act, 2017). The company manufactures sells and trades yarn while also trading cloth. The company’s products find their utility in denim, woven fabric, and knitwear. Its first plant was set up in Chiniot for spinning, weaving, dyeing and finishing. It added another plant at Sheikhupura and added a specialized unit that commenced commercial production in 2006.

Shareholding pattern

As at June 30, 2021, close to 34 percent shares are held in associated companies, undertakings and related parties. Within this category, nearly 20 percent shares are owned by Crescent Powertec Limited. The directors, CEO, their spouses and minor children hold over 26 percent shares within which a major shareholder is the CEO of the company, Mr. Khalid Bashir who holds over 11 percent of the total shares. The local general public owns 23 percent shares followed by almost 12 percent in NIT & ICP. The remaining roughly 5 percent shares are with the rest of the shareholder categories.

Historical operational performance

Shams Textile Mills has seen a declining topline several times since FY11, while profit margins in the last six years have also been fluctuating.

In FY18, the company witnessed one of the largest inclines in topline at over 41 percent to reach Rs 4.7 billion. Export sales registered a growth of over 74 percent while local sales grew by almost 32 percent. The growth in export sales is most likely attributed to currency devaluation that makes exports favorable in the international market. With cost of production down to 94 percent compared to over 95 percent in FY17, gross margin improved to almost 6 percent. Additionally, operating expenses also made a smaller share in revenue year on year. This coupled with an increase in other income allowed net margin to increase to 2 percent compared to the loss incurred in the previous year. Higher other income came from a combination of a net exchange gain, gain on sale of investment, excise duty payable written back and reversal of provision for workers welfare fund.

In FY19, revenue grew by almost 13 percent with export sales declining by almost 28 percent, while local sales increased by 28 percent. The decrease in export sales was attributed to a rise on cost of production that rendered products unfavorable in the export market. Additionally, export sales were also impacted due to the US-China trade war that adversely impacted demand from China which is one of the prominent export destinations for Pakistan’s textile products. The increase in cost of production is noted by it consuming more than 95 percent of revenue, thus reducing gross margin to 4.4 percent. With other income also reverting to pre-FY18 levels, net margin was recorded at 0.8 percent for the year.

Topline in FY20 decreased by 21 percent with both export sales and local sales declining by almost 10 percent and 23 percent, respectively. This was largely attributed to the outbreak of Covid-19 pandemic that resulted in strict nationwide lockdowns that led to a halt in production processes. This, together with increase in cost of raw materials raised the fixed cost as cost of production grew to nearly 98 percent of revenue. With little room for absorption of other costs, the company incurred loss at an all-time high of Rs 140 million.

Topline bounced back in FY21 as it posted the largest growth at over 70 percent to reach an all-time high of Rs 7 billion in value terms. While export sales continued to shrink, local sales more than made up for the latter as almost doubled year on year from Rs 3.4 billion to Rs 6.6 billion. The increase in revenue is attributed to an improvement in sales volumes as well as selling price. As a result, gross margin improved to over 10 percent. With operating expenses and finance expense also consuming a lower share in revenue, net margin inclined to 5 percent for the year with net profit posted at the highest of Rs 362 million.

Quarterly results and future outlook

Revenue in the first quarter of FY22 nearly doubled year on year as it grew by over 82 percent as the company continued its growth momentum. Cost of production although stood at 90 percent of revenue, it was lower than almost 94 percent seen in the same period last year. With operating expenses also making a smaller share in revenue, net margin for 1QFY22 was higher at 5.5 percent compared to almost 1 percent seen in 1QFY21.

In the second quarter as well revenue was higher year on year, by nearly 41 percent. Cost of production was lower year on year as a share in revenue at nearly 92 percent, versus 94 percent in 2QFY21. Thus, gross margin also improved to 8.2 percent. The increase was also reflected in the bottomline that was, although lower compared to 1QFY22, at a net margin of 4 percent, it was better than 1.7 seen in 2QFY21.

While the overall textile industry of the country has seen good results, the challenge of raw material prices continues to threaten profitability.