Shadab Textile Mills Limited

Shadab Textile Mills Limited (PSX: SHDT) was set up as a public limited company in 1979 under the Companies Act 2013. The company deals, manufactures and sells all types of yarn. The company’s two manufacturing facilities are located at District Nankana Sahib and District Kasur.

Shareholding pattern

As at June 30, 2021, almost 47 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, close to 15 percent shares are with Mr. Aamir Naseem followed by 11 percent with Mrs. Fatima Aamir. Another 48 percent shares are with the local general public, while the remaining roughly 5 percent shares are with the rest of the shareholder categories.

Historical operational performance

Shadab Textile Mills has mostly seen a growing topline, with revenue contracting twice in FY15 and FY20. Profit margins, on the other hand, in the last six years have remained more or less stable with a sharp incline in FY21.

In FY18, topline registered a growth of 11.2 percent. This was largely a result of an improvement in yarn prices. In addition, production also increased as there was a continuous supply of energy. The latter also helped to reduce production losses. But with cost of production remaining close to 95 percent of revenue, gross margin was also flat year on year at over 4 percent. With marginal changes in operating expenses as a share in revenue, this also trickled to the bottomline, with net margin at 1 percent for the year. Over the years, the company has been making repayments on long term loans that has helped reduce the finance expense.

The company saw the largest growth in revenue thus far in FY19 at almost 24 percent. This was attributed partly to an improvement in yarn prices whereas production also continued to increase. Cost of production fell to a 5-year low of almost 93 percent of revenue, allowing gross margin to incline to 7 percent. This can be a result of government notifying a lower electricity rate for zero rated textile industrial consumers. This also reflected in the bottomline that grew to Rs 78 million from last year’s Rs 24 million whereas net margin increased to 2.8 percent.

After rising consecutively for four years, revenue in FY20 contracted by over 18 percent. This was primarily attributed to the outbreak of the Covid-19 pandemic that resulted in strict lockdowns. Thus, the company’s mills also remained closed from the end of March 2020 till mid-May 2020. Therefore, the company suffered a production loss of 2.9 million kg converted to 20/s. By the start of FY21, when businesses resumed, yarn market was still dwindling. Thus, gross margin reduced to 5.7 percent. This also trickled to the bottomline as net margin was recorded at a lower 1.8 percent, despite the additional Rs 27 million supports coming in from other income.

In FY21 revenue inclined by an all-time high of over 44 percent, with topline crossing Rs 3 billion in value terms. This was attributed to an increase in selling price as well as an improvement in volumes. This in turn was a result of resumption of activities after the pandemic as demand increased particularly in the value-added sector. Additionally, since the neighbouring countries continued to grapple with the Covid-19 situation, global demand shifted to Pakistan. Thus, gross margin increased to over 11 percent, a level last seen in FY13. This also reflected in the net margin that grew to 5 percent with an all-time high net profit of Rs 170 million. During the period, the company also invested in adding new qualities and blends of yarn for capacity enhancement and diversification.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by nearly 60 percent year on year. This is due to rising prices and higher volumes. The latter can be attributed to investments made for capacity enhancement. As a result, gross margin improved to 14.3 percent versus 9.3 percent in 1QFY21. This also reflected in the net margin for the period that was also significantly higher at 8.5 percent compared to 4.5 percent in 1QFY21. In the second quarter of FY22, growth momentum continued as revenue was higher year on year, nearly double at Rs 1.34 billion. However, due to higher cost of production year on year, profitability was lower in 2QFY22 with a net margin of 3.3 percent compared to 5.5 percent in 2QFY21.

The third quarter also saw a significant year on year rise in revenue by 80 percent. However, cost of production continued to consume a larger share in revenue, causing net profit to reduce to 2.8 percent for the quarter compared to 4 percent in the same period last year. This is also seen cumulatively, as despite an almost 74 percent improvement in revenue year on year for 9MFY22, net margin is more or less flat at close to 4 percent.

In FY21, the company was operating at almost full capacity, indicating a need to enhance capacity, to take advantage of existing demand and also reduce costs as the latter has been consuming a significant share in revenue for a considerable period of time.