Suraj Cotton Mills Limited

Suraj Cotton Mills Limited (PSX: SURC) was established as a public limited company in 1984 under the Companies Act, 1913. The company has four spinning and weaving units where it manufactures, sells and trades yarn and cloth.

Shareholding pattern

As at June 30, 2022, over 47 percent shares are held under associated companies, undertakings and related parties within which a major shareholder is Crescent Powertec Limited. The directors, CEO, their spouses and minor children own over 29 percent shares. Major shareholders in this category are Humera Iqbal and Adil Bashir. The general public holds 14 percent shares, while the remaining roughly nine percent shares are with the rest of the shareholder categories.

Historical operational performance

Since FY10, the company has mostly seen a growing topline with the exception of a few years, while profit margins between the years FY17 and FY20 have remained more or less flat before rising sharply in FY21, and declining again in FY22.

In FY18, topline registered a growth of over 33 percent, that was the highest seen since FY11. Revenue crosses Rs 11 billion in value terms. Majority of this growth was associated with local sales that saw a 40 percent rise, whereas export sales fell from Rs 835 million in FY17 to Rs 440 million in FY18. The lower exports were attributed to lower demand coming from China which is a major export market. Thus, sales were redirected towards the local market. With cost of production down to almost 92 percent, gross margin increased to 8.2 percent, from last year’s 6.4 percent. However, net margin was lower year on year at 5.1 percent, as other income fell from Rs 383 million in FY17 to Rs 96 million in the current period.

Topline growth in FY19 stood at nearly 26 percent to reach close to Rs 14 billion in value terms. Local sales, again dominated the total revenue pie as they were recorded at Rs 13.6 billion, while export sales stood at Rs 372 million. With cost of production falling below 90 percent of revenue, gross margin improved to 11.4 percent. While this also reflected in the operating margin, increase in net margin was less pronounced due to considerably higher taxation year on year. Net margin was recorded at slightly over six percent for the year.

In FY20, topline contracted by 7.8 percent as both, local sales and export sales reduced due to the outbreak of the Covid-19 pandemic that resulted in strict lockdowns. With manufacturing facilities shutdown, production processes came to a halt, and so did trade with border closures. However, gross margin did not reduce drastically as cost of production increased only marginally to almost 90 percent of revenue. With significant support coming from other income in the form of dividends, the decrease in net margin was also fairly contained at 5.58 percent.

Revenue recovered in FY21 as it grew by almost 35 percent crossing Rs 17 billion in value terms. This was attributed to an improvement in product prices in addition to a gradual increase in demand, particularly in the local market, as lockdowns began to ease. This is also reflected in the fact that majority of the growth in topline was contributed by local sales. As production cost fell to its lowest thus far at 80 percent of revenue, gross margin reached a high of 19.8 percent. Combined with significant contribution from other income in the shape of dividends and returns from asset management companies, net margin reached a peak at 14.7 percent, whereas bottomline stood at Rs 2.5 billion.

Recent results and future outlook

In FY22, revenue witnessed a growth of over 35 percent to reach an all-time high of Rs 23.5 billion. Local sales saw majority of this growth as they were recorded at over Rs 23 billion, while export sales fell further to Rs 204 million. Moreover, product prices increased due to better demand. Majority of the growth in revenue was concentrated in the first half of the year as the second half was marred by political uncertainty within the country, while the Ukraine-Russia further exacerbated business sentiments. With production cost reducing marginally to 80 percent, gross margin was recorded at an all-time high of nearly 20 percent. However, net margin was lower at 11.9 percent due to lower the other income, combined with higher other expenses. The latter was a result of provision of equity investments, expected credit losses on unsecured debts and provisioning of WPPF/WWF. But, bottomline in value terms peaked at Rs 2.8 billion.

With inflationary pressures experienced globally, coupled with rising oil prices and probable crop damage due to floods in the country, the company does not hold a profitable outlook for the industry as these factors lead to decline in demand, followed by prices. In addition, the rising world cotton prices and currency depreciation will adversely impact the country’s balance of payments, even with a reduction in production capacity.