Shadman Cotton Mills Limited

Shadman Cotton Mills Limited (PSX: SHCM) was established as a public limited company in 1979 under the Companies Act, 1973 (now Companies Act 2017). It manufactures and sells yarn primarily. In FY20, it also commenced its apparel division.

Shareholding pattern

As at June 30, 2022, more than 84 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, the CEO, Mr. Shahid Mazhar is a major shareholding, owning over 58 percent shares in the company. Other key shareholders are Mr. Ahmed Bin Shahid and Mr. Muhammad Afnan Shahid. About 15 percent shares are held under the category of “individuals”, while the remaining less than 1 percent share is with the rest of the shareholder categories.

Historical operational performance

Topline has, more often than not, declined through the years, whereas profit margins, particularly in the last six years, have grown between FY17 and FY19 witnessed a sharp decline until FY21, before rising again in FY22.

In FY19, revenue contracted by over 21 percent with both local sales and export sales declining. Export sales registered a decrease of 20.7 percent, whereas local sales had halved. For the last four years, gross margin had consistently been recorded at a loss. With some curtailment in production cost in FY19, at 96 percent of revenue, the company managed to post a gross profit of Rs 18 million, with a gross margin of 4 percent. Net margin had also been negative since FY12, except for in FY15. However, with some support from other income in the form of “old liabilities written back”, the company posted a positive net margin of 3 percent, with bottomline recorded at Rs 13 million, compared to a net loss of Rs 147 million in the previous year.

Topline continued to contract in FY20 as well, this time by a prominent 74 percent with revenue shrinking to a mere Rs 112 million. Aside from revenue generated through sales of local yarn of Rs 123 million, there was no revenue contribution by export sales, fabric, waste or raw material sales. The company had begun operations on its new apparel division in the second half of the year, but operations soon had to be put on hold due to the outbreak of the Covid-19 pandemic. With minimal revenue, and a bigger production cost, the company incurred a gross loss of Rs 25 million. Other income helped in offsetting the loss, combined with a significant reduction in other expenses. While this raised the operating margin year on year, net margin was lower at almost 1 percent due to higher taxation.

Fall in revenue was considerably curtailed at almost 2 percent during FY21. Export sales surpassed local sales as the latter fell from Rs 123 million in the previous year, to Rs 3.6 million in the current period. However, operations at apparel division resumed as lockdowns eased, resulting in a contribution of Rs 104.7 million to export sales. But the higher cost of inputs matched with a lower selling price caused gross loss to escalate to Rs 56 million. Add to this, operating expenses, and some support from other income, net loss reached Rs 57 million for the year.

Revenue picked up in FY22 as it was recorded at Rs 378 million, compared to Rs 110 million in FY21. This was largely due to the export sales from the apparel division. The latter had gained prominence in the total revenue pie, whereas local sales of yarn continued to shrink. Apparel division also benefitted from currency devaluation as it is more export-oriented. The higher topline reflected in the gross margin that grew to an all-time high of 6.6 percent. This also trickled to the bottomline that was recorded at a positive Rs 11 million.

Quarterly results and future outlook

Revenue in the first quarter of FY23 was higher by almost 32 percent year on year. Export sales continued to dominate the total revenue pie as the former was recorded at almost Rs 80 million. However, the higher prices of fabric, among other overheads, prevented a positive gross margin for the period, albeit the gross loss was lower year on year. With some support from other income, the company managed to post a net profit of Rs 1 million, compared to a net loss of Rs 10 million in the same period last year.

While the addition of the export-oriented apparel division has improved the topline of the company, production costs continue to remain a challenge due to higher prices of raw material, and other inputs such as fuel and energy. Last year, the industry had seen some positive growth due to demand recovery after the Covid-19 pandemic. But a year later, demand has slowed down, particularly as the world experiences inflationary pressures that adversely impact the purchasing power. Coupled with political uncertainty within the country specifically, business activities are further affected.