Redco Textiles Limited (PSX: REDCO) is incorporated in Pakistan as a public limited company. It began its operations in 1991 and is engaged in the manufacturing and sale of yarn and greige fabric.
Pattern of Shareholding
As of June 30, 2022, REDCO has a total of 49.262 million shares outstanding which are held by 785 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of REDCO holding 60.52 percent shares. This is followed by local general public holding 30.54 percent shares. Insurance companies have a stake of 3.98 percent in the company while banks, DFIs and NBFIs have a representation of 2.02 percent in the outstanding share capital of REDCO. About 1.31 percent of the company’s shares are held by investment companies. The remaining shares are held by other categories of shareholders each having less than 1 percent stake in the company.
Historical Performance (2018-22)
REDCO’s topline posted a year-on-year drop in 2019 and 2022. In the remaining years under consideration, its revenue boasted growth. REDCO’s bottomline which posted a net loss in 2018 rebounded and began posting net profits in the subsequent years. The bottomline grew until 2021 and then plunged in 2022. The gross margin of the company after posting a recovery in 2019 followed a downhill journey until 2021 and then rebounded in 2022. Conversely, operating margin and net profit margin posted their optimum level in 2021 and then fell in 2022. The detailed performance review of each of the years under consideration is given below.
In 2019, REDCO’s net sales dipped by 43 percent year-on-year. During the year, the company had suspended its operations due to high cost of doing business, incidental taxes, provincial cess and withholding tax which had rendered the local textile industry uncompetitive compared to their international counterparts. However, it resumed its operations in December 2018 after the government announced subsidy for textile industry by reducing RLNG rates. Moreover, during the period of shutdown, the company installed 20 looms to increase its productivity and reduce conversion cost. Due to less number of operational days, the sales of both yarn and fabric tumbled; however, the company was able to post a gross profit of Rs.45.34 million in 2019 as against the gross loss of Rs.192.86 million in 2018. GP margin stood at 18 percent in 2019. The company was able to trim down its distribution cost by 93 percent year-on-year mainly on account of low payroll expenses as well as low carriage, freight and taxes. Administrative expense also slumped by 6 percent year-on-year in 2019. Other expense which stood at a whopping Rs.285 million in 2018 due to impairment loss on fixed assets as well as loss on disposal of fixed assets shrank to Rs.25.77 million in 2019. REDCO posted an operating profit of Rs.5.305 million in 2019 with an OP margin of 2.1 percent. Finance cost inched down by 76 percent year-on-year in 2019 despite high discount rate during the year. This was because the company largely settled the loans obtained from banking companies. As of June 30, 2019, REDCO’s balance sheet only contains interest free loans from associated undertakings and company directors. The company posted a net profit of Rs.0.94 million in 2019 as against the net loss of Rs.520.43 million in 2018. EPS stood at Rs.0.019 in 2019.
In 2020, REDCO’s topline grew by 41 percent year-on-year despite the outspread of COVID-19. In the first three quarters of 2020, sales volume posted an impressive uptick mainly due to the installation of 32 air jet looms and also because of replacement of sizing and warping with latest model machines. The topline also included export sales of Rs.11.083 million which wasn’t there until 2019. The cost of sales grew by 48 percent year-on-year in 2020 due to increase in utility charges on account of Pak Rupee depreciation. Gross profit grew by 13 percent year-on-year in 2020, however, GP margin climbed down to 14.5 percent. Distribution expense nosedived by 13 percent year-on-year in 2020 while administrative expenses rose by 21 percent year-on-year in 2020. Other expenses fell by 66 percent year-on-year in 2020 on account of lesser loss on the disposal of fixed assets and lesser allowance for expected credit loss on trade debts. Operating profit grew by a massive 384 percent year-on-year in 2020 while OP margin mounted to 7.2 percent. Finance cost shrank by 91 percent year-on-year in 2020 as there were no short-term borrowings from banking institutions as of June 2020. However, the company borrowed Rs.12.049 million under SBP Refinance Scheme for the payment of salaries and wages at a mark-up rate of 3 percent per annum. The bottomline expanded by 2124 percent year-on-year in 2020 to clock in at Rs.20.95 million with an NP margin of 5.9 percent. EPS surged to Rs.0.425 in 2020
2021 posted a topline growth of 39 percent year-on-year. During the year, the company installed another 40 air jet looms to increase its productivity. While there were no export sales in 2021, local sales of both yarn and fabric posted staggering growth. Cost of sales increased because of high inflation, high utility charges as well as Pak Rupee depreciation. While gross profit dropped by 28 percent year-on-year in 2021 with GP margin clocking in at 7.4 percent. Lesser local taxes, carriage and freight resulted in a 29 percent year-on-year drop in distribution expense while administrative expense grew by 2 percent year-on-year on the back of high payroll expense in 2021. Other expense dwindled by 21 percent year-on-year due to lesser WPPF and no loss on the disposal of fixed assets in 2021. Other income multiplied by over 52 times in 2021 on account of previous year impairment coupled with amortization of government grant. Operating profit grew by 97 percent year-on-year in 2021 translating into an OP margin of 10.2 percent – the highest among all the years under consideration. Finance cost grew by over 15 times to clock in at Rs.2.06 million due to higher bank charges, high mark-up on WPPF and long-term borrowings. Bottomline grew by 165 percent year-on-year in 2021 to clock in at Rs.55.44 million with an NP margin of 11.2 percent. EPS rose to Rs.1.125 in 2021.
2022 witnessed the highest topline growth of 47 percent year-on-year. The company increased its production capacity by adding 36 air jet looms in 2022. While the sale of yarn significantly dropped during the year, the sale of fabric posted an encouraging growth. Due to shortage in gas supply, the company had to rely on electrical energy which increased the cost of sales by 44 percent year-on-year in 2022. However, as the sales mix majorly included fabric which had better pricing, GP margin mounted to 9 percent in 2022. Distribution and administrative expense inched up by 150 percent and 33 percent in 2022 mainly on account of higher payroll expense. Higher loss on disposal of fixed assets resulted in a 126 percent year-on-year rise in other expense in 2022. Consequently, operating profit declined by 45 percent year-on-year in 2022 with OP margin shrinking to 3.8 percent. Finance cost shriveled by 59 percent year-on-year due to massive drop in company’s long-term financing as well as bank charges during the year coupled with lesser WPPF. The bottomline tapered off by 68 percent year-on-year in 2022 to clock in at Rs.17.94 million with an NP margin of 2.4 percent. EPS dropped to Rs.0.3555 in 2022.
Recent Performance (9MFY23)
During 9MFY23, REDCO’s topline grew by 22.43 percent year-on-year. However, high cost of sales due to mounting energy charges, high inflation and supply chain impediments due to massive floods which destroyed the crop, resulted in a gross loss of Rs.21.60 million in 9MFY23 as against the gross profit of Rs.44.88 million during the same period last year. Distribution cost multiplied by 153 percent year-on-year in 9MFY23 on account of high carriage and forwarding charges. Administrative cost also inched up by 8 percent year-on-year in 9MFY23 due to inflationary pressure which drove the payroll expense at an exorbitant rate. Other expense slid by 78 percent year-on-year maybe on the back of low WPPF in 9MFY23. Other income grew by 135 percent year-on-year in 9MFY23. REDCO made an operating loss of Rs. 42.08 million in 9MFY23 as against the gross profit of Rs.16.785 million during the same period last year. Finance cost reduced by 44 percent year-on-year in 9MFY23 despite monetary tightening as the company as the company didn’t have any short-term or long-term loans from banking companies on its books as of March 31, 2023. REDCO posted a net loss of Rs.50.6 million in 9MFY23 as against the net profit of Rs.8.12 million in 9MFY22. This translated into a loss per share of Rs.1.027 in 9MFY23 as against an EPS of 0.0165 during the same period last year.
Future Outlook
The future looks bumpy for REDCO as well as for the entire textile sector which is grappling against high energy cost, Pak Rupee depreciation which has pushed up the prices of imported raw materials as well as import restrictions on account of dwindling foreign exchange reserves amidst havoc created by the devastating floods in the southern region of the country. Inflation and high cost of borrowing are also squeezing the margins of the sector. The dust will not settle until political uncertainty prevails in the country and IMF deal isn’t finalized.
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