Towellers Limited

Towellers Limited (PSX: TOWL) was incorporated in Pakistan as a private limited company in 1973 and was converted into a public limited company in 1994. The company is engaged in the manufacturing and export of garments, towels and textile make ups.

Pattern of Shareholding

As of June 30, 2022, TOWL has a total of 17 million shares outstanding which are held by 756 shareholders. Around 84 percent of the company’s shares are held by Directors, CEO, and their spouse and minor children. This category is followed by local general public holding 7.9 percent shares of TOWL. Insurance companies hold 3.8 percent shares of TOWL while Modarabas and Mutual Funds have a stake of 1.8 percent in the company. Other companies account for about 3.04 percent shares of TOWL. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Except for a slide in 2020, TOWL’s topline and bottomline have been posting staggering growth since 2018. Gross margin after maxing out in 2019 tumbled in 2020. However, it recovered in 2021 to shed off again in the subsequent year. Operating margin and net margin also narrowed down in 2020 but unlike gross margin, they recovered and stayed afloat in the next two years under consideration. The detailed performance review of each of the years under consideration is given below.

In 2019, TOWL’s topline boasted a 48 percent year-on-year growth. Since TOWL is an export oriented business with local sales constituting less than 1 percent of its net sales, Pak Rupee depreciation and government rebates for exporters proved to be good omen for the company and greatly improved its gross margin. During 2019, cost of sales grew by 35 percent year-on-year on account of high indigenous inflation which drove up the prices of raw materials as well as fabric dyeing and stitching charges. However, TOWL’s gross profit improved by 122 percent year-on-year with GP margin tremendously growing from 14.9 percent in 2018 to 22.4 percent in 2019. Distribution expense rose by 31 percent year-on-year in 2019 on account of higher export freight charges, export surcharge, clearing and forwarding as well as travelling charges. Administrative expense also grew by 9 percent year-on-year in 2019 mainly on account of higher payroll expense as the company increased its human resource count from 794 employees in 2018 to 1012 in 2019 to meet additional demand. Other expense rose by 59 percent year-on-year in 2019 due to higher WPPF. On the contrary, other income plunged by 96 percent year-on-year in 2019 as the company received waiver of loan and markup in 2018 which wasn’t there in 2019. Operating profit grew by 61 percent in 2019 with OP margin picking up from 10.9 percent in 2018 to 11.9 percent. Finance cost inched up by 25 percent year-on-year in 2019, however, it mainly comprised of interest charges on WPPF and bank charges as TOWL didn’t have any external borrowings in 2019. Net profit grew by 59 percent year-on-year in 2019 to clock in at Rs.402.68 million with NP margin standing at 10.5 percent up from 9.7 percent in 2018. EPS also rose from Rs.14.92 to Rs.23.69 in 2019.

TOWL’s topline posted a year-on-year drop of 2 percent in 2020 as the company faced delays and cancellation of export orders due to restrictions on the movement of people and goods on account of COVID-19. Furthermore, TOWL also suffered from production losses and idle capacity due to lockdown which increased its fixed cost. The toplinee drop would have been more profound had the local currency not depreciated. Weaker Pak Rupee diluted the effect of a massive drop in volumes and kept the net sales afloat to a great extent. Cost of sales grew by 3 percent year-on-year in 2020 which reduced the gross profit by 19 percent year-on-year with GP margin sliding down to 18.6 percent. As sales volume nosedived, so did the distribution expense because of lower freight, clearing and forwarding and travelling charges coupled with lesser export development surcharge. Administrative expense mounted by 18 percent year-on-year primarily due to higher payroll expense due to rising inflation. Lesser WPPF drove the other expense down by 27 percent year-on-year in 2020; however, other income staggeringly grew by 299 percent due to remarkable profit earned on saving account. Operating profit tapered off by 30 percent year-on-year in 2020 with OP margin dropping to 8.5 percent. Finance cost contracted by 1 percent year-on-year in 2020 due to lesser bank charges. Net income plummeted by 31 percent year-on-year in 2020 with NP margin clocking in at 7.3 percent. EPS also fell to Rs. 16.23 in 2020.

The company came back even stronger in 2021 with a 38 percent year-on-year surge in its topline. As the signs of COVID-19 began to ease down, the retail markets of the US and Europe resumed and TOWL received huge sales orders. Local sales also grew by over 6 times in 2021. Due to the installation of solar power plant, new knitting and dyeing machines, the company was able to keep a check on its cost of sales which grew by 34 percent year-on-year in 2021. Gross profit improved by 59 percent year-on-year in 2021 with GP margin climbing up to 21.3 percent. Distribution and administrative expense mounted by 26 percent and 20 percent respectively due to increase in operational capacity and better sales volumes. The number of employees also grew from 1014 in 2020 to 1195 in 2021. Higher WPPF pushed the other expense up by 83 percent year-on-year in 2021 while other income shrank by 26 percent during the year due to lesser profit on saving account as discount rate greatly reduced during the year. Operating profit posted a robust 93 percent year-on-year rise with OP margin bouncing back to 11.9 percent – the level seen in 2019. Finance cost dropped by 15 percent year-on-year in 2021 due to lower interest charges on WPPF. Net profit grew by 102 percent year-on-year in 2021 to clock in at Rs.556.46 million with NP margin sitting at 10.7 percent. EPS jumped up to Rs.32.73 in 2021.

2022 brought about the highest year-on-year growth of 96 percent in TOWL’s topline due to rise in sales orders coupled with the impact of Pak Rupee depreciation. However, high inflation drove the cost of sales up by 98 percent year-on-year in 2022 which trimmed the GP margin down to 20.4 percent. Increase in sales volume coupled with higher ocean freight charges pushed the distribution expense by 159 percent year-on-year in 2022. Administrative expense also ticked up by 17 percent year-on-year in 2022 due to higher payroll expense coupled with higher allowance for expected credit losses. Other expense grew by 125 percent year-on-year in 2022 due to higher WPPF. Other income also posted a handsome growth of 67 percent year-on-year in 2022 mainly due to higher profit on saving account. Operating profit multiplied by 95 percent year-on-year in 2022 with OP margin staying afloat. Finance cost grew by a massive 327 percent year-on-year in 2022 as the company obtained long-term financing under SBP finance scheme for renewable energy and short-term borrowings under export finance scheme. Net profit rose by 91 percent year-on-year in 2022 to clock in at Rs.1062.65 million with NP margin at 10.4 percent. EPS ascended to Rs.62.53 in 2022.

Recent Performance (9MFY23)

Global recession led to reduction in export orders during 9MFY23; however, abnormal exchange gain guarded TOWL’s topline from excessive decline. TOWL’s topline slid by 4 percent year-on-year in 9MFY23. Lesser orders resulted in low capacity utilization and low production which trimmed down the cost of sales by 14 percent year-on-year in 9MFY23. This translated into a 34 percent year-on-year growth in gross profit with GP margin rising from 20.1 percent in 9MFY22 to 28.2 percent in 9MFY23. Distribution expense plunged by 39 percent in 9MFY23 due to low sales volume while administrative expense surged by 19 percent year-on-year due to high inflation. Other expense also grew by 92 percent year-on-year in 9MFY23 on account of higher WPPF, however, it was counterbalanced by a tremendous 736 percent year-on-year rise in other income. While the detailed financial statements are not yet published to comment on the exact reason for this abnormal rise in other income, previous years’ reports reveal that other income largely comprises of profit on saving account which might have surged in 9MFY23 on the back of excessive monetary tightening. Operating profit grew by 84 percent year-on-year in 9MFY23 with OP margin soaring to 23.4 percent from 12.2 percent in 9MFY23. Finance cost grew by 478 percent year-on-year in 9MFY23 on the back of higher discount rate while its borrowings greatly reduced during the period. Net profit surged by 79 percent year-on-year in 9MFY23 to clock in at Rs.1552.48 million with NP margin rising to 20.6 percent from 11 percent during 9MFY22. EPS also enlarged from Rs.51.11 in 9MFY22 to Rs.91.32 in 9MFY23.

Future Outlook

Owing to slowdown of export orders in recent times, the company might suffer in the short-term as Pak Rupee has strengthened after the finalization of IMF agreement which has paved way for multiple avenues of foreign inflows. However, the local currency is expected to end the ongoing financial year on a weaker note due to external loan repayments due in the coming times. This may buttress TOWL’s topline in terms on exchange gain, however, this is not a sustainable source of income and the company needs to sharpen its axe to procure more orders maybe by tapping new geographical markets or through product diversification to reduce its currency risk and make its growth more predictable and worthwhile.