Bannu Woolen Mills Limited

Bannu Woolen Mills Limited (PSX: BNWM) was incorporated in Pakistan as a public limited company in 1960. It was established by PIDC, however later purchased by Bibojee group of companies. The principal activity of the company is the manufacturing and sale of woolen yarn, cloth and blankets.

Pattern of Shareholding

As of June 30, 2023, BNWM has a total of 9.5 million shares outstanding which are held by 1107 shareholders. Local general public have the highest stake of 54.04 percent in the company followed by its associated companies, undertaking and related parties holding 34.06 percent shares. The company’s leadership which includes its directors, CEO, their spouse and minor children account for 5.83 percent shareholding while NIT and ICP hold 4.56 percent shares of BNWM. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-23)

After witnessing a year-on-year plunge in 2019 and 2020, BNWM’s topline has been riding an upward trajectory since 2021. However, the growth momentum has been fading each year. In 2019 and 2020, where BNWM’s net sales slid, its bottomline also registered net losses. The company’s bottomline turned to the profit territory in 2021; however, thebliss didn’t last for long as it again posted net losses in 2022 and 2023 despite an uptick in net sales. BNWM’s margins have been fluctuating over the period under consideration (see the graph of profitability ratios). While gross and operating margins have stayed in the positive zone over the period, net margin has portrayed immense ebb and flow on account of the company’s investment in its associated companies. The detailed performance review of each of the years under consideration is given below.

In 2019, BNWM’s topline slipped by 18 percent year-on-year. This was on the back of reduced duration and severity of winter season in Pakistan which greatly affected the sales volume of the company. Deteriorating macroeconomic indicators including high inflation, weaker Pak Rupee and hike in electricity tariff added to ado. In accordance with reduced demand and to cut down the losses from accumulation of inventory, the company temporarily suspended two shifts of production operations and continued with only one shift. In 2019, BNWM produced 779,642 kgs of yarn and 1.09 million meters cloth which was down 62 percent and 29 percent respectively. Cost of sales didn’t shrink with the similar momentum as net sales as fixed cost wasn’t absorbed efficiently. This culminated into a 39 percent dip in gross profit with GP margin diving down to 24.4 percent in 2019 from 32.5 percent in 2018. Operating expense dwindled by 2 percent year-on-year in 2019. While payroll expense drastically grew in 2019, it was offset by lower sales commission, rent, advertisement and promotion as well as repair & maintenance cost incurred during the year. Higher exchange loss and greater provisioning for ECL on trade debts also pushed the other expense up by 16 percent in 2019. As a consequence, operating profit declined by 86 percent in 2019 with OP margin marching down from 15 percent in 2018 to 2.6 percent in 2019. Finance cost escalated by 138 percent in 2019 on account of greater short-term borrowings and higher discount rate. BNWM booked reversals worth Rs.365.33 million on its investment in an associated company in 2018 which provided huge support to its bottomline during the past year. However, no such thing was there in 2019. Hence, the company posted a net loss of Rs.17.08 million in 2019 versus net profit of Rs.307.78 million in 2018. BNWM registered loss per share of Rs.1.80 in 2019 as against EPS of Rs.32.38 in 2018.

In 2020, BNWM’s topline registered an even severe decline of 52 percent when compared to the previous year. While the company’s net sales were already grappling against adverse macroeconomic conditions and unfavorable weather for past few years, the outbreak of COVID-19 further worsened the situation. The company resumed its second production line in 2020 which was temporarily suspended last year, yet the production volume massively fell to 474,274 kgs of yarn, down 39 percent year-on-year and 494,507 meters cloth, down 55 percent year-on-year. The curtailed production was the consequence of demand contraction and lockdown. Cost of sales slumped by 57 percent year-on-year in 2020. This greatly improved its GP margin to 33 percent despite 35 percent slippage in gross profit. Operating expense nosedived by 20 percent year-on-year in 2020 due to considerably lower sales commission, advertisement & promotion as well as payroll expense. BNWM reduced its number of employees from 467 in 2019 to 396 in 2020. Significantly lower provisioning and no exchange loss incurred in 2020 resulted in 99 percent reduction in other expense. However, other income multiplied by 538 percent in 2020 on account of mark-up earned on dealers’ balances, exchange gain as well as gain on sale of vehicles. Operating profit dwindled by 75 percent in 2020 with OP margin ticking down to 1.3 percent. Finance cost surged by 46 percent year-on-year in 2020 due to higher discount rate for most part of the year coupled with higher working capital related borrowings. This coupled with share of loss worth Rs.48.28 million and impairment loss worth Rs.17.46 on investment in associated companies radically tarnished the bottomline and culminated into a net loss of Rs.108.65 million in 2020 with loss per share of Rs.11.43.

In 2021, BNWM’s net sales posted a rigorous rebound of 112.7 percent year-on-year. With the ease of lockdown restrictions, the company’s sales began to pick up and the company had to resume the third production line which was suspended in 2019. To fulfill the demand, the company produced 888,832 kgs of yarn and 1.28 million meters of cloth, up 87.4 percent and 159 percent respectively. Cost of sales went up by 131 percent in 2021 which squeezed the GP margin to 27.2 percent. Operating expense spiked by 24 percent year-on-year on account of higher sales commission as well as repair & maintenance expense incurred during the year. Higher profit related provisioning drove the other expense up by over 12 times in 2021. Other income inched down by 32 percent in 2021 due to no mark-up earned on dealers’ balances, lesser exchange gain and lesser gain on sale of fixed assets in 2021. Operating profit multiplied by around 12 times in 2021 with OP margin jumping up to 8 percent. BNWM was able to cut down its finance cost owing to monetary easing backdrop and lesser borrowings in 2021. The company also earned a share of profit worth Rs.78.72 million from associated company. This translated into a net profit of Rs.95.72 million in 2021 with EPS of Rs.10.07 and NP margin of 13.7 percent.

The growth trajectory continued in 2022 with 39 percent year-on-year inclination in net sales. The production further rose to 1.17 million kgs of yarn and 1.44 million meters of cloth, up 31.7 percent and 12.6 percent respectively in line with demand recovery. Cost of sales spiked by 44 percent year-on-year in 2022 on account of steep rise in inflation, Pak Rupee depreciation and hike in power tariff. This pushed the GP margin down to 24.6 percent in 2022. Operating expense largely remained unchanged. While administrative expense rose on account of hike in payroll expense and utilities expense incurred during the year, massive drop in distribution expense due to discontinuation of commission to dealer from 2022 offset the hike in administrative expense during the year. Higher provisioning for ECL pushed the other expense up by 578 percent in 2022. Conversely, other income slid by 25 percent on account of no exchange gain earned during the year as well as no sale of trees made during the year. Operating profit improved by 60 percent in 2022 with OP margin marching up to 9.3 percent. Finance cost grew by 9 percent year-on-year due to higher discount rate. BNWM also earned a share of profit from associate company worth Rs.84.57 million in 2022. What turned the tables for the company was the massive unrealized impairment loss on investment in Janana De Malucho, an associate company of BNWM. This translated into a massive net loss of Rs.662.40 million in 2022 with loss per share of Rs.69.68.

Recent Performance (2023)

BNWM’s net sales posted a marginal rise of 7 percent in 2023 which may be the effect of upward revision in prices. The demand shrank in 2022 on account of high inflation which took its toll on the purchasing power of consumers. Production of yarn slid to 1.008 million kgs while production of cloth moved down to 1.22 meters of cloth, down 13.8 percent and 15.24 percent respectively in 2023. Cost of sales rose by 6 percent in 2023 on account of high inflation, Pak Rupee depreciation, high energy and power charges. GP margin rose to 25.7 percent in 2023. GP margin slightly improved to 25.7 percent Operating expense expanded by 17 percent on the back of higher depreciation on right of use assets and rental arrears of past years. Other expense slumped by 75 percent on the back of lesser provisioning for ECL. Higher income on PLS account and increased sale of scrap resulted in 20 percent recovery in other income. Operating profit grew by 29 year-on-year with OP margin climbing up to 10.4 percent in 2023. Impairment loss on investment in associate and share of loss from associate company dragged BNMW coupled with higher finance cost resulted in net loss of Rs.343.16 million in 2023 with a loss per share of Rs.36.1 in 2023.

Future Outlook

The company had to shut down its operations during FY23 on the back of supply chain bottlenecks due to import restrictions. The resumption of imports and a recent rebound in the value of Pak Rupee is a good omen for BNWM. However, with tighter consumer spending due to a contraction in the purchasing power, the demand may not witness any considerable recovery in the coming times. The company should also reconsider its decision of investing in Janana De Malucho, an associate company, which is terribly diluting BNWM’s bottomline.