Prosperity Weaving Mills Limited

Prosperity Weaving Mills Limited (PSX: PRWM) was incorporated in Pakistan as a public limited company in 1991. The company is engaged in the manufacturing and sale of woven cloth.

Pattern of Shareholding

As of June 30, 2023, PRWM has a total of 18.48 million shares outstanding which are held by 587 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 53.62 percent in the company followed by associated companies, undertakings and related parties holding 30.19 percent shares of the company. Local general public accounts for 15.3 percent shares of the company. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2019-23)

Barring year-on-year drop in 2020, PRWM’s topline has been inclining since 2019. Conversely, its bottomline slid in 2020, 2022 and 2023. Its margins significantly improved in 2019 followed by a dip in 2020. In 2021, PRWM’s margins attained marked recovery only to tumble in the subsequent years. The detailed performance review of each of the years under consideration is given below.

In 2019, PRWM’s topline registered 14.5 percent year-on-year rise. This was attributable to a combination of Pak Rupee depreciation, upward price revision as well as increased sales volume. To meet the growing demand, the company operated its plant at 79 percent capacity in 2019 versus 72 percent capacity in 2018. Total capacity also increased during the year (see the graph of plant capacity & production). Increase in the price per meter sold as well as weaker local currency allowed the company to attain 98.8 percent higher gross profit in 2019 with GP margin picking up from 5.7 percent in 2018 to 9.9 percent in 2019. Distribution expense spiked by 28 percent in 2019 which largely includes sales commission paid on local and export sales. Administrative expense inched up by 18.8 percent in 2019 on account of higher payroll expense despite the fact that number of employees was reduced from 1188 in 2018 to 1099 in 2019. Higher profit related provisioning, loss on investments designated at FVTPL as well as loss on sale of investments designated at FVTPL resulted in 23 percent hike in other expense in 2019. Other income slid by 5.4 percent in 2019 due to no dividend income on available for sale investments as well as lower exchange gain on debtors. Despite hike in operating expense, PRWM was able to post 151.43 percent rise in its operating profit in 2019 with OP margin climbing up from 3.2 percent in 2018 to 7 percent in 2019. Finance cost escalated by 25.7 percent in 2019 on account of higher discount rate. PRWM was able to post 284 percent year-on-year growth in its net profit which stood at Rs.210.03 million in 2019 with EPS of Rs.11.37 versus Rs.2.96 in 2018. NP margin also tremendously grew from 0.9 percent in 2018 to 3 percent in 2019.

In 2020, PRWM’s net sales slumped by 15.4 percent on account of lesser number of looms operational during the year due to lockdown imposed as COVID-19 protocol. Total capacity and capacity utilization also dwindled during the year. Cost of sales ticked down by 14.3 percent due to lesser absorption of fixed overheads. This resulted in 25 percent thinner gross profit recorded by the company in 2020 with GP margin marching down to 8.8 percent. Distribution expense tapered off by 1.24 percent in 2020 on account of lesser sales commission due to curtailed off-take. Administrative expense shrank by 0.25 percent in 2020 due to contraction of workforce to 1077 employees in 2020. Other expense dropped by 37.4 percent in 2020 due to high base effect on account of loss incurred on investments designated at FVTPL in the previous year. Other income mounted by 51.65 percent in 2020 due to gain on sale of investments. Operating profit narrowed down by 26.74 percent in 2020 with OP margin shrinking to 6.1 percent. Finance cost contracted by 34.52 percent in 2020 due to considerable reduction in working capital-related borrowings. Net profit dropped by 26.32 percent year-on-year in 2020 to clock in at Rs.154.76 million with EPS of Rs.8.37. NP margin eroded to 2.6 percent in 2020.

In 2021, PRWM’s net sales posted a staggering 35.42 percent rise. This was on account of higher sales volume and better prices. During the year, the company installed 36 new high speed looms which not only increased the production capacity to 69.39 million meters but also helped company achieve cost efficiency. This is evident by the fact that PRWM’s gross profit expanded by 120.8 percent in 2021 with GP margin jumping up to 14.3 percent. Distribution expense surged by 48 percent year-on-year in 2021 on account of higher ocean freight charges as well as increased volume. Administrative expense soared by 7.74 percent in 2021 mainly due to increased remuneration of directors as well as higher legal and professional charges. Higher profit related provisioning drove up other expense by 93 percent in 2021. Conversely, other income slid by 27 percent on account of high-base effect due to gain on sale of investment in 2020. Operating profit magnified by 146.33 percent in 2021 with OP margin rising up to 11 percent – the highest among all the years under consideration. Finance cost eroded by 25 percent in 2021 due to lower discount rate as well as no foreign currency loans obtained during the year which squeezed PRWM’s short-term borrowings in 2021. This is also evident in the company gearing ratio, portraying its lower value in 2021. PRWM’s net profit magnified by 314.6 percent in 2021 to clock in at Rs.641.58 million with EPS of Rs.34.72 and NP margin of 7.9 percent – the highest among all the years under consideration.

PRWM’s topline continued to enlarge in 2022 registering 58 percent growth on account of higher sales volume and better pricing; however, it couldn’t trickle down to produce a healthier bottomline on account of variety of factors. Firstly, cost of sales spiked by 68.5 percent in 2022 on account of massive hike in energy, labor and raw material charges due to high inflation as well as Pak Rupee depreciation. Gross profit slipped by 6.29 percent in 2022 with GP margin shrinking to 8.5 percent. During the year, PRWM installed 26 new looms which increased the total plant capacity to 71.21 million meters out of which it utilized 77 percent capacity. Distribution expense escalated by 52.3 percent in 2022 due to momentous hike in ocean freight and forwarding charges due to increased volume as well as spike in the prices of POL products. Higher commission paid particularly on local sales also pushed up the distribution expense in 2022. Administrative expense registered 15.33 percent growth in 2022 due to higher payroll expense as well as directors’ remuneration. Other expense shrank by 23 percent year-on-year in 2022 due to lower profit related provisioning. Lower dividend income on investments classified as FVTOCI also drove down other income by 17.7 percent in 2022. As a consequence, operating profit shed its value by 18 percent year-on-year in 2022 with OP margin slipping to 5.8 percent. Finance cost magnified by 32 percent in 2022 due to higher discount rate coupled with increased short-term borrowings particularly running finance and foreign currency loans. Net profit tumbled by 45.5 percent in 2022 to clock in at Rs.349.90 million with EPS of Rs.18.93 and NP margin of 2.7 percent.

In 2023, PRWM’s topline posted 13.95 percent year-on-year growth on account of higher volume, better pricing as well as Pak Rupee depreciation which made export sales dearer. However, 15.3 percent hike in cost of sales due to increase in energy tariff, higher raw material prices as well as steep hike in inflation squeezed gross profit by 0.29 percent and drove down GP margin to 7.5 percent in 2023. Distribution expense magnified by 63 percent year-on-year in 2023 on account of higher commission on export sales, transportation & octroi charges as well higher freight charges incurred during the year. Administrative expense also surged by 19 percent year-on-year in 2023 due to higher payroll expense as number of employees surged from 1191 in 2022 to 1306 in 2023. Lower provisioning for WWF and WPPF trimmed down other expense by 38 percent in 2023. Other income also ticked down by 22 percent year-on-year in 2023 due to high-base effect as PRWM sold its investment designated at FVTPL in 2022. Operating profit tapered off by 21.36 percent in 2023 with OP margin sliding down to 4 percent. Finance cost surged by 103.5 percent year-on-year in 2023 due to higher short-term and long-term borrowings. As a consequence, net profit slid by 56.24 percent year-on-year in 2023 to clock in at Rs.153.13 million with EPS of Rs.8.29 and NP margin of 1 percent,

Recent Performance (1QFY24)

PRWM’s closed the first quarter of FY24 by following the same performance pattern exhibited in the last two years. Net sales jumped up by 20 percent year-on-year in 1QFY24 based on both improved volume and prices. Cost of sales spiked by 22 percent year-on-year in 1QFY24 resulting in meager 5 percent rise in its gross profit with GP margin falling down from 8.1 percent in 1QFY23 to 7.1 percent in 1QFY24. Distribution expense plummeted by 6 percent in 1QFY24. Conversely, administrative expense marched up by 17 percent year-on-year during the period. 55 percent lower other expense may be the consequence of curtailed profit-related provisioning. Conversely, other income magnified by 135 percent year-on-year supposedly due to higher exchange gain. Operating profit grew by 19 percent year-on-year in 1QFY24 with OP margin slightly falling from 4.4 percent. Finance cost surged by 120 percent year-on-year in 1QFY24 due to higher discount rate and increased short-term borrowings. As a result, bottomline slid by 83 percent year-on-year in 1QFY24 to clock in at Rs.10.14 million. EPS also marched down from Rs.3.25 in 1QFY23 to Rs.0.55 in 1QFY24. NP margin also shrank from 1.6 percent in 1QFY23 to 0.2 percent in 1QFY24.

Future Outlook

PRWM’s increasing focus on export sales will continue to drive up its revenue. However, slower demand for finished goods as well as rising cost has greatly squeezed the company’s margins. With recent appreciation of Pak Rupee, PRWM’s margins and profitability will shrink further in the coming quarter.