Maqbool Textile Mills Limited

Maqbool Textile Mills Limited (PSX: MQTM) was incorporated in Pakistan as a public limited company in 1989. The principal activity of the company is the manufacturing and sale of yarn, cotton seed and cotton lint.

Pattern of Shareholding

As of June 30, 2023, MQTM has a total of 18.432 million shares outstanding which are held by 572 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 55.31 percent in the company followed by local general public holding 34.83 percent shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

During the period under consideration, MQTM’s topline and bottomline posted a plunge twice i.e. in 2020 and 2023 with latter being more grievous as it translated into net loss. The company’s margins have been oscillating over the period to reach their optimum level in 2022 only to slide back in the subsequent year (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, MQTM’s topline grew by 11 percent year-on-year. During the year, the company enhanced its capacity from 70,440 spindles in 2018 to 81,192 spindles in 2019. Improved sales volume coupled with upward price revision and operational efficiency achieved by the installation of modern machinery during the year culminated into 30 percent year-on-year rise in MQTM’s gross profit in 2019 with its GP margin rising up to 8.3 percent from 7.1 percent in 2018. Distribution expense slid by 12 percent year-on-year in 2019 due to lower export expenses as MQTM’s export sales took a hit in 2019 on account of global slowdown. The company also incurred lesser export development surcharge during the year. Conversely, administrative expense hiked by 21 percent year-on-year in 2019 as the company hired more employees to put into operation the newly installed capacity. This took the human resource count from 1522 in 2018 to 1561 in 2019. Other expense mounted by 1119 percent in 2019 due to loss incurred on the sale of fixed assets as well as higher profit related provisioning booked during the year. Other expense was conveniently offset by 44 percent rise in other income as the company recorded exchange gain on its export sales. Operating profit escalated by 40 percent year-on-year in 2019 with OP margin climbing up to 5.3 percent versus 4.2 percent in the previous year. Finance cost surged by 35 percent year-on-year in 2019 on account of high discount rate as well as increased borrowings which primarily included running finance to meet working capital requirements and long-term financing to fund its expansion projects. MQTM’s bottomline grew by 33 percent year-on-year in 2019 to clock in at Rs.72.84 million with EPS of Rs.4.34 versus EPS of Rs.3.26 in 2018. NP margin also inched up from 1 percent in 2018 to 1.2 percent in 2019.

2020 was a challenging year for the local as well as global economies as COVID-19 resulted in lockdown which severely restricted the economic activity. MQTM’s topline also succumbed to external vulnerabilities and plummeted by 6 percent year-on-year in 2020 due to reduced demand and suspension of production activities during the lockdown period. As the demand of CVC yarn drastically dropped in 2020, the company changed its production and sales mix which required addition on new machinery. During 2020, the total number of spindles increased to 82,224. This helped company to somehow dilute the impact of the global pandemic on its sales. Cost of sales declined by 9 percent during the year, resulting in 20 percent improvement in gross profit with GP margin mounting to 10.6 percent. Distribution cost dropped by 15 percent year-on-year in 2020 due to lower sales commission, freight and export expense as export sales further eroded due to restriction on the movement of goods and people across borders. Administrative expense enlarged by 11 percent in 2020 due to higher payroll expense despite the fact that the number of employees dipped to 1519 in 2020. Lower profit related provisioning and no loss incurred on the sale of fixed assets in 2020 drove other expense down by 49 percent in 2020. Absence of exchange gain and warehouse rental income resulted in 98 percent reduction in other income in 2020. Operating profit inched up by 19 percent in 2020 with OP margin rising up to 6.7 percent. Finance cost spiraled by 53 percent in 2020 due to higher discount rate for the most part of the year as well as increased borrowings. During the year, MQTM also obtained Rs.86 million under TERF scheme of SBP for the addition of new machinery. As a consequence, the company’s bottomline diminished by 64 percent year-on-year to clock in at Rs.26.39 million with EPS of Rs.1.57 and NP margin of 0.5 percent.

2021 proved to be quite cheering for MQTM as its topline expanded by 26 percent year-on-year mainly on account of robust demand from the international market despite COVID-19 related challenges. As many economies of the world were still in the lockdown state, Pakistani textile industry witnessed huge demand influx from different geographical markets. Surge in the cost of raw materials resulted in the company’s GP margin slipping to 9.8 percent despite 16 percent fatter gross profit recorded in 2021. Distribution expense posted an uptick of 5 percent in 2021 mainly on account of higher freight and forwarding charges incurred during the year. Administrative expense swelled by 25 percent in 2021 as a result of enlarged payroll expense as MQTM’s workforce witnessed massive expansion to clock in at 1669 employees. As the company disposed off its fixed assets at a gain, its other income multiplied by 615 percent in 2021, however, it was nullified by 18 percent escalation in other expense due to higher profit related provisioning. Operating profit picked up by 16 percent in 2021 but OP margin declined to clock in at 6,2 percent. Finance cost gave some breather as it shrank by 29 percent in 2021 on account of monetary easing by the SBP as well as considerable streamlining of its short-term loan during the year. MQTM’s net profit mounted by 492 percent in 2021 to clock in at Rs.156.27 million with EPS of Rs.9.08 and a healthier NP margin of 2.1 percent.

MQTM’s topline continued its growth trajectory in 2022 and registered 41 percent year-on-year rise. This was on account of improved sales volume as well as better pricing and sales mix. Effective capacity utilization and operational efficiency achieved by the installation of state-of-the-art machinery and equipments resulted in cost reduction. As a consequence, gross profit grew up by 59 percent in 2022 with GP margin reaching its optimum level of 11.1 percent. Distribution expense posted a massive 36 percent escalation in 2022 due to higher sales commission and export expenses. Administrative expense also spiraled by 45 percent in 2022 as MQTM’s workforce reached another milestone of 1715 employees which amplified payroll expense. Tremendous exchange gain earned during the year drove other income up by 580 percent. This easily counterbalanced the effect of 11 percent higher other expense incurred on the back of increased provisioning. Operating profit turned out to be 78 percent bigger in 2022 with OP margin climbing up to 7.9 percent – the highest among all the years under consideration. Finance cost surged by 68 percent in 2022 on account of monetary tightening as well as significantly higher short-term borrowings obtained during the year. The effect of super tax imposed during the year resulted in 103 percent higher tax charged during the year. MQTM’s net profit registered 72 percent enhancement in 2022 to clock in at Rs.268.51 million with EPS of Rs.14.57 and NP margin of 2.6 percent.

Unfavorable socio-economic backdrop of the country took its toll on the net sales of MQTM which dropped by 5 percent year-on-year in 2023. Dwindling foreign exchange reserves resulted in import restrictions, making the company devoid of essential raw materials cotton, polyester staple fiber and viscose staple fiber, resulting in reduced capacity utilization. Pak Rupee depreciation and withdrawal of subsidy on energy prices resulted in higher per unit cost. Overall cost of sales slid by 2 percent during the year as fixed overhead couldn’t be completely absorbed, resulting in 30 percent shrinkage in the company’s gross profit with GP margin ticking down to 8.2 percent. Distribution expense shrank by 39 percent year-on-year in 2023 on account of lower sales volume which lowered export expense, commission and freight charges. Administrative expense enlarged by 14 percent in 2023 which was the effect of high inflation. Drastic decline in exchange gain during the year resulted in 35 percent thinner other income recorded during the year. The company didn’t book any provisioning on WWF and WPPF in 2023. As a consequence, operating profit eroded by 42 percent in 2023 with OP margin diving down to 4.8 percent. 102 percent spike in finance cost during the year proved to be the last nail in the coffin and translated into net loss of Rs.249.53 million in 2023 with loss per share of Rs.13.54.

Recent Performance (1QFY24)

After a tumultuous year, MQTM seems poised for a positive turnaround in 2024. MQTM registered 18 percent year-on-year rise in its topline in 1QFY24 which came on the back of improved sales volume and better pricing. While the soaring electricity costs have the potential to elevate MQTM’s cost of sales, this impact has been largely mitigated by the favorable combination of low yarn prices in the global market and stability in the value of the Pakistani Rupee. As a consequence, the company’s gross profit multiplied by 141 percent year-on-year in 1QFY24 with GP margin ascending to 11.2 percent from 5.5 percent during the same period last year. Distribution and administrative expense grew by 20 percent and 43 percent respectively in 1QFY24 as an outcome of high inflation as well as increased operations and higher production volumes. Operating profit multiplied by 271 percent year-on-year in 1QFY24 with OP margin of 7.5 percent, up from 2.4 percent in 1QFY23. Finance cost escalated by 59 percent during the period which was the upshot of unprecedented level of discount rate. In the face of unfavorable influences stemming from a grim political and economic environment, MQTM excelled and managed to achieve a positive bottom line of Rs.40.24 million in 1QFY24 versus net loss of Rs.74.88 million in 1QFY23. EPS for the period stood at Rs.2.18 versus loss per share of Rs.4.06 during the same period last year. NP margin clocked in at 1.3 percent during 1QFY24.

Future Outlook

The lingering impact of the global recession continues to cast a substantial influence on the overall economy, including the country’s textile industry, with the possibility of persisting for an extended period. On the positive note, a remarkable enhancement in local cotton harvest has led to decreased cotton prices, potentially advantageous for local producers. Nevertheless, elevated power costs, unpredictable natural gas availability, and increased financial expenses will persistently diminish profit margins. Additionally, an anticipated global growth slowdown and diminishing disposable income in the local market will further dampen demand.