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, 2023, TOWL has a total of 17 million shares outstanding which are held by 859 shareholders. Around 84.13 percent of the company’s shares are held by its Directors, CEO and sponsors followed by local general public holding 9.83 percent shares of TOWL. Insurance companies account for 3.85 percent shares of TOWL. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-23)
Except for a slide in 2020, TOWL’s top line and bottom line have been posting year-on-year growth since 2018. The margins posted sound growth in 2019 followed by a plunge in 2020. In 2021, the margins greatly recovered followed by a marginal down tick in 2022. In 2023, TOWL’s margins registered whopping growth to reach their highest levels (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, TOWL’s top line boasted a staggering growth of 47.68 percent year-on-year. 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 bliss for the company and greatly improved its gross margin. During 2019, cost of sales grew by 34.64 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 122.10 percent year-on-year with GP margin tremendously growing from 14.91 percent in 2018 to 22.43 percent in 2019. Distribution expense rose by 31.33 percent year-on-year in 2019 on account of higher export freight charges, export surcharge, clearing and forwarding as well as traveling charges. Administrative expense also grew by 9.44 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 2019in order to meet additional demand. Other expense rose by 59.41 percent year-on-year in 2019 due to higher provisioning for WPPF. On the contrary, other income plunged by 96.40 percent year-on-year in 2019 due to high-base effect 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 top line posted year-on-year drop of 1.98 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 production losses and idle capacity due to lock-down which increased its fixed cost. The top line 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 2.89 percent year-on-year in 2020 which reduced the gross profit by 18.79 percent year-on-year with GP margin sliding down to 18.58 percent. As sales volume nosedived, so did the distribution expense because of lower freight, clearing and forwarding and traveling charges coupled with lesser export development surcharge. Administrative expense mounted by 17.67 percent year-on-year in 2020 primarily due to higher payroll expense due to rising inflation. Lesser provisioning for WPPF drove other expense down by 27.21 percent year-on-year in 2020; however, other income staggeringly grew by 298.56 percent due to remarkable profit earned on saving account. Operating profit tapered off by 29.78 percent year-on-year in 2020 with OP margin dropping to 8.52 percent. Finance cost contracted by 1.46 percent year-on-year in 2020 due to lesser bank charges. Net income plummeted by 31.49 percent year-on-year in 2020 with NP margin inching down to 7.31 percent. EPS also fell to Rs. 16.23 in 2020.
The company came back even stronger in 2021 with 38.40 percent year-on-year surge in its top line. 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 as well as new knitting and dyeing machines, the company was able to keep a check on its cost of sales which grew by 33.79 percent year-on-year in 2021. Gross profit improved by 58.59 percent year-on-year in 2021 with GP margin climbing up to 21.3 percent. Distribution and administrative expense mounted by 25.63 percent and 20.10 percent respectively in 2021 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 provisioning for WPPF pushed other expense up by 82.79 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 92.86 percent year-on-year rise in 2021 with OP margin bouncing back to 11.87 percent – the level seen in 2019. Finance cost dropped by 14.78 percent year-on-year in 2021 due to lower interest charges on WPPF. Net profit grew by 101.69 percent year-on-year in 2021 to clock in at Rs.556.456 million with NP margin clocking in at 10.66 percent. EPS jumped up to Rs.32.73 in 2021.
2022 brought about the highest year-on-year growth of 96.10 percent in TOWL’s top line due to rise in sales orders coupled with the impact of Pak Rupee depreciation. However, elevated inflation drove the cost of sales up by 98.36 percent year-on-year in 2022. This trimmed the GP margin down to 20.38 percent. Increase in sales volume coupled with higher ocean freight charges pushed the distribution expense by 158.52 percent year-on-year in 2022. Administrative expense also ticked up by 16.71 percent year-on-year in 2022 due to higher payroll expense coupled with higher allowance for expected credit losses. Other expense grew by 124.78 percent year-on-year in 2022 due to higher provisioning for WPPF. Other income also posted a handsome growth of 67.50 percent year-on-year in 2022 mainly due to higher profit on saving account. Operating profit multiplied by 94.99 percent year-on-year in 2022 with OP margin staying afloat at 11.8 percent. 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.1063.048 million with NP margin of 10.38 percent. EPS ascended to Rs.62.53 in 2022.
Global recession led to reduction in export orders during 2023; however, unprecedented level of exchange gain guarded TOWL’s top line which posted 8.29 percent year-on-year rise in 2023. Local sales did quite well in 2023, however, still stood at 1 percent of the net sales of TOWL in 2023 versus 0.14 percent share in net sales mix in 2022. Lesser orders resulted in low capacity utilization and low production which trimmed down cost of sales by 2.54 percent year-on-year in 2023. This translated into 50.58 percent year-on-year growth in gross profit with GP margin rising to its highest level of 28.35 percent in 2023. Distribution expense plunged by 41.76 percent in 2023 due to curtailed sales volume which pushed down export freight and export development surcharge. Administrative expense surged by 9.64 percent year-on-year due to high inflation which drove up payroll expense in 2023 while headcount was reduced from 1892 employees in 2022 to 1736 employees in 2023. Other expense grew by 114.18 percent year-on-year in 2023 on account of higher provisioning for WPPF. Other expense was counterbalanced by a tremendous 696.87 percent year-on-year rise in other income in 2023 which was the result of hefty profit earned on saving accounts and mutual funds investment. Operating profit grew by 118 percent year-on-year in 2023 with OP margin soaring to 23.76 percent. Finance cost escalated by 131.61 percent year-on-year in 2023 on the back of higher discount rate while borrowings greatly reduced during the year. Lesser borrowings are evident from TOWL’s gearing ratio dropping from 12.95 percent in 2022 to 0.14 percent in 2023. Net profit surged by 124.67 percent in 2023 to clock in at Rs.2388.337 million with EPS of Rs.140.49 and NP margin of 21.54 percent.
Recent Performance (9MFY24)
During 9MFY24, TOWL’s top line progressed by 22 percent year-on-year. During the period, stability was seen in the exchange parity. Stronger rupee as well as elevated input cost including gas and electricity prices resulted in shrunken GP margin of 12.59 percent during 9MFY24 versus GP margin of 28.18 percent recorded during the same period last year. Distribution expense inched up by 6.62 percent and administrative expense by 30 percent during 9MFY24 due to inflationary impact and an increase in minimum wage rate. Other expense dwindled by 43.37 percent during the period on the back of lower profit-related provisioning. Conversely, other income improved by 62.68 percent during 9MFY24 on account of improved profitability on saving accounts and investments. Operating profit fell by 49.55 percent during 9MFY24 with OP margin shrinking to 9.67 percent versus OP margin of 23.41 percent recorded during 9MFY23. Finance cost slid by 81.4 percent during the period under consideration. Introduction of slabs for super tax also proved to detrimental for the company and resulted in 48.36 percent surge in the tax expense during 9MFY24. Net profit plummeted by 57.23 percent to clock in at Rs.663.955 million during 9MFY24 with EPS of Rs.39.06 versus EPS of Rs.91.32 recorded during 9MFY23. NP margin also drastically fell from 20.57 percent during 9MFY23 to 7.2 percent in 9MFY24.
Future Outlook
The company plans to expand its product portfolio and geographical outreach to garner greater export orders. Political unrest in Bangladesh, a key player in the textile market may also result in improved export orders for Pakistan. Signs of economic recovery in the local economy including a down tick in inflation and discount rate may pave way for the company to invest in new technology to elevate its quality and efficiency. While stronger Rupee may take its toll on the margins, the company can offset the impact of unfavorable currency movement by shifting to high margin products.
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