Shadab Textile Mills Limited

Shadab Textile Mills Limited (PSX: SHDT) was incorporated in Pakistan as a public limited company in 1979. The principal activity of the company is manufacturing, buying, selling, and dealing in all kinds of yarn.

Pattern of Shareholding

As of June 30, 2023, SHDT has a total of 16.6 million shares outstanding which 485 shareholders hold. The local general public has the highest stake of 48.044 percent in the company followed by Directors, CEO, their spouses, and minor children holding 46.96 percent shares. NIT & ICP accounts for 3.14 percent shares of SHDT while joint stock companies hold 1.796 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a year-on-year decline in 2020, SHDT’s topline has registered growth over the period under consideration. Its bottom line plunged in 2020 and 2023 with a net loss in the latter year. SHDT’s margins which posted significant improvement in 2019, slid back in 2020. This was followed by a whopping rebound in 2021. In the subsequent two years, the margins considerably shrank to record their lowest values in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SHDT’s net sales grew by 23.86 percent. This was on account of improved sales volume, better yarn prices, and continuous supply of electricity to the textile sector. The government also notified the reduced electricity rate of 7.5 cents/kwh for zero-rated textile industrial consumers. This greatly reduced the energy cost. The overall cost of sales surged by 20.36 percent in 2019 on the back of higher prices of raw materials coupled with Pak Rupee depreciation. Gross profit strengthened by 100.38 percent in 2019 with GP margin climbing up to 7.07 percent from 4.37 percent in 2018. Distribution expense escalated by 28.98 percent in 2019 on account of higher freight & other expenses incurred on local sales. Administrative expense multiplied by 27.8 percent in 2019 primarily due to higher payroll expense on account of inflation and also because SHDT expanded its workforce from 1084 employees in 2018 to 1092 employees in 2019. Other expenses magnified by 188.27 percent in 2019 due to higher provisioning done for WWF and WPPF. Conversely, other income slid by 35.49 percent in 2019 due to lower gains earned on the sale of operating fixed assets in 2019 and also because no office rent was received and no balances were written off during the year. SHDT’s operating profit improved by 182.82 percent in 2019 with OP margin clocking in at 4.22 percent in 2019 versus 1.85 percent in 2018. Finance costs escalated by 34.29 percent in 2019 which was on account of a higher discount rate as the company considerably reduced its outstanding borrowings during the year. This is evident from the gearing ratio of 8 percent recorded by SHDT in 2019 versus the gearing ratio of 29 percent posted in 2018. Net profit picked up by 215.93 percent in 2019 to clock in at Rs.78.045 million with EPS of Rs.24.31 versus EPS of Rs.8.23 recorded in 2018. NP margin also improved from 1.09 in 2018 to 2.77 percent in 2019.

In 2020, SHDT’s topline contracted by 18.59 percent on account of the outbreak of COVID-19. The company’s production was reduced was 14.65 percent in 2020 to clock in at 16.287 kgs due to the lockdown imposed during the year (see the graph of production capacity versus volume). The high cost of raw materials coupled with the Pak Rupee depreciation drove up the cost of sales by 17.37 percent in 2020. This resulted in 34.6 percent thinner gross profit recorded in 2020 with GP margin inching down to 5.68 percent. Lower sales volume translated into lesser freight charges. This drove down distribution expenses by 6.19 percent in 2020. Administrative expenses ticked up by 6.46 percent in 2020 due to higher payroll expenses. This was despite the fact that the workforce was considerably streamlined to include 1069 employees in 2020. Lower profit-related provisioning resulted in a 37.72 percent decline in other expenses in 2020. Conversely, other income posted a whopping 1008.73 percent rise in 2020 due to hefty profit earned on bank deposits. Operating profit tapered off by 37.74 percent in 2020 with OP margin moving down to 3.23 percent. Finance cost posted a paltry growth of 4.53 percent in 2020 due to higher short-term borrowings. Net profit narrowed down by 47.66 percent to clock in at Rs.40.85 million in 2020 with EPS of Rs.3.27 and NP margin of 1.78 percent.

In 2021, SHDT’s net sales recorded a robust comeback with year-on-year growth of 44.3 percent. This was the result of improved demand from the value-added textile sector post-global pandemic coupled with better sales prices of yarn. Capacity utilization was recorded at 98.92 percent in 2021 with actual production clocking in at 20.017 kgs, up 22.90 percent year-on-year. While raw materials prices were on the higher side, local currency remained relatively stable compared to last year. This resulted in 194.14 percent higher gross profit recorded in 2021 with GP margin attaining its highest level of 11.58 percent. Higher sales volume drove distribution expenses up by 29.62 percent in 2021. Administrative expenses also surged by 33.71 percent in 2021 due to higher payroll expenses as the workforce was expanded to incorporate a total of 1194 employees. Other expenses mounted by 256.78 percent in 2021 on the back of higher profit-related provisioning. Conversely, other income slid by 55.97 percent in 2021 due to lower gains earned on bank deposits due to monetary easing and also because the company en-cashed its TDR worth Rs.236 million in 2021. Operating profit strengthened by 267.83 percent in 2021 with OP margin climbing up to 8.23 percent. Finance costs mounted by 206.54 percent in 2021 due to a long-term loan worth Rs.328.677 million obtained during the year under the TERF scheme for the import of gas generators. SHDT also acquired greater short-term borrowings during the year to meet its working capital requirements. Net profit progressed by 317.73 percent in 2021 to clock in at Rs.170.64 million with EPS of Rs.10.28 and NP margin of 5.16 percent.

In 2022, SHDT’s topline boasted the highest year-on-year growth of 60.28 percent. This was the consequence of higher demand and improved prices. Production stood at 22.998 million kgs, up 14.89 percent year-on-year. Despite upward price revision, elevated raw material prices, conversion cost, and Pak Rupee depreciation drove down SHDT’s GP margin to 9.68 percent in 2022. Gross profit in absolute terms grew by 34 percent in 2022. Higher freight on local sales drove distribution expenses up by 41.58 percent in 2022. Higher payroll expenses on account of inflationary pressure pushed up administrative expenses by 26.68 percent in 2022. Number of employees was squeezed to 1173 during the year. Higher profit-related provisioning drove up other expenses by 22.13 percent in 2022. Other income couldn’t support either as it slid by 42.23 percent in 2022 on account of the thin profit earned on bank deposits. Operating profit enhanced by 33.83 percent in 2022, however, OP margin moved down to 6.87 percent. 119.69 percent higher finance cost incurred by SHDT in 2022 was due to an elevated discount rate coupled with higher short-term borrowings to meet working capital requirements. Higher finance costs together with the imposition of super tax resulted in the bottom line growth of 14.42 percent in 2022. SHDT’s net profit was recorded at Rs.195.255 million in 2022 with EPS of Rs.11.76 and NP margin of 3.69 percent.

SHDT’s net sales ticked up by 12.56 percent in 2023. While textile demand was suppressed across the world due to the global recession, topline growth was the result of higher prices. In accordance with shrunken demand, the company produced 21.322 kg of yarn, down 7.29 percent year-on-year. This translated into capacity utilization of 93.96 percent in 2023. Lesser capacity utilization resulted in low absorption of fixed cost. This culminated in a 64 percent lower gross profit in 2023 with the GP margin hitting its lowest level of 3.1 percent. Lower sales volume translated into a 79.19 percent decline in distribution expense in 2023. Conversely, administrative expenses inched up by 12.83 percent in 2023 due to higher payroll expenses despite rationalizing the workforce down to 1125 employees in 2023. The company didn’t book any profit-related provisioning during the year. Lower gain earned on the disposal of fixed assets also pushed down other income by 58.15 percent in 2023. SHDT’s operating profit registered an 87.79 percent year-on-year plunge in 2023 with OP margin moving down to 0.75 percent. Finance costs enlarged by 91.19 percent in 2023 due to monetary tightening. SHDT incurred a net loss of Rs.107.742 million in 2023 with a loss per share of Rs.6.49.

Recent Performance (9MFY24)

SHDT recorded 22.36 percent year-on-year growth in its topline during 9MFY24. Overall demand remained suppressed due to higher prices of raw materials, Pak Rupee depreciation, and elevated energy tariffs. However, during the 2nd and 3rd quarters of FY24, Pak Rupee began to gain momentum. The company increased the prices of its products to absorb high costs. This resulted in 111.94 percent higher gross profit in 9MFY24 with GP margin moving up from 3.04 percent in 9MFY23 to 5.26 percent in 9MFY24. Distribution expenses shrank by 69.54 percent in 9MFY24 while administrative expenses also posted a paltry 0.54 percent uptick during the period. Profit-related provisioning stood at Rs.5.966 million in 9MFY24. Other income enhanced by 351 percent during 9MFY24 supposedly due to higher profit on bank deposits. Operating profit magnified by 532.84 percent during 9MFY24 with OP margin clocking in at 3.36 percent versus OP margin of 0.65 percent recorded in 9MFY23. Finance costs tumbled by 2.57 percent during 9MFY24 due to lower outstanding borrowings. SHDT recorded a net profit of Rs.77.416 million in 9MFY24 versus a net loss of Rs.76.557 million posted during the same period last year. EPS stood at Rs.4.66 versus a loss per share of Rs.4.61 in 9MFY23. SHDT’s NP margin clocked in at 1.46 percent in 9MFY24.

Future Outlook

Stability in the value of local currency off-late and improved economic fundamentals which include controlled inflation and the onset of monetary easing cycle are the positive factors for SHDT and for the overall economy. Political upheaval in the neighboring country Bangladesh may pave the way for improved textile exports of Pakistan. SHDT should also diversify its geographical market to enhance its margins and hedge against fluctuations in the value of Pak Rupee.