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, 2024, PRWM has a total of 18.48 million shares outstanding which are held by 547 shareholders. Directors, CEO, their spouses, 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. The local general public accounts for 15.35 percent of the shares of the company. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2019-23)

Barring a year-on-year drop in 2020, PRWM’s topline has been inclining since 2019. Conversely, its bottom line grew only in 2019 and 2021. Its margins significantly improved in 2019 followed by a dip in 2020. In 2021, PRWM’s margins attained their optimum level 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 a 14.48 percent year-on-year rise. This was attributable to a combination of Pak Rupee depreciation, upward price revision, and increased sales volume. To meet the growing demand, the company operated its plant at 79 percent capacity in 2019 versus 72 percent capacity utilization recorded in 2018. Total capacity also increased during the year (see the graph of plant capacity & production). An increase in the price per meter sold as well as weaker local currency allowed the company to attain a 98.8 percent higher gross profit in 2019 with GP margin picking up from 5.72 percent in 2018 to 9.94 percent in 2019. Distribution expense spiked by 27.82 percent in 2019 which largely included sales commission paid on local and export sales. Administrative expenses inched up by 18.68 percent in 2019 on account of higher payroll expenses despite the fact that the 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 a 23.33 percent hike in other expenses in 2019. Other income slid by 5.37 percent in 2019 as unlike last year there was no dividend income earned on for-sale investments as well as no lower exchange gain recorded on debtors. Despite a hike in operating expenses, PRWM was able to post a 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 costs escalated by 25.66 percent in 2019 on account of the 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 EPS of Rs.2.96 posted in 2018. NP margin also tremendously grew from 0.88 percent in 2018 to 2.95 percent in 2019.

In 2020, PRWM’s net sales slumped by 15.38 percent on account of a lesser number of looms operational during the year due to the lockdown imposed as COVID-19 protocol. Total capacity and capacity utilization also dwindled during the year. Cost of sales ticked down by 14.31 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 expenses shrank by 0.25 percent in 2020 due to the contraction of the workforce to 1077 employees in 2020. Other expenses dropped by 37.41 percent in 2020 due to a 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 a gain on the sale of investments. Operating profit narrowed down by 26.74 percent in 2020 with OP margin shrinking to 6.1 percent. Finance costs contracted by 34.52 percent in 2020 due to a 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 the company achieve cost efficiency. This is evident by the fact that PRWM’s gross profit expanded by 120.77 percent in 2021 with GP margin jumping up to 14.34 percent. Distribution expense surged by 47.89 percent year-on-year in 2021 on account of higher ocean freight charges as well as increased volume. Administrative expenses 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 expenses by 92.81 percent in 2021. Conversely, other income slid by 27.16 percent on account of the high-base effect due to the gain on the 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 costs eroded by 25 percent in 2021 due to lower discount rates 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 314.57 percent in 2021 to clock in at Rs.641.58 million with EPS of Rs.34.72 and NP margin of 7.87 percent – the highest among all the years under consideration.

PRWM’s topline continued to enlarge in 2022 registering 57.79 percent growth on account of higher sales volume and better pricing; however, it couldn’t trickle down to produce a healthier bottom line on account of a variety of factors. Firstly, the cost of sales spiked by 68.52 percent in 2022 on account of a massive hike in energy, labor, and raw material charges due to high inflation as well as the Pak Rupee depreciation. Gross profit slipped by 6.29 percent in 2022 with GP margin shrinking to 8.52 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 52.27 percent in 2022 due to a momentous hike in ocean freight and forwarding charges due to increased volume as well as a spike in the prices of POL products. Higher commissions paid particularly on local sales also pushed up the distribution expense in 2022. Administrative expenses registered a 15.33 percent growth in 2022 due to higher payroll expenses as well as directors’ remuneration. Other expenses 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 17.68 percent in 2022. As a consequence, operating profit shed its value by 17.89 percent year-on-year in 2022 with OP margin slipping to 5.77 percent. Finance cost magnified by 31.86 percent in 2022 due to a higher discount rate coupled with increased short-term borrowings particularly running finance and foreign currency loans. Net profit tumbled by 45.46 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, a 15.3 percent hike in the cost of sales due to an increase in energy tariff, higher raw material prices as well a steep hike in inflation squeezed gross profit by 0.29 percent and drove down GP margin to 7.45 percent in 2023. Distribution expense magnified by 62.84 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. The administrative expense also surged by 18.98 percent year-on-year in 2023 due to higher payroll expenses as the number of employees surged from 1191 in 2022 to 1306 in 2023. Lower provisioning for WWF and WPPF trimmed down other expenses by 38.23 percent in 2023. Other income also ticked down by 22.11 percent year-on-year in 2023 due to the 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 3.98 percent. Finance costs surged by 103.48 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.

PRWM registered topline growth of 27.92 percent in 2024. This came on the back of improved sales volumes as well as a high fabric rate. During the year, the company increased its rated capacity to 91.325 million meters and achieved a capacity utilization of 69 percent. This resulted in the production of 62.729 million meters of fabric. Cost of sales surged by 29.5 percent in 2024 which was mainly driven by exorbitant power tariffs and store and spare cost. Gross profit inched up by 8.2 percent in 2024, however, GP margin fell to 6.3 percent. Distribution expense ticked up by 5.25 percent in 2024 due to higher commissions paid on local sales. Higher salaries and directors’ remuneration drove up administrative expenses by 22.92 percent in 2024. The company squeezed its workforce from 1306 employees in 2023 to 1236 employees in 2024. Other expenses slid by 19.37 percent in 2024 due to lower profit-related provisioning done during the year and gains recognized on forward contracts. Other expense was completely offset by 33.54 percent higher other income recorded during the year which was the result of dividend income from investments disposed off during the year. PRWM recorded a 9 percent higher operating profit in 2024, however, OP margin slipped to 3.39 percent. Finance costs mounted by 71.13 percent in 2024 due to a higher discount rate. The gearing ratio plunged from 63.14 percent in 2023 to 56.24 percent in 2024. The company recorded a net profit of Rs.86.65 million in 2024, down 43.41 percent year-on-year. This translated into EPS of Rs. 4.69 and an NP margin of 0.462 percent.

Recent Performance (1QFY25)

During 1QFY25, PRWM’s topline grew by 14.93 percent mainly on the back of improved prices. Despite increasing its prices, the company couldn’t offset the impact of elevated energy prices. This resulted in a decline in GP margin from 7.11 percent in 1QFY24 to 6.61 percent in 1QFY25. In absolute terms, gross profit ticked up by 6.87 percent in 1QFY25. Distribution expense mounted by 30.81 percent in 1QFY25. The main components of this account are commission, freight & octroi charges. Administrative expenses ticked up by only 4.63 percent in 1QFY25. Higher profit-related provisioning resulted in a 32.52 percent spike in other expenses in 1QFY25. Other income slid by 83.37 in 1QFY25 which may be because of lower dividend income as the company disposed of a significant portion of its investments in the previous year. Operating profit shrank by 11.63 percent in 1QFY25 with OP margin sliding down from 4.32 percent in 1QFY24 to 3.32 percent in 1QFY25. Finance costs tumbled by 33.11 percent in 1QFY25 due to a lower discount rate. Lower finance costs greatly buttressed the bottom line which strengthened by 99.45 percent in 1QFY25 to clock in at Rs.20.23 million with EPS of Rs.1.09 versus EPS of Rs.0.55 recorded during the same period last year. NP margin also ticked up from 0.23 percent in 1QFY24 to 0.4 percent in 1QFY25.

Future Outlook

PRWM’s increasing focus on export sales will continue to drive up its revenue. However, frail demand from value-added sectors as well as rising costs, particularly higher yarn prices and energy tariffs, has greatly squeezed the company’s margins. With the recent appreciation of Pak Rupee, PRWM’s margins and profitability can shrink further. However, the company is adopting cutting and product diversification strategies to stay resilient.