Feroze1888 Mills Limited

Feroze1888 Mills Limited is Pakistan's leading manufacturer and exporter of specialized yarn and terrycloth products. It began its journey in 1970, listing itself on the KSE in 1975. Today, it boasts a market capitalisation of over Rs 22.5 million - the second-largest market cap of any textile company in Pakistan. The company partnered with 1888 Mills (USA) and is well-known for its high quality products in the global market.
Feroze1888 specialises in bath towels, bath robes, and beach towels. It relies heavily on its international customer base, as it exports its products to big retail multinational giants like Wal-Mart Stores, Inc, Target Corporation, Dollar General Corp, Sears Holdings Corp, and J C Penney Company to name a few.
PRIOR PERFORMANCE Feroze1888 has been on an unabated growth course. As can be seen from the graph, the company's sales have been moving in tandem with the aggregate Pakistani towel exports. This is because an enormous portion of the firm's sales are in the form of exports - over 96 percent as of FY14. Thus, any movement in exchange rates and global trends are of great consequence to the company.
Other than top line increment, the company's bottom line growth has not lagged behind either (save for a fall in FY12); net profit shot up from Rs 793 million in FY11 to Rs 1,698 as of FY14 - an impressive growth of 114 percent in just three years.
Also, save for the dip in FY12, Feroze1888 has seen its gross margins and net margins grow. The company has managed to hold its own and boosted gross margins from near 18 percent in FY11 to 21 percent as of the nine months ended FY15. Similarly, net margins have improved from 7 percent in FY11 to a far more impressive 12 percent as of the most recent quarter.
As per the company's annual report, the declining bottom line in FY12 was attributed to an aggravated energy crisis and volatile export demand for yarn, which had "put the management in a fix by hindering a better forecast and difficult negotiations with customers. "
RECENT PERFORMANCE For the nine months ended FY15, Feroze1888 stole a win; although the firm's top line and gross profit reduced by 4 percent and 1 percent year-on-year, the bottom line expanded by a healthy 19 percent.
However, this bottom line improvement can be said to be misleading; operating profit was down 7 percent year-on-year, and the growth in net profit followed from an 81 percent decline in the firm's finance cost, giving a cushion of over Rs 360 million to what should have otherwise been a less impressive bottom line. Nevertheless, one must give credit where credit is due; Feroze1888's debt to equity ratio has improved from 34:66 in FY10 to a far healthier 7:93 as of FY14.
Costs were curtailed largely due to lower cotton prices. However, the benefit of this was passed on to the customers. Nevertheless, the Director's report mentioned that the company was "fortunate to be benefited from organized buying pattern and due to time lag between raw materials price changes and finished products price revision." Scarcity of water, general price increase, and the energy crisis also had their negative impact on the profitability.
New looms became available for production at the start of the current fiscal year and inefficient looms were discarded. This probably improved efficiency and productivity, but perhaps not enough to mitigate the overall negative aspects that plague the textile industry.
OUTLOOK It is unfortunate that not even the value-added end of the textile chain is immune to the gloomy textile industry zeitgeist - international cotton prices remain depressed and an overvalued rupee makes exports uncompetitive.
Feroze1888 Mills Limited is looking at tougher comparisons in the future amid lower profitability. As its domestic market is non-existent, the company has no choice but to weather the storm and keep taking hits to its profitability in the near term.

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Feroze1888 Mills Limited

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Rs (Million)             9MFY15      9MFY14          YoY

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Sales                    12,864      13,402          -4%

Cost of Sales            10,213      10,728          -5%

Gross Profit              2,651       2,674          -1%

GP Margin                   21%         20%    up 60 bps

Administrative Cost         449         407          10%

Distribution Cost           377         324          16%

Other Cost                   12           9          33%

Workers' Funds               99          85          16%

Operating Profit          1,716       1,849          -7%

Finance Cost                 87         450         -81%

Profit Before Taxation    1,630       1,399          17%

Provision for Taxation      134         146          -8%

Profit After Tax          1,495       1,253          19%

NP Margin                   12%          9%   up 230 bps

EPS                        7.62       13.15         -42%

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