One of the big names in textile composites, Masood Textile Mills Limited (PSX: MSOT) happens to be an enormous exporter of finished products from Pakistan. The firm has a market capitalisation of over Rs 10.4 billion. Masood Textile operates in three segments - Spinning, Knitting, and Processing & Garments.
The company focuses on finished goods, producing all sorts of apparel, including sportswear, undergarments, t-shirts, etc. Its international clientele is a who's who of big names in global fashion and retail - Reebok, Adidas, Tommy Hilfiger, Abercrombie & Fitch, and Aeropostale, to name just a few. The firm also claims to be the number one exporter of underwear in Pakistan. In FY15, around 24.4 percent of the company's ordinary shareholding was acquired by a Chinese firm, Shanghai Challenge Textile Co Ltd, through a privately negotiated deal.
Prior Performance
Masood Textile has been the picture of growth where top line is concerned. However, the firm's gross profits haven't moved in the past three years, meaning profitability is getting worse; the graph indicates how the firm's gross and net margins have been declining each year. The recent year ended FY15 was particularly problematic for the company - although sales growth was an admirable 11 percent year-on-year, net profit fell by 12 percent. The firm cites an increase in cost of production, including increase in minimum wages and a higher PKR-USD parity weighing down on the firm. Both of these factors are particularly problematic for a firm like Masood Textile; firstly, the value-added segment of the textile industry is more labour-intensive, and thus a rise in minimum wage is going to impact its costs more. Secondly, the firm is highly export-oriented; Masood Textile's exports account for over 84 percent of its sales, as of FY15. And this number is a marked improvement from before: in FY12, exports were 95 percent of total sales.
That being said, Masood Textile's Directors' Report mentions that the company has milked the GSP Plus status, increasing its share of exports to the EU without reducing its volumes to Canada and the US. This explains the higher sales growth, yet the profitability is still struggling. Regarding the higher domestic sales, it seems that the company is following the prudential strategy of growing its share in the domestic market, in light of the prevalent uncertainty surrounding international markets.
As mentioned earlier, Masood Textile focuses on its Processing & Garments segment, which makes up almost 97 percent of its revenues. But its margins have been declining, and when compared with industry leader Gul Ahmed, it is short by a whopping 5 percentage points (Gul Ahmed's 19 percent Processing segment's gross margin as of FY15 versus Masood Textile's 14 percent in the same period).
Recent Performance
Masood Textile is not having a good year. Sales are down 17 percent year-on-year, while gross profit was down by almost the same. Gross margins were unmoved and the bottom line saw a fall of 14 percent over last year. This is the company's first decline in revenues during the last eight years.
It seems the harsh conditions of the textile industry have finally hit the company. In lieu of competitive international prices, energy constraints, and dwindling demand from the EU and China, the company has failed to keep pace in spite of the Rupee's depreciation in August, the electricity tariff cut, and the (initially) depressed cotton prices.
That being said, the bottom line figure could have been much worse. A much lower finance cost on the back of decades-low interest rate gave a bit of a cushion to a tumbling NPAT.
Outlook
Textile exporters know how tough it is to operate in Pakistan. The high cost of doing business, complemented with energy deficiency and a still overvalued Rupee, makes exports unviable. Most firms have liquidity problems, owing to pending refunds from the government.
All this is happening at a time when the international scene has been captured by cheaply made products from Bangladesh or India. To make matters worse, the short cotton crop in Pakistan has left most of the industry reliant on imports.
There have been some positive developments as of late; as of March, textile mills have been getting RLNG and their energy needs are being fulfilled, while the electricity tariff was also lowered recently.
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