Kohinoor Textile Mills

Kohinoor Textile Mills (PSX: KTM) is a renowned name in Pakistan's textile sector and has grown massively from its humble origins. Over the past 30 years, KTM has transformed itself from a small weaving mill to one of Pakistan's largest vertically integrated textile units with more than Rs10 billion in sales supply over 70 million meters of world-class grey, white and dyed fabrics to leading fashion brands and retailers, and an employee headcount of more than 1800 employees.
The weaving division remains the jewel of the company and was originally set up as a small 48 loom project in 1988. It has now expanded to 258 high speed air jet looms sourced from Toyoda and Picanol. The production capacity is 40 million meters of grey fabric per annum some of which is utilised by the dyeing division while the rest is exported to Europe and Asia. The company has also entered the Jacquard and Dobby fabrics segment for local fashion industry and high end clients in the US and Europe.
KTM established its dyeing unit in 2002 with the aim of becoming a vertically integrating unit. The company has now become a market leader in cotton stretch bottom wear for the fashion industry and produces 4 million meters of dyed, white and print fabric every month. KTM has become a key supplier for leading global brands including Zara, Levis and Next. Kohinoor Mills has also set a 30MW IPP in 2003 to become self-reliant in its energy needs
Stock performance and shareholding pattern
Kohinoor Textile Mills has a concentrated shareholding pattern with almost 67 percent residing with the CEO, directors and their spouses. Major shareholders having more than 5 percent shareholding include Aamir Fayyaz Sheikh (CEO) at 24 percent and Asad Fayyaz Sheikh and Ali Fayyaz Sheikh both of whom are directors and own 21 percent of KTM each. KTM's stock has underperformed the benchmark KSE-100 index and the difference has only widened in the previous few months.
Financial performance
KTM has managed to increase its top-line by a decent amount over the past two years but on the flip side gross margins have been decreasing while net margins have shown little improvement as well. Going back further, the company witnessed a sharp plunge in its net margins for FY14, but this was only due to the extra-ordinary income the company realised in FY13 due to the one off gain of Rs824 million gains on the recognition of financial liabilities. Barring that outlier, net margins have remained in 1.5-2.2 percent range for the past five years.
The overall gloomy textile sector conditions have affected the company's export sales which have been steadily decreasing as part of the company's overall revenue mix. The company's exports made up almost 87 percent of the top-line in FY14 which has dropped down to 77 percent in FY18. The top export destination for KTM in FY18 was Asia followed by Europe.
Over the past few years, the company's weaving division has struggled due to tough international competition and consistently rising raw material prices. The margin cushion has been provided by the higher value added dyeing division, which has been able to capitalise on increased sales to international brands that has resulted in higher capacity utilisation as well.
FY18 told the same story with the KTM's weaving division continuing to underperform, which the company blamed on increase in raw material prices and competition. As a lot of raw material used by the textile industry including dyes and fabric are imported, the sharp currency devaluation has resulted in these input costs going up as well. However, the company is bullish on the future and has increased the capacity of the weaving division by 60 percent with the addition of 84 looms. According to the company's annual report for FY18, this increase in capacity was absorbed by the dyeing division, but new export markets have been tapped and the revenue is expected to increase as a result.
KTM has also increased the dyeing division production capacity by 20 percent, which will bode well given the government's priority to increase textile exports. However, during FY18 international demand remained depressed while the increase in raw material and utility costs did no favour to the division's margins.
Recent snapshot 1QFY19
The increased capacity paid off as the company was able to process more orders and the revenue saw a slight increase of 6 percent in 1QFY19 as compared to 1QFY18. KTM received fabric orders that led to full production capacity utilisation till Dec-18. However, the company continued to lament the high cost of energy, which increased the cost of sales by a higher proportion resulting in a fall in gross margins. The finance cost of the company also increased due to the pending tax refunds issue resulting in a strain on liquidity for almost all textile firms. Overall, the company's EPS for 1QFY19 went down by almost half.
Future outlook
With the recent expansion and BMR investment by KTM in both its weaving and dyeing segments, the company is positioned well to take advantage of the host of incentives offered by the government to textile exporters. Some positive triggers that might push the company's margins higher are the government's recent decision to slash duty on imported cotton as well as removal of duties on other input raw materials as well for the textile sector. The gas prices have also been revised downward to $6.5/mmbtu, which will give a breather in the rising utility costs. The government has also promised to clear pending refunds on a priority basis, which will also bode well for the company.

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Pattern of Shareholding (as on June 2018)

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Categories of Shareholders                              Share

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Directors, CEOs and their spouse(s) and minor childr   67.48%

of which

Mr. Aamir Fayyaz Sheikh (CEO)                          24.43%

Mr. Asad Fayyaz Sheikh (Director)                      21.42%

Mr. Ali Fayyaz Sheikh (Director)                       21.35%

Associated companies and related parties                    -

Banks, DFIs and NBFCs                                   1.88%

NIT and ICP                                             8.75%

Public                                                 19.49%

Others                                                  2.21%

Total                                                    100%

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Source: Company accounts

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Kohinoor Mills Limited

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Rs (Mn)               1QFY19   1QFY18       YoY Chng

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Revenue                 2928     2752             6%

Cost of sales           2582     2384             8%

Gross profit             345      368            -6%

Distribution cost        141      119            18%

Admin expenses            72       63            14%

Profit from operations   154      171           -10%

Finance cost              77       62            24%

PBT                       77      109           -29%

Tax                       35       27            30%

PAT                       41       81           -49%

EPS                     0.81      1.6           -49%

Gross margin             12%      13%   down 159 bps

Net margin                1%       3%   down 154 bps

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