Feroze1888 Mills Limited

Feroze1888 Mills (PSX: FML) formerly Nakshbandi Industries Limited was incorporated in Pakistan in October 1972 as a public limited company. It is primarily engaged in the manufacturing and sale of textile terry products. Products consist of hand towel, bath towel, bathrobe, kitchen towel and beach towel. FML is mainly an export oriented composite with almost the entire revenue stream being generated in foreign markets. Major export markets for the company are Europe and United Sates constituting more than 90 percent of the export revenue. As for inputs, more than 70 percent of the raw materials are procured from domestic sources. Raw materials include raw cotton, yarn, dyes, chemicals, general stores and spares and packing materials.

FML began its journey in 1970 when it first installed its weaving facility. By 1996 the company had become a full vertically integrated composite. FML post change of name to Feroze1888 Mills (formerly: Nakshbandi Limited) was subject to a merger with Feroze textiles in 2012. During FY19, the company dissolved its subsidiary Xublimity(pvt) ltd. for which it had an ownership of 76 percent. FML is a fairly large company as reflected by an average 3500 employees working annually. The company turnover averaged Rs 21 billion in the five years (FY14-19). Moreover, FML is currently equipped with 348 looms and the capacity to produce 126 million towels annually.

Pattern of shareholding

The ownership is mainly concentrated with directors holding a 41 percent stake in the company. This is followed by individuals having a 34.3 percent shareholding and associate companies jointly accounting for 15.5 percent of the total shares of the company.

Industry dynamics

Significance of the industry stems from its hefty contribution to the exchequer as well as the ample employment opportunities it provides across the economy. It is solely responsible for more than 50 percent of the total export of the country and provides employment to about 40 percent of the industrial labor force as per Pakistan Economic Survey FY 2016-17.

The industry is connected through a value chain starting with the ginning process which requires separating cotton fiber from the seed. The extracted fiber then goes through spinning, turning it into yarn which then moves over to weaving to complete the fabric. Once the fabric is in place, it goes for dyeing before making it to retail. Combine this process and you have a composite.

The official representative for the industry is All Pakistan Textile Mills Association (APTMA). It represents about 396 member textile mills out of which 315 are spinning units, 44 are weaving units and 37 are composite units.

The industry in FY20 manifested lower export prices per unit, simultaneously volumetric growth was also witnessed. However, it is not a country specific phenomenon as global trends mirror it -according to an industry source. As of now, the industry awaits the next five year textile policy as the draft is already in place. Also, talks of reviving textile city are starting to resurface as the incumbent government gives the green signal.

It is pertinent to shed some light on the ongoing challenges in the industry to understand the full picture. The industry is in the need to tackle issues emanating from the imposition of the 17 per cent sales tax, the CNIC condition for transactions which has effectively blocked the flow of money, and a four percent withholding tax on every transaction within the sector.

The industry will struggle to remain buoyant unless the challenges are addressed in a way that implementation becomes a top priority as barely any implementation was witnessed in the last two policies.

Current performance

Feroze Mills 1888 witnessed its highest sales turnover to date during FY19. Despite the declining export prices worldwide, export revenues for the company went north of the $200 million mark for the first time. Almost the entire revenue for the company comes through export and bulk is concentrated in United States-accounting for more than 80 percent of the entire exports.

The top line witnessed an increase of 34 percent during FY19. The company attributes the higher revenue in FY19 to volumetric sales growth and steep valuation of PKR against the greenback. It further points out a gradual decrease in sales prices due to tough competition in the international markets.

On the cost size, the company report sheds light on the various factors burdening cost such as volatile raw material prices, increase in natural gas tariff, increase in fuel prices, and higher cost of imported material due to rupee devaluation and inflation. Raw material prices as a percentage of total sales clocked at 58 percent during FY19 as opposed to 54 percent in the corresponding period. Yet, the company during FY19 managed to increase its gross margins to 26 percent (SPLY: 22 percent). The improvement stems from a higher volumetric sales growth.

Finance costs as a percentage of sales during the year inched up slightly to 0.5 percent versus 0.4 percent in the corresponding year. Interest rates during the period under review rose by 5.75 percent-taking its toll on net profit as debt servicing swells. Finance cost as a percentage of sales has averaged 0.38 percent during the five years (FY14-19). However, the current year witnessed finance costs a rise to 0.53 percent of

In absolute terms, net profit for the year stood at its highest, clocking at Rs 5.9 billion. Net profit margin during the year stood at 20 percent as opposed to the 13 percent in the previous year. The increase in net profit percentage trickles down from the top line for reasons explained above.

The current ratio for the company was recorded at 1.73-its lowest in 6 years. A current ratio is used to assess the liquidity position for a company in the short term and it implies here that current assets cover current liabilities by 1.73 times. However, this requires further dissection to get the full picture. In case the company has to retire its entire current liabilities, it will not be able to do so using cash only as it amounts to 28 percent of the total current liabilities. The company will have to expedite its receivable collection and sell its inventory to generate enough cash to pay off the current liabilities. The average day's receivable turnover for the past 6 years stands at 62 days, whereas for FY19 it clocked at 80 days-indicative of a delay in payments from customers. As for inventory the average for 6 years is calculated at 78 days while in FY19 it was recorded at 87 days-suggesting inventory buildup. In short, the two ratios do not paint a favorable picture for the short-term liquidity of the company.

The capital structure for FY19 constitutes debt at 40 percent of total capital. From an industry stand point the structure is not an anomaly as the industry is a highly leveraged one, especially for companies on a scale such as Feroze1888 Millis itself. However, it is important to note that debt as a percentage of capital is at its highest in the last years (6-year average: 28 percent). Going forward, this has implications on debt servicing.

Past performance

The net turnover for the company has increased at a CAGR of 9.63 percent in the last six years. Company accounts attribute this to a consistent volumetric sales growth and a favourable impact on devaluation. Increase in volume has been a function of the marketing efforts.

Similarly, cost of sales has risen at a CAGR of 8.57 percent during the past six years. The move has been in tandem with the rising volumetric growth. Also, the company accounts point at rising cost of doing business which served as the reason for why the costs were not curtailed any further during this period

The net profit of the company has increased at a CAGR of 28.68 percent over the past six years. In FY17 rising raw material prices pushed the profitability downwards disrupting a near perfect upward trajectory.

Company has witnessed a fairly constant capital expenditure mainly on plant, property and equipment from the periods starting 2014 till 2016. A spike was seen in 2017-18 due to up gradation of plant and machinery.

Outlook

The future direction of FML to be determined by both internal and external factors. A further downside on PKR in the future will work in favour for the company given that demand remains robust. The company in its annual statement recognizes the increasing threats from international competition and has emphasized on diversifying the product range. Cost of doing business will weigh largely on the industry as we move ahead. To tackle these issues the company plans to enhance the production facility to curtail costs.

Going forward, the company plans to enhance and modernize the production facility to curtail costs. The company as reflected by its past can see revenue growth to persist - as mentioned in the annual statements. To meet the ambitious targets new looms and spindles are underway to be commissioned along with new production and storage sites.