Sapphire Textile Mills Limited (PSX:STML)

Sapphire Textile Mills Limited (PSX:STML) is a vertically integrated composite textile unit incorporated as a public limited company in Pakistan in 1969 and its shares are listed on Pakistan Stock Exchange. The company is primarily engaged in the manufacturing of yarn, fabrics, home textile products and energy sales. As of June-19, the company had 139,433 installed and 360 looms-- for the purpose of weaving. Star segments of the company include yarn and fabric, contributing over 40 percent and 30 percent to sales, respectively. Home textile accounts for a relatively smaller chunk of the turnover-accounting for 15 percent. Irrespective of the sales mix, bulk of the revenue is generated through exports-accounting for over 70 percent of sales.

Furthermore, STML is the flagship company of the large Sapphire group. It is poised to benefit from the strong group synergies. Over the period of four decades, Sapphire group has enhanced its penetration into the textile industry through continuous expansion.

On the other hand, it has also step foot outside the textile territory through its diversification into the power generation and dairy sector. Collectively, the group exports to over 35 destinations around the globe and employs more than 16,000 workers. The group locks in an annual turnover north of $800 million with an asset base above $500 million.

Pattern of Shareholding

Directors/Chief Executive Officer and their spouse stand at the top of the ladder with a 49.5 percent stake in the company, followed by associated companies that account for 31 percent of the shares and general public accounting for 13.5 percent shareholding as of June-19.

Company Performance Revenue over the last year has increased by 19 percent, crossing the Rs 30 billion mark and recording the highest stream till date. However, this is no anomaly with respect to its peer companies. Export during FY19 grew 34 percent-company accounts point at steep currency devaluation as a cause.

Notice that increase in export occurs at a time when exports were displaying signs of falling unit prices-implying an increase in volumetric sales.

On the domestic front, the company saw a reduction in sales of about 34 percent during FY19. Nonetheless, the company managed to keep the revenues in the positive trajectory.

The leading business segments, fabric and yarn while witnessing an increase in exports lost business on the local front. As for home textile, it managed to grow in both the export and domestic market. Yarn export during FY19 increased by 44 percent while losing 56 percent in the domestic market. Fabric grew about 50 percent in export simultaneously losing 70 percent in domestic markets. Home textile on the other hand, registered an increase in both export and domestic sales recorded at 18 percent and 41 percent respectively.

Company accounts suggest some relieve on the cost side due to the rationalization of energy prices for the export-oriented industry and attribute the increase in sales to currency devaluation seen during the year under review. For these reasons, STML managed to improve its gross profit margin to 16 percent compared to 12 percent in the corresponding period.

Despite peaked interest rates, following a 5.75 percent increase during FY19, the company reported a 7 percent net profit margin as opposed to 6 percent in the previous year.

Future Outlook The situation for textile industry as a whole was critical during the past year, this is corroborated by the fact that 200 mills shutdown operation during the past year as reported by All Pakistan Textile Mills Association (APTMA), yet Sapphire managed to not only witness jacked revenues but also a healthy increase in margin. Keeping in mind, that dynamics for FY20 on policy level may be different, the company will be impacted differently as well. By and large, keys factors going forward will be the direction of currency, energy costs, raw-material costs and finance costs.

Erratic movement from interest rates in either direction seems unlikely for the ongoing fiscal year. Incase interest rates remain sticky or picks up further, it will weigh heavily on the bottom line of the company as the company is highly leveraged-common among the industry.

Raw material prices are not expected to drop either as local cotton crop yield is expected to see reduction. However, domestic cotton prices are to be dictated by both international and domestic forces. Impediments in supply, domestic demand patterns and international cotton indexes.

The currency so far in FY20 has remained largely stable. If this persists the company may not see a massive growth in revenue, as it did during FY19. In this case, increasing revenues for the next year will either stem from a price increment, given it is transferred to the customer, and volumetric growth in sales. The focus of the company should be on volumetric growth, as price increase may not be transferable at a time when competition is cut throat.

However this can also result in inventories piling up with weak demand in the mix-a right balance is the best bet here.