Mehmood Textile Mills Limited

Mehmood Textile Mills Limited (PSX: MEHT) is a vertically integrated textile composite incorporated in Pakistan on February 25, 1970 as part of the conglomerate Mehmood Group. The group since its inception in 1935 has evolved into a business empire engaged with cotton growing to finished apparel, tanneries, real estate and food industries. It locks in about $300 million annually and employs a work force of over 12,500 employees.

The company is principally engaged in the manufacturing and sale of yarn, grey cloth (unprocessed cloth also know as greige fabric) and generation of electricity. The mills are located at District Muzaffargarh, Dera Ghazi Khan Division and Punjab.

As of June-19, the installed capacity for spindles amounted to 115,824 - an increase by 5.5 percent year-on-year. The company has 196 looms installed for producing cloth while power generation capacity stands at 20.45 megawatts.

Pattern of shareholding

The ownership in the company is highly concentrated between Directors/Chief Executive Officer, their spouses and the general public with a stake of 42.6 percent and 50.1 percent respectively, followed by associate companies have a 6 percent share in the company.

Current performance

During the year FY19, the top-line of the company witnessed a sharp increase of 34 percent. The bulk of the revenue is generated through exports-accounting for over 80 percent of the turnover. Though it is worth mentioning that domestic sales performed better in comparison to exports during the year. Exports for MEHT increased 13 percent versus domestic sales which increased by 30 percent, dragging the revenue to the highest level in the past five years. The increase in turnover is also in line with peer companies - as larger players in the industry have witnessed rising top-line. In comparison, the large players of the industry are all involved in the export business, a massive 20 percent devaluation in the currency during FY19 has resulted in swelled up revenues throughout the industry- impact depending on the sales mix.

Gross profit almost doubled during the period under review. Gross profit margin stood at 10.6 percent for FY19 as compared to 7.1 percent in the preceding period. Management attributes the increase to volumetric sales growth and added production capacity. Company accounts reveal a 6 percent increase in capacity for yarn manufacturing during FY19. Minor curtailment on the cost side was seen

Other income reduced 43 percent mainly because of withdrawal of DLTL by the Government, other expenses increased due to collapse of PSX 100 Index and increase of SBP policies rate has doubled the finance cost as compared to last year. However, these losses have been mitigated against income on investment of associated companies and bottom-line achieved encourage able results.

Finance costs more than doubled on the back of a 5.75 percent increase in SBP policy rate during FY19. However, costs were curtailed as income from investment of associated companies increased about 28x. Net profit margin for the year improved, clocking at 3.41 percent compared to 1.17 percent in the preceding year.

The company over the past five years managed to increase turnovers at a CAGR of 10 percent. During this time, margins remained largely flat. Adding to the consistency, exports as a percentage of sales remained sticky through the five-year period.

Future outlook Going forward, energy costs, cotton crop and finance costs will be crucial factors in determining the profitability for the company. The company will be subject to industry forces that entail policies and demand and supply dynamics.

On the cost side, raw material costs are expected to increase as per industry sources. This may be attributed to the low expectation on the upcoming cotton crop yield. Prices in the international markets will also influence the direction of prices in the future. If cotton prices do increase, it will squeeze margins as raw material costs account for more than 70 percent of the total cost of goods. A way around this involves a volumetric increase in sales, penetrating further into domestic markets, as prices on the local front are more enticing according to industry sources. This would help the company achieve economies of scale and hence a better margin.

Tentative policy on energy tariffs makes it difficult to predict the future. However one thing is certain, the company alongside the industry will require power tariffs to be at par with the regional competitors to provide them a level playing field in the export market. Adding to the cost burden, finance costs are likely to remain within a tight proximity in the coming years, as signs of stability have started to appear-implying less erratic movement. Sky-high interest rates with meager movement translate to a likely high debt servicing, at least for FY20. In the later years, the policy rate is expected to decline as reflected by the inverted yield curve that has recently emerged.

Furthermore, the company will feel the heat as the industry boils down. Efficiency and diversification will be the key areas for focus that may keep the company buoyant in times of a downturn.