Suraj Cotton Mills Limited (PSX: SURC) was incorporated in 1984 as a public limited company under the Companies Act 1913. It has four spinning and weaving units in total, located in Karachi, Shahkot in Punjab and Raiwind at which it manufactures, sells and trades yarn and cloth, and also processes cloth.
Shareholding pattern
As at June 30, 2021, close to 48 percent shares are held by the associated companies, undertakings and related parties. Within this category, majority shares are owned by Crescent Powertec Limited, while Premier Insurance Limited owns the remaining 3.3 percent. The directors, CEO, their spouses and minor children collectively hold over 29 percent shares of which Mrs. Humera Iqbal holds the biggest share at 7.4 percent. The general public has roughly 14 percent shares; the remaining over 9 percent shares are with the rest of the shareholder categories.
Historical operational performance
Suraj Cotton has mostly seen a growing topline, with the exception of FY12, FY15, FY16 and fairly recently in FY20. Profit margins, on the other hand, have been fluctuating over the years, following a declining trend until FY20 after which they improved in FY21.
At 33.5 percent in FY18, the company saw the highest growth in revenue seen since FY11. This was largely attributed to the 40 percent growth seen in local sales, whereas export sales halved year on year, from Rs 835 million in FY17 to Rs 440 million in FY18. This can be due to a low demand seen in one of the country’s major export market, China. Therefore, Suraj Cotton, along with the rest of the industry players, shifted their focus to sales in the local market. Production cost reduced to almost 92 percent, allowing gross margin to increase to over 8 percent. However, net margin fell to 5 percent due to a significant reduction in other income from Rs 383 million in FY17 to Rs 96 million in FY18.
The company remained on its growth trajectory as revenue grew by nearly 26 percent. Export sales continued to decline, while local sales made a larger share in revenue, contributing Rs 13.6 billion versus Rs 372 million of export sales. Production cost fell to its lowest seen in the last three years, at 88.6 percent. As a result, gross margin improved to 11.4 percent. This also trickled down to the bottomline as net margin was recorded at 6 percent. However, the increase in net margin was less pronounced since taxation stood at a negative Rs 211 million, compared to a positive tax figure for the last two years.
After growing consecutively for the last three years, revenue in FY20 registered a contraction of 7.8 percent. Both local sales and export sales witnessed a decline. This was attributed to the lockdowns due to the outbreak of the Covid-19 pandemic that forced trade and production processes to come to an abrupt halt. Production cost increased marginally as a share in revenue, to nearly 90 percent, causing gross margin to fall to over 10 percent. But with notable support coming from other income, net margin was relatively contained at 5.6 percent. majority of the increase in other income came from dividend income.
In FY21, revenue witnessed a rise of nearly 35 percent, clocking in at over Rs 17 billion, from Rs 12.9 billion in FY20. This was due to an improvement in product prices, combined with inventories sold of previous year that were carried over.
Towards the end of the year, demand in local market also began to increase. Rather, majority of the growth in sales was brought about by a growth in local sales. Thus, production cost fell to an all-time low of 80 percent, allowing gross margin to peak at 19.8 percent. In addition, other income generated from dividend income and returns from asset management companies also contributed towards the bottomline, leading net margin to more than double year on year to 14.7 percent.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by 21.6 percent, as the year began with a positive economic growth outlook and encouraging demand, compared to 1QFY21 that began after a long period of lockdown. Although due to inflationary pressures, prices for raw materials had inclined, but as a share in revenue, production cost reduced considerably year on year, from 87.5 percent in 1QFY21 to nearly 75 percent in 1QFY22. Therefore, gross margin inclined to 25 percent; this also trickled down to the bottomline, with net margin recorded at 16.7 percent.
The company expects production of cotton crop to be around 8.5 million bales, but the requirement of the textile industry surpasses this, compelling reliance on imported cotton. In addition, another challenge is the rising input prices as demand after Covid surges, while the local currency continues to lose against world currencies that further increases prices of imported goods.
Moreover, the company has procured new machinery for its new weaving unit that is expected to begin commercial production by 2022 and allow for economies of scale.