Fazal Cloth Mills Limited (PSX: FZCM) was established as a public limited company in 1966 under the Companies Act, 1913 (now, Companies Act, 2017). The company manufactures and sells yarn and fabric. Its manufacturing facilities are located in Lahore and Multan, in the province of Punjab.
Shareholding pattern
As at June 30, 2021, nearly 40 percent shares were held in associated companies, undertakings and related parties. Within this, a major shareholder is Fazal Ahmed Sheikh. Nearly 35 percent shares are categorized under “Shareholders holding 10%”. This includes the associated company Fazal Holdings Private Limited and a director Rehman Naseem. The directors, CEO, their spouses and minor children own over 15 percent shares within which a major shareholder is Faisal Ahmed. Close to six percent are held in NIT & ICP followed by four percent in general public. The remaining roughly one percent shares are with the rest of the shareholder categories.
Historical operational performance
Fazal Cloth Mills has largely seen a growing topline since FY09, with the exception of FY16 when it contracted by over 19 percent.
In FY18, topline grew by close to 19 percent to cross Rs 31 billion in value terms. The growth was a result of better volumes and prices. Local sales as well as export sales registered increases by 4.5 percent and 50 percent respectively. Cost of production saw some decrease from last year’s over 93 percent, although it still made more than 90 percent of revenue, allowing gross margin to improve slightly to 8.7 percent. Moreover, operating expenses also reduced as a share in revenue, while “GoP support by way of duty drawback on exports to zero rate the same” along with currency devaluation provided further support to profitability. Net margin grew to almost four percent with net profit at the highest thus far of Rs 1.2 billion.
Revenue in FY19 grew by 16 percent to cross Rs 36 billion in value terms. While export sales contracted by 36 percent, local sales picked up by 53 percent. After remaining above 90 percent of revenue for four consecutive years, cost of production reduced to 88 percent that allowed gross margin to improve to 11.9 percent. The decrease in cost is attributed to electricity and gas tariff being available at regionally competitive rates. The increase in profitability was also reflected in operating margin that received additional support from other income. However, increase in finance expense owing to higher working capital requirements allowed net margin to increase only marginally at four percent. Increases in raw material prices combined with a higher KIBOR caused finance expense to consume over 5 percent of revenue.
Revenue growth continued in FY20, albeit it was contained to single-digit at 9 percent with topline nearing Rs 40 billion in value terms. The increase can be attributed to an increase in export sales of yarn that almost doubled year on year along with an almost 19 percent rise in local sales of fabric. Cost of production hovered around 88 percent keeping gross margin flat at 11.5 percent. But with a sudden incline in other expenses due to a significant exchange loss, a notable share of loss from associate of Rs 884 million and a further escalation in finance expense, the company incurred a loss for the first time, of Rs 569 million.
In FY21 topline grew by over 31 percent, the highest seen since FY12 with revenue reaching an all-time high of over Rs 52 billion. There was a significant rise in indirect export of yarn and fabric that cumulatively grew from Rs 968 million in FY20, to Rs 7.9 billion in FY21. Overall, export sales registered an almost 50 percent rise, while local sales grew by almost 21 percent. Cost of production fell to an all-time low of 84.6 percent of revenue allowing gross margin to peak at 15.36 percent. With reduction in operating expenses and finance expense as a share in revenue, the latter a result of reduced interest rates, net margin also reached a peak of 10.4 percent with an all-time high net profit of Rs 5.4 billion.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was only marginally higher year on year by 2 percent. This is attributed to an increase in prices that restricted sales. As a result, inventories have increased that have shrunk margins. The increase in selling price is in response to increase in costs such as raw material expenses and freight costs. However, for the quarter the company’s statements show cost of production down to 80 percent of revenue compared to nearly 91 percent in 1QFY21. This allowed profitability to improve year on year at 11.5 percent despite rises in other expenses and reduction in other income, compared to 3.9 percent in 1QFY21.
Topline increased in 2QFY22 by over 23 percent year on year. During the period, the company also added to its capacity in addition to covering the raw material requirements for the rest of the year. Cost of production was slightly better at 83 percent compared to 85 percent in 2QFY21 that allowed gross margin to be better at 17 percent. But the rise in other expenses and finance cost caused net margin to remain flat. Since a major expense of procuring and bearing the raw material expense has been done, in addition to capacity enhancement, the company expects profitability in the second half to be similar to 1HFY22.