Bannu Woolen Mills Limited (PSX: BNWM) was incorporated in Pakistan as a public limited company in 1960. It was established by PIDC, however later purchased by the Bibojee group of companies. The principal activity of the company is the manufacturing and sale of woolen yarn, cloth, and blankets.

Pattern of Shareholding

As of June 30, 2023, BNWM has a total of 9.5 million shares outstanding which are held by 1107 shareholders. The local general public has the highest stake of 54.04 percent in the company followed by its associated companies, undertaking, and related parties holding 34.06 percent shares. The company’s leadership which includes its directors, CEO, their spouse, and minor children account for 5.83 percent shareholding while NIT and ICP hold 4.56 percent shares of BNWM. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2018-24)

After witnessing a year-on-year plunge in 2019 and 2020, BNWM’s topline rode an upward trajectory until 2023. However, the topline growth momentum lowered each year and translated into a decline in 2024. In 2019 and 2020, when BNWM’s net sales slid, its bottom line also registered net losses. The company’s bottom line stood in the profit territory in 2021; however, the bliss didn’t last for long as it again posted net losses in 2022 and 2023 despite an uptick in net sales. In 2024, the company posted net profit. BNWM’s margins have been fluctuating over the period under consideration (see the graph of profitability ratios). While gross and operating margins have stayed in the positive zone over the period, the net margin has portrayed immense ebb and flow on account of the company’s investment in its associated companies. The detailed performance review of the period under consideration is given below.

In 2019, BNWM’s topline slipped by 18.33 percent year-on-year. This was on the back of reduced duration and severity of winter season in Pakistan which greatly affected the sales volume of the company. Deteriorating macroeconomic indicators including high inflation, weaker Pak Rupee, and hike in electricity tariff added to ado. In accordance with reduced demand and to cut down the losses from an accumulation of inventory, the company temporarily suspended two shifts of production operations and continued with only one shift. In 2019, BNWM produced 779,642 kgs of yarn and 1.09 million meters of cloth which was down 62 percent and 29 percent year-on-year respectively. The cost of sales didn’t shrink with a similar momentum as net sales because fixed cost wasn’t absorbed efficiently. This culminated in a 38.8 percent dip in gross profit with GP margin diving down to 24.4 percent in 2019 from 32.5 percent in 2018. Operating expenses dwindled by 2.13 percent year-on-year in 2019. While payroll expense drastically grew in 2019, it was offset by lower sales commission, rent, advertisement, and promotion as well as repair & maintenance costs incurred during the year. Higher exchange loss and greater provisioning for ECL on trade debts pushed other expenses up by 15.78 percent in 2019. As a consequence, operating profit declined by 85.87 percent in 2019 with OP margin marching down from 15 percent in 2018 to 2.6 percent in 2019. Finance costs escalated by 137.92 percent in 2019 on account of greater short-term borrowings and higher discount rates. In 2018, BNWM booked reversals worth Rs.365.33 million on its investment in an associated company which greatly buttressed its bottom line during the past year. However, the absence of such a one-off gain in 2019 resulted in a net loss of Rs.17.08 million in 2019 versus net profit of Rs.307.78 million posted in 2018. BNWM registered a loss per share of Rs.1.80 in 2019 as against EPS of Rs.32.38 recorded in 2018.

In 2020, BNWM’s topline registered a year-on-year decline of 52 percent. While the company’s sales were already grappling against adverse macroeconomic conditions and unfavorable weather for the past few years, the outbreak of COVID-19 further worsened the situation. The company resumed its second production line in 2020 which was temporarily suspended last year, yet the production volume massively fell to 474,274 kgs of yarn, down 39 percent year-on-year, and 494,507 meters of cloth, down 55 percent year-on-year. The curtailed production was the consequence of demand contraction and lockdown. Cost of sales slumped by 57.39 percent year-on-year in 2020. This greatly improved its GP margin to 32.9 percent despite 35 percent slippage in gross profit. Operating expenses nosedived by 20 percent year-on-year in 2020 due to considerably lower sales commission, advertisement & promotion as well as payroll expenses. BNWM reduced its number of employees from 467 in 2019 to 396 in 2020. Significantly lower provisioning and no exchange loss resulted in a 98.67 percent reduction in other expenses in 2020. However, other income multiplied by 537.94 percent in 2020 on account of markup earned on dealers’ balances, exchange gain as well as gain on the sale of vehicles. Operating profit dwindled by 75.32 percent in 2020 with OP margin ticking down to 1.3 percent. Finance cost surged by 46.23 percent year-on-year in 2020 due to higher discount rates for most part of the year coupled with higher working capital related borrowings. This coupled with a share loss worth Rs.48.28 million and impairment loss worth Rs.17.46 on investment in associated companies radically tarnished the bottom line and culminated in a net loss of Rs.108.65 million in 2020 with a loss per share of Rs.11.43.

In 2021, BNWM’s net sales posted a rigorous rebound of 112.69 percent year-on-year. With the ease of lockdown restrictions, the company’s sales began to pick up and the company had to resume the third production line which was suspended in 2019. To fulfill the demand, the company produced 888,832 kgs of yarn and 1.28 million meters of cloth, up 87.4 percent and 159 percent respectively. Cost of sales went up by 130.74 percent in 2021 which squeezed the GP margin to 27.2 percent. Operating expenses spiked by 23.63 percent year-on-year on account of higher sales commission as well as repair & maintenance expenses incurred during the year. Higher profit-related provisioning drove other expenses up by 1262.13 percent in 2021. Other income inched down by 32.49 percent in 2021 due to no markup earned on dealers’ balances, lesser exchange gain, and lesser gain on the sale of fixed assets in 2021. Operating profit multiplied by 1180.97 percent in 2021 with OP margin jumping up to 8 percent. BNWM was able to cut down its finance cost by 43 percent in 2021 owing to monetary easing and lesser borrowings in 2021. The company also earned a share of profit worth Rs.78.72 million from the associated company. This translated into a net profit of Rs.95.72 million in 2021 with EPS of Rs.10.07 and an NP margin of 13.7 percent.

The growth trajectory continued in 2022 with a 38.67 percent year-on-year inclination in net sales. The production further rose to 1.17 million kgs of yarn and 1.44 million meters of cloth, up 31.7 percent and 12.6 percent respectively in line with demand recovery. The cost of sales spiked by 43.57 percent year-on-year in 2022 on account of a steep rise in inflation, Pak Rupee depreciation, and a hike in power tariff. This pushed the GP margin down to 24.6 percent in 2022. Operating expenses largely remained unchanged. While administrative expenses rose on account of a hike in payroll expense and utility expense incurred during the year, a massive drop in distribution expense due to the discontinuation of commission to dealer from 2022 offset the hike in administrative expense during the year. Higher provisioning for ECL pushed other expenses up by 578.15 percent in 2022. Conversely, other income slid by 25.5 percent in 2022 on account of no exchange gain earned during the year as well as no sale of trees made during the year. Operating profit improved by 60.39 percent in 2022 with OP margin marching up to 9.3 percent. Finance costs grew by 8.61 percent year-on-year due to a higher discount rate. BNWM also earned a share of profit from an associate company worth Rs.84.57 million in 2022. What turned the tables for the company in 2022 was the massive unrealized impairment loss on investment in Janana De Malucho, an associate company of BNWM. This translated into a massive net loss of Rs.662.40 million in 2022 with a loss per share of Rs.69.68.

BNWM’s net sales posted a marginal rise of 7.14 percent in 2023 which appears to be the effect of upward revision in prices to combat mounting cost pressure. The demand shrank in 2023 on account of high inflation which took its toll on the purchasing power of consumers. Production of yarn slid to 1.008 million kgs while production of cloth moved down to 1.22 meters of cloth, down 13.8 percent and 15.24 percent respectively in 2023. The cost of sales rose by 5.57 percent in 2023 on account of high inflation, Pak Rupee depreciation, and high energy and power charges. Gross profit ticked up by 11.94 percent in 2023 while GP margin slightly improved to 25.7 percent in 2023. Operating expenses expanded by 16.83 percent in 2023 on the back of higher depreciation on right-of-use assets and rental arrears of past years. Other expenses slumped by 75.47 percent on the back of lesser provisioning for ECL. Higher income on the PLS account and increased sales of scrap resulted in a 20.13 percent recovery in other income. Operating profit grew by 20 year-on-year with OP margin climbing up to 10.4 percent in 2023. Impairment loss on investment in associate and share of loss from associate company coupled with elevated finance cost resulted in a net loss of Rs.343.16 million in 2023 with a loss per share of Rs.36.1 in 2023.

In 2024, BNWM’s net sales deteriorated by 14.2 percent. This was on account of the squeezed purchasing power of consumers leading to lower demand. The company shut down its plants multiple times during the year due to fewer orders. Cost of sales shrank by 14.59 percent in 2024, resulting in a 13.1 percent thinner gross profit recorded by the company in 2024. On the positive front, the company was able to drive up its GP margin to 26 percent in 2024 by revising the prices of its products in accordance with hiking costs. Operating expense multiplied by 11.96 percent in 2024. While distribution expenses dropped during the year owing to curtailed sales volume, administrative expenses succumbed to inflationary pressure. Other expenses fell by 93.65 percent in 2024 possibly due to lesser provisioning done for ECL. Other expense was wiped off by 25.41 percent improving other income recorded by BNWM in 2024. This could be the result of higher profit earned on PLS accounts due to higher discount rates. Operating profit tapered off by 45.7 percent in 2024 with OP margin sliding down to 6.6 percent. Finance costs mounted by 30.34 percent in 2024 primarily due to the higher discount rate. As per 9MFY24 report posted by the company, its outstanding short-term liabilities have fallen owing to lesser working capital requirements. During the year, BNWM incurred a share loss of Rs.111.92 million from its investment in the associate company, Janana De Malucho. However, its impact was conveniently offset by the reversal booked on impairment loss on investment in associate. This was the result of the “Market Value of Net assets approach” adopted by the company to provide more accurate value of its investments. BNWM booked a reversal of Rs.446.51 million on impairment loss in 2024. This resulted in a net profit of Rs.306.21 million in 2024 as against a net loss of Rs.343.16 million posted by the company in the previous year. EPS stood at Rs.32.21 in 2024 versus a loss per share of Rs.36.10 posted last year. NP margin was recorded at 34.4 percent in 2024.

Future Outlook

The resumption of imports and stability observed in macroeconomic indicators are good signs for BNWM. However, with tighter consumer spending due to a contraction in purchasing power, the demand may not witness any considerable recovery in the near term. The company’s investment in its associate company, JDMT, is also adversely affecting its bottom line and warrants meticulous review.