OVERVIEW: Masood Textile Mills Limited (PSX: MSOT) commenced its operations in 1984. It is a public limited company, established under the Companies Act, 1913 (now Companies Act, 2017). It is principally engaged in the business of manufacturing and sale of cotton, synthetic fiber yarn, knitted and dyed fabrics and garments.
The company is vertically integrated, hence involved in all the processes of the supply chain from spinning, knitting, dyeing, finishing to cutting and stitching. It also has a laundry department. Thus, it gives the company a degree of control and ability to process orders timely.
Most of the shares, around 41 percent are held under the category “Shareholders holding 10 percent". The major shareholder in the category is Mrs. Nazia Nazir. Close to 26 percent of the shareholding is with the associated companies, undertaking and related parties. This category solely includes Shanghai Challenge Textile Company Limited. Another major shareholder of the company is the joint stock companies and cooperative societies which together hold about 16 percent of the shares. Of this a major shareholder is Kohistan Corporation (Pvt.) Limited.
Historical operational performance
Masood textiles revenue has consistently been on a rise, although at varying rates, with the exception of FY16 when it saw a double digit decline. Over the decade, gross margins have been gradually declining as cost of production moves in the opposite direction. Despite this, net margins, specifically in the last five years have been steadily increasing owing to a rise in ‘other income'.
During FY15, topline increased year on year by almost 10 percent; however, cost of production increased more than by a corresponding change, thus reducing gross margins. Topline increased due to expanding export markets. Apart from selling to the US and Canada, the company also increased its export volume to the European market, without affecting the volume sold to its existing customers. The increase in cost of production was mostly associated with salaries and wages due to a rise in minimum wages, fuel and power costs, and dyes and chemicals. Despite a much higher other income than previously seen, it could not lift margins as the increase in costs surpassed it.
In FY16, Masood Textiles saw a negative growth in its revenue for the first time in almost a decade. The year 2016 was a bad year for the textile industry as competition grew fierce in the international market, demand from one of the major export markets of the country slackened, which largely kept the textile exports of the country to remain stagnant or increase in only a few segments. Costs on the other hand, increased marginally as a percentage of revenue, keeping gross and operating margins more or less flat. Net margin, however, was able to improve due to a notable reduction in finance cost; this arose as a result of a reduction in mark-up paid on long and short term borrowings.
There was a marginal incline in revenue in FY17 as demand remained subdued, along with Pakistan's inability to increase a high price in the international market due to competition. Due to a negligible decline in costs, gross margins improved slightly. However, reduction in other income to less than 1 percent of the revenue also reduced operating margins. Net margin improved on the back of a notable decline in finance cost as it made the lowest percentage of revenue in nearly a decade.
In FY18, the company saw unprecedented growth in its topline- close to 32 percent. Currency devaluation is largely attributed for this kind of growth – the highest ever seen. The Prime Minister's incentive package for the industry also provided an impetus for the growth. However, despite the increase in revenue, similar effect could not be seen in the net margin as the currency devaluation caused a rise in prices of imported raw materials; it increased by 32 percent year on year. Other income, which rose due to a net exchange gain, lifted operating margin only to some extent, while the rise in finance cost lowered net margin marginally.
The company saw a relatively lower growth rate in its topline in FY19; it was a positive double digit growth, nonetheless. However, it was accompanied by a more than corresponding rise in costs as the latter made nearly 89 percent of the topline. Most of the rise in costs was associated with raw material consumption, fuel and power, dyes and chemicals consumption, and outside knitting, dyeing, and CMT charges. While gross margins reduced slightly due to rise in cost of production, operating margin improved on the back of other income; the latter more than doubled and made up nearly 7 percent of the topline. With a rise in finance cost coming mostly from mark up on short term borrowings, net margin increased only by a little.
Quarterly results and future outlook
Masood Textiles incurred a loss during 9MFY20, which primarily arose in the third quarter; this was due to the ongoing pandemic which led to a halt in deliveries, cancellation and deferment of export orders. On the other hand, supply side was also hampered due to production either being shut down or units operating at less than optimum capacity. The fall in demand, along with high cost as a percentage of revenue made profit margin to decline and enter the negative zone.
The future at the moment holds uncertainty with respect to the pandemic. As an industry overall, the players commend the efforts made by the government to facilitate the businesses; however, in the long run it looks forward to measures from the government such as restoration of zero rating status.
MSOT: Pattern of shareholding as at June 30, 2019
Categories of shareholders %
Directors, CEO, their spouses and minor children 2.39
Associated companies, undertakings and related parties 25.77
NIT & ICP 3.28
Banks, DFIs, NBFIs 6.76
Insurance companies 0.59
Shareholders holding 10% 41.48
Local general public 3.9
Others-joint stock companies/cooperative societies 15.82
Source: Company accounts
MSOT: Quarterly results
Rs (000s) 9MFY20 9MFY19 YoY
Net revenue 23,796 25,527 -6.78%
Cost of sales (21,709) (22,264) -2.49%
Gross profit 2,087 3,263 -36.04%
Distribution costs (1,785) (1,908) -6.45%
Administrative expenses (513) (521) -1.54%
Other income 191 1,239 -84.58%
Other expenses 0 (60) -100.00%
Operating profit/(loss) (20) 2,013
Finance cost (1,284) (882) 45.58%
Profit/(loss) before taxation (1,304) 1,131
Taxation (222) (257) -13.62%
Profit/(loss) after taxation (1,526) 874
EPS (21.20) 11.81
GP margin-RHS 8.77% 12.78%
OP margin-RHS -0.08% 7.89%
NP margin-RHS -6.41% 3.42%
Source: Company accounts