Idrees Textile Mills Limited – BR Research

Idrees Textile Mills Limi-ted (PSX: IDRT) was set up as a public limited company in 1990 under the Companies Ordinance, 1984 (now Companies Act, 2017). Two years later, 1992, it was listed on the stock exchange. The company manufactures and sells yarn and fabric.

Shareholding pattern

As at June 30, 2022, over 87 percent shares are held with the directors, CFO, their spouse and minor children. Within this category, the major shareholders are Mr. S. M. Idrees Allawala, Mr. Rizwan Idrees Allawala and Mr. Omair Idrees Allawala. Individuals own close to 12 percent shares, while the remaining about 1 percent share is with the rest of the shareholder categories.

Historical operational performance

Since FY17, the company has mostly experienced a growing topline with the exception of FY20. Profit margins have declined between FY17 and FY20, before inclining until FY22.

Topline growth in FY19 stood at over 20 percent to reach Rs 3.5 billion in value terms. Local sales were largely responsible for this growth as it registered a 30 percent rise, whereas export sales had also increased. Production cost reduced to 88.6 percent despite a slowdown in the economy, low demand and currency devaluation that allowed gross margin to improve to 11.4 percent. However, net margin did not follow as finance expense escalated to consume 6 percent of revenue, up from last year’s almost 4 percent. This was attributed to a near doubling of borrowing rate from 6.5 percent at the start of the year to 12.2 percent towards the end. Thus, net margin was recorded at almost 1 percent for the year, compared to 2.7 percent in the previous year.

In FY20, revenue fell by 6.7 percent to Rs 3.2 billion in value terms. This was a result of the first half of the year experiencing a gradual economic recovery, whereas the second half saw the outbreak of the Covid-19 pandemic that led to strict lockdowns, supply chain constraints and halts in production processes, as well as trade. Production cost was again beyond 90 percent of revenue, reducing gross margin to 8.7 percent. Finance expense further escalated to consume 7 percent of revenue due to a rising borrowing rate that only came down towards the end of the year. Thus, the company incurred a loss of Rs 103 million.

Revenue in FY21 registered a growth of 23.6 percent to reach Rs 4 billion in value terms. This was partly a result of an increase in yarn prices. While export sales were adversely impacted due to the impact of Covid-19 on trade activities, as evident from a 7.5 percent decline in export sales, local sales posted a whopping 40 percent rise. With production cost down to 86.7 percent of revenue, gross margin increased to the highest seen thus far at 13.3 percent. As borrowing rate remained relatively low, finance expense consumed a smaller share in revenue at over 4 percent. Thus, net margin also increased to 4 percent, which was also the highest seen thus far, with bottomline recorded at Rs 160 million.

In FY22 the company witnessed the biggest rise in revenue at 29 percent, with topline amounting to Rs 5.2 billion in value terms. This was primarily attributed to the economic recovery after the Covid-19 pandemic. The demand for value-added products, in particular, witnessed a rise which in turn, had a positive impact for downstream industries. Production fell to an all-time low (since FY17) of 84.5 percent that allowed gross margin to peak at 15.45 percent. Net margin also followed that reached a high of 8.4 percent. In addition to higher gross margin, net margin was also supported by other income that stood at Rs 138 million, versus Rs 25 million in FY21. Other income, in turn, was abnormally high due to ‘contract settlement”. The company’s annual report for the year reveals that this was due to damages paid by cotton suppliers who had defaulted due to an increase in cotton prices in the international market, whereas the contracts were made at a lower price. Of the almost Rs 110 million, Rs 87 million had been received.

Quarterly results and future outlook

Revenue in the first quarter of FY23 was lower by over 22 percent year on year. This was attributed to a decline in demand, in both the export market and local market. The global economy has experienced inflationary pressures that have contracted demand as purchasing power is adversely impacted. The reduced topline also brought down the gross margin that was recorded at 11.9 percent, versus 14.7 percent in 1QFY22. Coupled with this is the rise in finance expense due to increase in borrowing rate by the central bank. Thus, net margin fell to 1.5 percent compared to 6.75 percent in the same period last year. Bottomline was also considerably lower at a mere Rs 13 million compared to Rs 73 million in 1QFY22.

The company is expanding its production capacity, the work for which is underway. It is also installing a 1-megawatt solar power system to due to rising cost of energy. Profitability has become uncertain in general due to inflation that has been worsened by the event of disastrous floods.