Reliance Weaving Mills Limited (PSX: REWM) was established in 1990 under the Companies Ordinance 1984 (now the Companies Act 2017). It is one of the Fatima group companies. The latter has other companies under its umbrella such as Fatima Fertilizer and Pakarab Fertilizers, to name a few. Reliance Weaving primarily manufactures and sells yarn and fabric.
As of June 30, 2022, the directors, their spouses and their minor children hold 78% of the company’s shares. In this category, approximately 25% of the shares are held by each of the following players: Mr. Fazal Ahmed Sheikh, Mr. Faisal Ahmed Mukhtar and Mr. Fawad Ahmed Mukhtar. The local general public owns 16% of the shares, while the remaining 6% belongs to the rest of the shareholder categories.
Historical operating performance
The company has especially seen its turnover increase since the 2012 financial year, within a few years. Profit margins over the past six years have largely increased, with the exception of a slight decline in FY20.
In FY18, revenue grew nearly 23%, the highest growth rate seen to date. In terms of value, the turnover came close to Rs 14 billion. Export sales and local sales recorded increases of almost 44% and 6.3%, respectively. The increase in export sales was greater due to the devaluation of the local currency against the US dollar, as well as government export rebates. In addition, sales were also supported by higher domestic and export yarn and fabric prices combined with improved demand. With some decline in production costs as a percentage of revenue, gross margin improved to 9.7% from 8.7% last year. This also impacted the net margin which was recorded at 2.2%, compared to almost 1% in FY17.
Revenue for FY2019 grew by more than 19% to reach Rs 16.6 billion in value. This can be attributed to the 25% increase in the price of yarn and fabric in the domestic and export market. However, revenue from export sales fell nearly 9%, while local sales increased nearly 51%. With production costs once again slightly lower at more than 89% of sales, the gross margin improved slightly to 10.7%. Operating margin increased more significantly from 7.8% in FY18 to 10.2% in FY19 as foreign exchange gains increased other revenue levels. Due to higher financial costs, which resulted from higher KIBOR rates and the accumulation of cotton and yarn inventories, net margin growth was marginal at 3%.
Revenue growth was moderate in FY20, as it was recorded at 4%. The sales breakdown reveals that the situation reversed from the previous year, with export sales more than doubling year-on-year, becoming the main contributor to total revenue, while local sales declined as they were recorded at less than six months over a year. The weak sales growth was attributed to the impact of Covid-19 on demand, both domestically and globally. While gross margin continued to gradually improve, recorded at 11.9%, operating margin and net margin decreased to 8% and less than 1%, respectively due to a decrease in other income, coupled an increase in other expenses and financial charges. Both of these were impacted by rising interest rates and a significant foreign exchange loss on loans exposed to US dollar funding due to currency devaluation.
Reliance Weaving saw the strongest revenue growth in FY21, at over 39%, topping Rs 24 billion in value. This was largely attributed to improved prices and demand as business resumed following the easing of lockdown measures put in place due to the Covid-19 pandemic. Yarn prices rose in response to the high cotton price, but as the company was able to source raw materials at competitive prices, it was able to improve its profitability. Moreover, with India facing a high number of Covid-positive cases, export orders have been redirected to Pakistan, which has also boosted the country’s textile sector. Additionally, better yarn prices in the local market, compared to the export market, boosted local sales, as evidenced by local sales which more than doubled year-on-year. Thus, gross margin and net margin peaked at 14.6% and 7.2%, respectively.
Recent results and future prospects
Topline continued its growth momentum in FY22 by growing nearly 28% to an all-time high of Rs 30.7 billion in value. Export sales grew by 39%, followed by an 11.6% increase in local sales. Moreover, yarn prices also continued their upward trajectory, both in the local market and in the international market. Thus, the gross margin reached a new high of 17.7%. But the increase in net margin was less pronounced in comparison due to the increase in operating and financial expenses as a share of revenue. The increase in expenses was associated with energy costs, increased KIBOR and working capital, and ocean freight. Thus, net margin increased slightly to 8.6%, which was still the highest ever, with net income also at a record high of 2.6 billion rupees.
While fiscal 21 and 22 saw incredible increases in sales and profitability, due to pent-up demand, this is unlikely to hold as demand contracts amid high inflation around the world. On the other hand, raw material prices are rising, while orders are falling, which will force textile manufacturers to reduce their production capacities. In addition, poor prospects for cotton production in the United States and Pakistan will have a further negative impact on world cotton supply and prices.