Bhanero Textile Mills Limited (PSX: BHAT) was established as a limited company in 1980 under the Repealed Companies Ordinance 1984 (now the Companies Act 2017). It is part of the Umer group of companies. Bhanero Textile manufactures and sells yarn and fabric. It has three manufacturing units, one in Kotri and two in Sheikhupura.
As of June 30, 2021, more than 47% of the shares were held in each of the following categories: directors, CEOs, their spouses and minor children, and associated companies, companies and related parties. In the first category, Mrs. Samia Bilal is a major shareholder, while in the second category, nearly 17% of the shares are held by Admiral (Private) Limited. The remaining shares of approximately five percent belong to the rest of the shareholder classes.
Historical operating performance
Since FY12, the company has mostly seen an increase in revenue, with the exception of FY15, FY16 and most recently FY20. Profit margins rose slightly between FY16 and FY19 before declining in FY29, then rising sharply again in FY21.
The company recorded the strongest revenue growth in FY18 at 18%. This was largely due to local sales which recorded a growth rate of 24%, while overseas sales export increased by 7%. The company mainly derives its revenue from local sales, while export sales make up a smaller share of the total revenue pie. Although local sales account for a significant portion of revenue, the company has benefited from currency devaluation through the recovery of export sales of yarns and fabrics. But the cost of production increased slightly as a share of revenue, resulting in a reduction in gross margin to 10.75%. However, it received support from other income which was unusually high at Rs 112 million due to a one-time sale of land and machinery. Thus, the net margin was recorded at almost six percent, the highest since FY14.
Revenue growth in FY 2019 was nearly 16%, exceeding Rs 9 billion in value. Local sales grew by 19% while export sales increased by 9.5%. Local sales were dominated by yarn sales. The company has a prominent presence in the local market due to intense competition in the international market in addition to Pakistan’s high cost of production which makes Pakistani products unfavorable in the global arena. The company’s cost of production was reduced to 86% of revenue, gross margin hit a five-year high of 13.8%. This was also reflected in the net income which was supported by other income of Rs 228 million. This amount was earned through interest income and gain on disposal of property, plant and equipment. Thus, the net margin reached the highest to date of 8.9%.
Topline contracted 4.5% in FY20 as exports declined 10.5%, while local sales continued to grow 16%. Fabric sales dominated total local sales. The drop in export sales can be attributed to the outbreak of the Covid-19 pandemic which affected sales in the last quarter of FY20 for the majority of companies. As Covid-19 has caused borders to close and trade to stop, there have been delays and cancellations of orders and shipments while supply chains have also been disrupted. For Bhanero Textiles, the cost of production increased to nearly 91% of sales, bringing the gross margin down to 9.2%. This was also reflected in net margin which declined to 3.7% for the year.
Revenue rebounded in FY21 as it posted one of the largest increases at over 36%, reaching a record high of over Rs 12 billion. Local sales increased by 48.5% while export sales increased by 9.4%. This can be attributed to the return to some normalcy in business activities as lockdown restrictions eased and trade picked up somewhat. The increase in revenues was reflected in the gross margin which peaked at 22.5%. With financial expense also reduced to less than 1% of revenue due to lower interest rates, from 2% in fiscal 2020, net margin also reached an all-time high of 15.2%, with a net profit close to 2 billion rupees.
Quarterly results and future outlook
Revenue for the first quarter of FY22 increased 14.6% year-over-year as pent-up demand continued to grow. Additionally, the cost of production has dropped significantly as a share of revenue, which has enabled profitability despite the constraints facing the industry, such as declining cotton production and other factors such as pest attacks, climate change, etc. With significantly higher revenues as well, net margin was 17.5% for the quarter versus 3.33% in 1QFY21.
In the second quarter, revenue increased nearly 49% year-on-year. This can be attributed to the increase in the country’s local cotton production which increased by 44%. Industry exports also posted 26% growth during 1HFY22. The company is also installing new machinery that will improve production. Cost of production again decreased year-on-year for 2QFY22 to nearly 77% of revenue. Thus, the net margin was higher at 19.5% against 13.3% in 2QFY21. Although cotton production was quite reasonable for 1HFY22, it is not expected to continue in the second half due to poor quality and gas supply issues. Thus, production should be negatively affected.