Ideal Spinning Mills Limited – BR Research
Ideal Spinning Mills Limited (PSX: IDSM) was established by Ideal Group in 1989 under the Companies Ordinance 1984. It manufactures and sells yarns, fabrics and hosiery. Its manufacturing plant is located at Sheikhupura Road, Faisalabad.
As of June 30, 2020, the directors, the CEO, their spouses and their adult children hold more than 75% of the shares of the company. Of this total, nearly 19 percent is owned by CEO, Mr. Amjad Saeed, and nearly 17 percent is owned by one of the directors, Mr. Khizar Saeed. Just over 17% of shares are held in the “individuals” category, followed by 7% in “others”. The remaining 1% shares belong to the rest of the shareholder categories.
Historical operational performance
With the exception of FY2017, the company’s revenue mostly increased, while profit margins were down after falling in FY17.
In fiscal 2017, Ideal Spinning Mills’ lead line contracted 7.4%. Yarn sales fell 16 percent, while fabric conversion / sales revenue fell 13 percent. Segmentally, it was the spinning segment that saw lower sales, suffering losses for another year, while the weaving segment saw its turnover improve by 48% from year over year and pre-tax profit has also more than doubled in value year over year. year. There has been a recession in the spinning segment of the country’s textile industry, due to rising electricity tariffs, input costs and political instability. This is reflected in the cost of production consuming more than 95 percent of the income during the year. The increase in administrative and financial expenses led to a further decline in profitability, which caused the company to increase its loss for the year to Rs 117 million.
The company has experienced the strongest revenue growth so far in FY18, at over 23 percent; yarn sales increased 9 percent while conversion / fabric sales revenue grew nearly 46 percent. In terms of segment, the spinning division was able to record a profit, albeit nominal, for the year; the weaving segment, on the other hand, although its turnover increased by more than 42 percent, more than 90 percent of it was consumed by production costs and financial expenses, combined. The socks division also contributed to the top line, however, the division suffered a loss for the period. Overall, the cost of production of the company has been reduced to 90%, which has restored some profitability as it has made a profit of 5 million rupees after suffering losses for three consecutive years. .
FY19’s revenue increased further, increasing by more than 29%. Sales of yarns and socks grew by 24% in sales, while revenues from conversion / sales of fabrics experienced a contraction of almost 7%. Regarding the sectoral division, the three divisions – spinning, weaving and socks – saw their turnover increase; the socks division was able to generate a profit over the period, unlike FY18. Overall, the company’s cost of production was reduced to 88%, which helped bring the gross margin to its highest level so far at 11.6%. Increases in distribution and administration costs were somewhat offset by the higher contribution from other income. Thus, Ideal Spinning Mills posted a net margin of 1.7%, the highest to date. The increase in distribution costs was largely due to outbound freight, handling and commission to sales agents.
While FY20 was a difficult year for companies due to the economic challenges of the first half of the year and the Covid-19 epidemic in the second half, the company managed to increase its revenue by 11.7% during of the year. Export sales have also increased steadily over the years; local sales increased 10 percent, while sales of yarns increased 25.7 percent. Once again, all three divisions saw their sales increase, although the spinning division was the only segment to post healthier profits year on year. The overall cost of production fell to nearly 86 percent, taking the gross margin to another high of 14 percent. The effect of this was also reflected in the net margin which also improved to its highest level of 2.7 percent.
Quarterly results and future outlook
The first quarter of FY21 saw revenue rise 8 percent year-on-year as business resumed after the lockdown was eased. Due to a lower cost of production during the period, profitability was also better year over year. The second quarter saw higher year-over-year revenue, as well as above 1QFY21. However, due to an increase in distribution and financing costs, the net margin was comparatively less than 2%.
The third quarter saw better profitability thanks to higher sales and improved costs. The net margin for 9MFY21 was recorded at 5.8 percent, compared to 2.9 percent for 9MFY20. With the expansion and continuous improvement of its business capacity, along with an increase in its turnover, it is likely that its profitability will improve.