Kohinoor Mills Limited
Kohinoor Mills Limited (KML) has grown from a small weaving mill established in 1987 to one of Pakistan’s largest vertically integrated textile operations. KML employs roughly 1700 employees and boasts of an annual turnover of Rs10.6 billion.
According to the company’s most recent annual report it supplies over 90 million meters of grey, white and dyed fabrics to leading fashion brands in 20 countries around the globe. There are two core segments of the company: dyeing & finishing and weaving.
Kohinoor Weaving (KW) is the flagship division of the company. Set up of a small 48-loom project on a green field site in 1988, it has now grown to 260 high-speed power looms from Toyota in Japan, and Picanol in Belgium. The division produces 4 million meter of grey fabric every month, which is partially consumed upstream by the dyeing division, while the rest is exported to clients in Southern Europe and Asia. KW has also diversified its operations into Jacquard fabrics for the local fashion industry and luxury clients in the US and Europe.
Kohinoor Dyeing (KD) was set up in 2002 after a strategic decision by KML management to move up the apparel value chain and compete with processing mills in Europe where manufacturing costs were becoming uncompetitive. After fifteen years of operations, KML claims KD is a market leader in cotton stretch bottom wear for the fashion industry. The company has become a key supplier for leading global brands like Zara, Levi’s, Ralf Lauren, American Eagle and Next. The division produces 4 million meters of dyed, white and print fabric every month using machinery from Bennenger in Switzerland, and Brugman in Belgium.
Historical performance
The textile sector in Pakistan has had more than its fair share of challenges in recent years with exports plunging due to a variety of factors. These include an overvalued rupee, rising cost of doing business in comparison to regional competitors like Vietnam, Bangladesh and China and pending tax refund issues. In circumstances like these the profitability of textile firms has remained stagnant and Kohinoor Mills Limited has been no exception. FY14 saw the company’s turnover and profitability margins plunge on account of a fall in the dollar combined with a slowdown in the US and EU markets.
However, it is pertinent to mention that the decline in the net profit margin came because of extra-ordinary income in FY13. This income was attributable to a one time gain on recognition of financial liabilities at fair value worth Rs824 million. In FY15 there was only a marginal increase in turnover, but a decrease in energy costs and higher capacity utilisation resulted in improved gross margins. However, it was the dyeing division that came to the company’s rescue because of the higher margins it enjoys on account of higher value-addition. The weaving division faced tough international competition taking a toll on its contribution to the firm’s top-line.
A similar trend of mild growth in revenue along with stagnant margins prevailed in FY16. Once again, the weaving division’s contribution to the top-line remained under stress due to rising raw material prices and increased overseas competition. On the other hand, value added fabric witnessed increased sales to international brands and led to higher capacity utilisation for the dyeing division.
Even though the company managed to grow its top-line by 25 percent in FY17 as compared to the previous year, margins still remained under duress primarily on account of escalating raw material costs according to the company. Keepings its disappointing streak intact, KML’s weaving division once again dragged down the top-line on account of expensive raw material and competition.
Recent snapshot
The 9MFFY18 period saw KML’s revenues drop by 3 percent while gross profit shrank by 11 percent on a year-on-year basis. Increasing raw material prices as well as lagging demand from overseas due to tough regional competition dented the firm’s profitability yet again. Even though the weaving division saw installation of 84 new air jet looms which were made operational during 1HFY18, the segment’s profitability remained in check due to high raw material prices. International demand for dyeing segment also remained lacklustre although the company plans to increase capacity by 20 percent which is expected to be completed by 4QFY18. The rise in coal and HFO prices will also have an adverse impact on the company’s energy costs going forward. Overall, KML’s bottom-line dipped by 11 percent as compared to 9MFY11 whereas the company’s gross and net margin contracted by 125 bps and 25 bps respectively.
Stock performance
KML has been underperforming the benchmark KSE-100 index since Apr-18. The stock is thinly traded with the bulk of shareholding, almost 68 percent residing with directors and their children.
Future outlook
KML has invested in BMR to increase production capacity in both its weaving and dyed fabric division. In order to remain internationally competitive, the company needs to make its costs more streamlined while at the same time look to explore new avenues both in the domestic as well international market. The focus should be on enhancing the export of dyed fabric which results in higher margins due to increased value addition.
KML has invested in BMR which involves installation of an additional 84 high speed air jet looms. As the dying division’s capacity utilisation picks up this will aid in supplying increased quantities of greige fabric for value addition. KML is also enhancing its production capacity by 20 percent in the dying division for an anticipated bump in export sales. However, the company noted dull overseas demand in FY17 so additional efforts will have to be made to increase international market presence in order to fully utilise its enhanced production capacity.
