Bannu Woollen Mills Limited – BR Research

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Bannu Woolen Mills Limited (PSX: BNWM) was established in 1960 as a public limited company under the Companies Act 1913 (now the Companies Ordinance 1984). The company mainly manufactures and sells woolen yarns, fabrics and blankets.

Shareholding model

As of June 30, 2021, approximately 34% of the shares were held by associates, companies and related parties. In this category, a major shareholder is M / S Bibojee Services (Pvt) Limited. More than 51 percent of shares are owned by the local general public, followed by 5 percent held by directors, CEO, their spouses and minor children. Of this amount, the majority of the shares are held by Ms. Shahnaz Sajjad Ahmed, CEO of the company. The remaining 9 percent belong to the rest of the shareholder categories.

Historical operational performance

Since FY13, the company has witnessed fluctuating revenue. On the other hand, while the gross margin and operating margin have remained largely stable, the net margin has been volatile, with a significant decline observed during FY20.

After contracting for two consecutive years, revenue for fiscal year 2017 increased by 5.7%. The majority of the company’s revenue comes from the sale of fabrics and blankets made by the company itself, while the fabric lawn purchased for resale contributes slightly to the total revenue. Production costs, during the year, were reduced to nearly 67% of sales, which improved the gross margin to 33%, but operations and net margin did not did not have the same effect, as distribution costs took a larger share in revenues, coupled with a decline in other revenues. Distribution expenses were higher due to higher ad spend, while other income mainly from PLS accounts decreased significantly. Thus, the net margin fell to 8.6%, against 10% in FY16.

FY18 revenues increased 5.8 percent, although production for the year was 2.77 percent lower. This is explained by the decline in the production of blazers by more than 43% year-on-year. A breakdown of sales reveals that revenues from sales of fabrics and blankets have increased; The fabric lawn purchased for resale also increased its contribution to revenue from Rs 6.4 million in FY17 to Rs 23 million in FY18. The cost of production, on the other hand, rose slightly to over 67 percent, reducing the gross margin to 32.5 percent. However, the operating margin improved year on year thanks to a significant reduction in administrative costs; this was due to a drop in wage costs. The net margin further jumped to 36.7% for the year due to Rs 339 million contributed by a share of the profits of associated companies.

Revenues for fiscal 2019 fell 18.3%. The majority of this decline was seen in fabrics and blankets due to lower market demand. This was due to the fact that the period of winters was reduced, as well as its severity, therefore the stock of finished products increased, creating a higher working capital requirement. As a result, the board of directors had cut two production teams that would resume later in January 2020. In addition, the company also reduced its production workforce to reduce costs. However, production costs jumped to 75.6% of sales in fiscal 2019. This can be attributed to the depreciation of the currency which made imported raw materials more expensive. With almost zero support, compared to that observed during the year 18, coming from a share of the profits of associated companies, the company suffered for the first time a loss of Rs 17 million.

During FY20, turnover fell by more than half, recorded at Rs 329 million, against Rs 685 million recorded during FY19. Fabrics and blankets turnover decreased to Rs 398 million from Rs 782 million in fiscal year 2019; on the other hand, sales of fabric sod have all but disappeared as Covid-19 has reduced demand, disrupted supply chains and resulted in severe lockdowns. In March 2020, the board of directors authorized the resumption of one of the production shifts, of the two which were suspended “to carry out the production orders of the mill concessionaires”. While production costs represented a smaller share of revenue, allowing the company to post a gross margin of 32.8%, the increase in finance cost due to a sharp rise in interest rates and a loss from associated companies, led the company to post a loss of Rs 109 million for the period.

Recent results and future prospects

Income recovered somewhat in FY21 as it was recorded at Rs 699 million. The first quarter saw a significant improvement in sales year over year thanks to better volumes and a better sales mix. Finance charges were also contained during the period as the State Bank of Pakistan reduced the interest rate. The second quarter also saw a similar trend except for the slight increase in production costs due to an increase in the prices of imported wool. The third quarter turnover was better, year on year, but compared to the first and second quarter income, it was below Rs 58 million; As a result, 3QFY21 recorded a loss. Overall, fiscal year 21 saw an increase in production costs to 72.8% of sales, but lower financial expenses and support for profits of associated companies supported the bottom line. Thus, it posted a net margin of 13.7%.

As incomes have recovered and the economy as a whole has also been relatively better than it was when Covid-19 was rampant, financial performance can be expected to improve. Although the company is still exposed to currency risk as the currency continues to fluctuate, depreciating, for the most part, the price of imported wool itself follows a downward trend.

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