Mainly, RWML manufactures and exports cotton and synthetic yarn, woven and processed fabrics to its customers in Pakistan, United States of America, Europe, Middle East, Far East, China and other Asian Countries.
FINANCIAL ANALYSIS OF RELIANCE WEAVING MILLS LIMITED
Profitability Net sales of the company for FY09 showed a healthy growth of 25 percent compared with the figures of FY08, reaching Rs 4,337 million. The company was successful in making a gross profit of Rs672 million, an increase of 113 percent from FY08. Despite such performance, the company ended up making a net loss of Rs177 million for the year.
This can be attributed to a number of reasons: increase in the company's financial and operational cost, exchange loss of Rs159 million on loans exposed to US dollar financing due to the depreciation of the Pakistani Rupee. This also cost the company Rs 90 million on cross currency swap transactions. The Company's net sales revenue for FY10 increased by 56 percent, moving to Rs 6,773 million in FY10, due to an increase in both the domestic and export demand.
Cost of sales of the company have continued its upward trend, moving from Rs 3,665 million in FY09 to Rs 5,610 million in FY10. This may be attributed to the rising gas and electricity tariffs along with an increase in the cost of labour. Despite these costs, purchase of cotton at competitive prices resulted in tremendous improvement in the company's profitability from the spinning units, with its net profit after tax reaching Rs 403 million compared with a loss of Rs 177 million a year earlier.
A 30.4 percent decline in the financial charges in FY10 compared with the previous year has also affected the bottom line results favourably. The boom in cotton price during the first half of FY11 was fuelled by speculative trading in commodities which increased prices to record highs. In line with cotton prices, cotton yarn and fabric prices also continued to remain high. This increase was in fact more than the increase in cotton prices due to pent up demand in the system where the yarn stock was at very low levels and also due to increase in demand from a recovering global economy. As a result, the Company's revenues increased by 47 percent to Rs 9,993 million.
Although the sales went up, both in volume and dollar terms, profit margins were difficult to maintain as increase in yarn price was not completely absorbed at the customer end. As a result of these developments, coupled with fierce competition from regional players, the weaving segment profitability remained unimpressive.
Increase in the price of finished goods during FY11 led to an increase in the gross earnings of the company to Rs 1,351 million. However, the cotton prices crashed at end of the year, significantly affecting the profitability of the company. Additionally, some of the buyers did not honour their contracts and the cancellation of orders led to substantial losses for the company's gross profit. Resultantly, the Company made an after tax profit of Rs504 million for FY11.
Liquidity Although the current ratio of the company is improving since FY09, it is still below the strong short-term liquidity position. The management of the Company has imposed strict controls on inventory and has adopted the policy of purchasing and storing limited raw material.
Debt Management The management of RWML prudently worked towards minimising costs that affected the company's revenues. This is evident from a decline in the finance cost from Rs647 million in FY09 to Rs450 million in FY10. The debt to equity ratio has also declined, moving from 1.33 in FY09 to 0.56, indicating that the company has brought stability in its financing by reducing its debt financing for growth. This can result in volatile earnings as a result of the additional interest expense.
Operational Efficiency The company has shown gradual improvement in its ability to use the investment in fixed assets to generate revenues. This can be seen by the increase in the fixed asset turnover ratio, which increased from 2.12 in FY 09 to 3.60 in FY 11.
The management has successfully implemented the BMR plan, whereby 92 of the old model looms have been replaced with new state of the art air jet looms. This has led to an increase in production by 25 percent, from 3.8 million to about 4.8 million meters per month.
Future Prospects Global cotton production is expected to increase by about 13 percent in the coming year. The closing stock of 2011-2012 is also expected to be higher than the last two years but still lower than normal closing stock levels in the past. The stock to use ration is expected to improve but will still be lower than the normal in the past.
In anticipation of bumper cotton crop, global cotton prices have already crashed in FY11. Global yarn prices, too, are following the downward trend. The market anticipation that prices may come off further has resulted in the decline in the demand of yarn and fabrics, as buyers are waiting for lower of prices to buy. Overall, the ongoing fiscal year is likely to be turbulent and may have an adverse impact on the operations of the industry at large. Energy crisis is at its peak with frequent tariff increases and excessive loadshedding. The Company has focused on increasing the efficiency and productivity in the presence of such issues and initiated cost cutting and energy saving efforts.