Shareholding pattern, stock performance and subsidiaries
STML has six subsidiaries and fully owns four of these. These include Sapphire Retail Limited, Sapphire Wind Power Company Limited, Tricon Boston Consulting Corporation (Private) Limited and Sapphire Tech (Pvt.) Limited.
STML is a thinly traded stock with low liquidity. The reason is that 54 percent of the shareholding resides with directors, CEOs and their relatives whereas 31 percent is with associated companies. Only 9 percent shareholding resides with the public hence the low trading volume.
The company's stock has underperformed the benchmark KSE-100 index for the past year and due to thin participation by the public, the volatility found in other textile scripts has been absent in STML.
Textile sector overview
Textile exports have not seen any meaningful growth in the 5MFY19 period and the industry is still struggling to make a comeback. Even though the new government has decided to give gas at a subsidised rate of $6.5 to bring down the high cost of production of local firms, liquidity has become a major problem for textile exporters. Pending refunds of the industry amount to almost Rs100 billion and are creating liquidity crunch for many firms.
Other illogical measures such as the imposition of duty on raw materials for the textile sector, especially imported cotton need to be revisited by the government. Local cotton production has also declined as the area of cultivation has fallen and yields have not picked up either. Yet, with the rupee devaluation of more than 25 percent in the past year alone, exporters have gotten some measure of relief and coupled with preferential arrangements such as the GSP plus status for exports to Europe, things are not all doom and gloom for the sector.
Historical performance
STML has managed to keeps its gross margins intact over the years while the top line has also remained stable over in the FY13-FY17 period. The company's gross margins have historically remained in the 10-12 percent range over the past five years while net profit margins clocked in at 4-6 percent. FY17 was an outlier for the company in terms of profitability due to an increase in other income because of capital gains booked on the sale of investments.
The company's export contribution to the top line peaked in FY14 when exports contributed 83 percent to overall revenues. However, this decreased steadily and in FY17 exports dropped to 71 percent of aggregate sales. Challenges faced by the company included the high cost of inputs including raw materials and utilities as well as tough completion from other textile exporting countries such as Vietnam, Bangladesh and China.
However, FY18 was a good year for the company, which saw the overall top line increase by 13 percent on the back of strong export sales that surged by 21 percent on a year-on-year basis. The company attributed the growth to availability of energy at affordable costs and the government incentives including rebates. STML also hailed the currency devaluation as a positive trigger for the company's textile exports.
The group enjoys strong domestic presence through its retail brand "Sapphire" operated through its subsidiary Sapphire Retail Limited and is extremely popular amongst women in Pakistan. Although the retail segment is still a small proportion of the company's overall revenue mix the growth potential is significant.
Future outlook
The Sapphire Group has invested heavily in value addition and balancing, modernisation and replacement investment. This has resulted in modern technology being used by the company and has brought efficiency across its production value chain resulting in significant cost savings. With the expansion in the retail sector, Sapphire is set to capture a decent chunk of the Pakistan textile retail sector.
Given the rebates and reduction in utility costs by the government, the coming years are expected to allow the company to increase its export sales by a decent margin. Of course, the rupee devaluation has also come as a big boon as noted by the company in its annual reports. The group already exports to Asia, Europe and North America and should consider diversifying in other non-traditional export markets as well for which the government has provided additional rebates to textile exporters.
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Pattern of Shareholding (as on June 2018)
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Categories of Shareholders Share
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Directors, CEOs and their spouse (s) and minor children 54.24%
Associated companies and related parties 30.95%
NIT and ICP 4.63%
Public 8.83%
Others 1.28%
Total 100%
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Source: Company accounts
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STML: Plant capacity and actual production
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Spinning FY18 FY17
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Total number of spindles installed 136,689 130,407
Average number of spindles worked 135,210 129,416
Total number of rotors installed 3,120 3,120
Installed capacity after conversion into 20/s lbs. 116,402,443 109,867,178
Actual production after conversion into 20/s lbs 94,254,079 99,947,948
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Weaving
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Total number of looms installed 371 345
Average number of looms worked 349 345
Installed capacity at 50 picks per inch of fabric square meters 134,694,682 122,946,331
Actual production converted at 50 picks per inch of fabric square meters 133,169,328 127,473,002
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Finishing and Printing
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Production capacity meters 38,400,000 36,000,000
Actual production meters 35,983,431 33,231,522
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Source: Company accounts