Khyber Textile Mills (PSX: KHYT) was established as a public limited company in Pakistan in 1961. The company was originally engaged in the production and sale of cotton and polyester yarn and fabric, however, since 2017, the company has suspended the production of the textile line and is engaged in agricultural livestock. In addition, it has been leasing its surplus buildings for storage and rental purposes since 2016 as an alternative business.
Model of shareholding
As of June 30, 2022, KHYT has 1.2 million shares held by 474 shareholders. The general public is the largest shareholder of the company with ownership of 98.2 percent of shares. The remaining shares are owned by insurance companies, joint stock companies, financial institutions, investment companies, etc.
Historical performance (2018-2022)
While KHYT’s top line has been rising since 2018, its bottom line appears to be in the profit zone in just two years – 2018 and 2021. It is striking to note that even in 2018 and 2021, the company made operating losses just like other years but “other income” came to save the end from making net losses. Another key observation is that KHYT makes a gross profit in all years under review; however, high administrative costs prevent gross profit from being reduced to net profit. Administrative expenses rise to as much as 7 times the company’s top line in 2018. However, over the years, the company has been able to proportionately reduce its administrative expenses which now stand at 1.05 times its top line – still a huge chunk.
Let’s dive into these two accounts – “residual income” and “administrative expenses” that are game changers for KHYT’s bottom line. The “Other income” account mainly consists of written off trade creditors. In the administrative expense account, the main culprit is the depreciation expense that inflates this account to an incredibly high value.
Another factor that tends to support the company’s result is the income from the rent of its vacant buildings and warehouses, however, in the presence of huge administrative costs; All efforts to boost the bottom line seem to be going in vain.
Unlike other industries that remained under severe pressure throughout 2020 due to the global pandemic, KHYT’s top line boasts a top-line growth of 129 percent in 2020. The main source of income is the sale of livestock appears to be unaffected by the lockdowns imposed from March 2020 onwards; however, with government restrictions on all non-essential business activities, the company’s rental income took a hit in 2020. Consequently, the company recorded a net loss worth Rs. 1.5 million in 2020. Other income in the form of written-off liabilities reduced the size of the net loss by 46 percent on an annual basis.
In short, in the absence of written-off liabilities, the company’s sources of income – livestock sales and rental income do not seem strong enough to translate into a positive end in the presence of huge administrative costs, mainly at the expense of depreciation costs. However, it should be noted that it is a non-cash expense and does not affect the company’s liquidity.
Recent Performance (1HFY23)
During 1HFY23, KHYT’s livestock and rental business remained strong with YoY growth of 16 percent and 6 percent, respectively. GP’s margin grew from 25 percent in 1HFY22 to 32 percent in 1HFY23. During the year, the company used its fallow land for agricultural activities such as growing fodder for livestock which reduced the company’s input costs. However, given the unreduced administrative costs, the company could not make an operating profit. Operating loss margin fell from 26 percent in 1HFY22 to 14 percent in 1HFY23. There was no other income as apparently, there are no return liabilities in 1HFY23. Hence, the bottom line remained in the loss zone with a net loss worth 0.187 million in 1HFY23 as against Rs. 1.07 million in the same period last year.
The company does not appear to be continuing its textile business in the near future under insolvency litigation; however, its livestock and rental business are strong enough to generate a reasonable income for the company. The size of the losses has been reduced as the company has been able to control its administrative costs which now amount to 70 percent of its revenue as opposed to as much as 700 percent. Net loss margin stood at 2 percent in 1HFY23 versus 12 percent in the same period last year. If the same continues, the decline of the company will soon enter the profit zone.