Verdict
Suraj Cotton Mills Ltd (PSX: SURC) closed the year ended June 30, 2026 with a genuine earnings recovery, not merely a top-line rebound. Revenue rose 4.5% to PKR 28.65 billion, but gross profit increased 23.0% to PKR 2.81 billion as cost growth stayed below sales growth. Lower finance cost and a much smaller levy then amplified the operating improvement, lifting profit after tax 61.0% to PKR 1.80 billion and earnings per share to PKR 36.90.
The quality of the result is mixed but clearly better. Manufacturing margins improved in both spinning and weaving, borrowings fell sharply, and operating cash flow turned strongly positive. However, the cash-flow surge depended heavily on a release of working capital, particularly inventory; other income still supplied PKR 594.6 million of pre-tax support; and weaving revenue declined. FY2026 therefore looks like a substantial repair year, but not yet a return to the exceptional margins achieved earlier in the cycle.
Reporting basis
The analysis uses Suraj Cotton Mills’ audited standalone financial statements for the year ended June 30, 2026. Unless stated otherwise, figures are in Pakistani rupees and comparisons are against the audited year ended June 30, 2025. The company reports two operating segments—spinning and weaving—and eliminates inter-segment transactions in the company total.
Results at a glance
- Revenue: PKR 28.65 billion, up 4.5% from PKR 27.41 billion.
- Gross profit: PKR 2.81 billion, up 23.0%; gross margin improved to 9.82% from 8.34%, a gain of about 147 basis points.
- Profit from operations: PKR 2.54 billion, up 15.5%, including other income of PKR 594.6 million.
- Profit before levy and tax: PKR 2.42 billion, up 20.2%. Profit after tax: PKR 1.80 billion, up 61.0%.
- EPS: PKR 36.90 versus PKR 22.92. The board proposed a final cash dividend of PKR 10 per share, subject to shareholder approval, implying a payout of roughly 27% of earnings.
- Operating cash flow: PKR 5.91 billion versus an outflow of PKR 324 million. Cash after property, plant and equipment expenditure was about PKR 5.33 billion, before investment purchases and disposals.
- Borrowings: long-term financing plus short-term borrowings fell to PKR 2.62 billion from PKR 4.23 billion, a reduction of about 38%.
What improved
Margin recovery did more work than sales growth
The central improvement was the spread between sales and production cost. Revenue added PKR 1.24 billion, while cost of sales increased by only PKR 714 million. That widened gross profit by PKR 525 million and raised the gross margin to 9.82%. Management attributes the better gross margin to improved raw-material procurement and lower energy costs through alternative sources. This explanation is consistent with the arithmetic: cost of sales rose 2.8%, materially slower than the 4.5% increase in revenue.
Distribution cost edged down 2.6% to PKR 261 million, helping preserve the gross-profit gain. Administrative expenses rose 20.5% to PKR 366 million, mainly because of higher employee and benefit costs and continued corporate social responsibility spending, while other expenses increased 48.3% to PKR 237 million. Even after those increases, the operating subtotal before other income rose about 25% to PKR 1.95 billion. This is important because it shows that the recovery was present in the manufacturing and operating cost base before investment-related income was added.
Spinning carried growth; weaving defended profitability
External spinning revenue rose 24.6% to PKR 13.58 billion. Its gross profit increased 39.2% to PKR 1.25 billion, taking the segment gross margin to about 9.20% from 8.23%. Weaving moved in the opposite direction on volume and sales: external revenue fell 8.7% to PKR 15.07 billion. Yet weaving gross profit still rose 12.4% to PKR 1.56 billion, lifting its gross margin to about 10.37% from 8.42%. The segment data therefore points to better unit economics across both businesses, but sales growth came from spinning rather than weaving.
Export sales increased 58.7% to PKR 1.52 billion, while local sales rose 2.1% to PKR 26.71 billion and processing income grew 41.5% to PKR 426 million. Exports remained only about 5.3% of company revenue, so the result was still principally domestic. The filing does not provide a clean price-versus-volume split by product; it would be unsafe to assign the revenue change to pricing, mix or physical volume beyond the disclosed segment and production data.
Production figures require care. Reported spinning output was broadly flat at 46.42 million kilograms, but stated capacity fell to 48.64 million kilograms from 57.98 million following suspension of the Karachi spinning unit. On the reported capacity base, utilization rose to roughly 95% from 80%. Weaving output declined 2.2% to 143.49 million square metres, with utilization around 92% versus 94%. Management says under-utilization reflected low demand and the Karachi suspension. These figures support the improved efficiency narrative, but they do not by themselves prove pricing power.
Financing and tax became meaningful tailwinds
Finance cost fell 33.6% to PKR 126 million. Management links this to lower average borrowings and easing interest rates. The balance sheet confirms the first part: long-term financing decreased to PKR 2.47 billion from PKR 3.06 billion, while short-term borrowings fell to PKR 145 million from PKR 1.16 billion. The company repaid PKR 729 million of long-term financing and reduced short-term borrowing by PKR 1.02 billion during the year.
The levy charge also fell to PKR 23 million from PKR 132 million, while tax expense declined to PKR 592 million from PKR 760 million. The lower levy included absorption of brought-forward minimum tax and a prior-year adjustment. These tax items helped profit after tax grow much faster than profit before levy and tax: 61.0% versus 20.2%. Investors should therefore separate the durable operating improvement from the additional boost supplied by levy and tax movements.
Cash flow and balance sheet improved
Net cash generated from operating activities reached PKR 5.91 billion, reversing the prior year’s PKR 324 million outflow. The strongest driver was a PKR 3.79 billion working-capital release, compared with a PKR 1.80 billion working-capital absorption in FY2025. Inventory contributed PKR 2.22 billion of the release, other receivables PKR 875 million and payables PKR 785 million, partly offset by PKR 102 million absorbed in trade debts.
That distinction matters. Before working-capital movements, cash generation improved, but by far less than the headline swing. The inventory reduction may represent healthier capital discipline after a difficult cycle, yet it cannot be assumed to recur indefinitely. After PKR 585 million of property, plant and equipment expenditure, operating cash flow less capital expenditure was approximately PKR 5.33 billion. The company then deployed substantial funds into investments: purchases of PKR 8.74 billion exceeded disposals of PKR 5.03 billion, creating a PKR 3.97 billion net investing outflow overall.
Year-end equity rose 15.0% to PKR 15.58 billion. Total assets increased 5.0% to PKR 25.51 billion, while total liabilities declined 7.7% to PKR 9.92 billion. Current assets of PKR 14.50 billion covered current liabilities of PKR 6.51 billion by roughly 2.23 times, up from 2.06 times. Cash itself was modest at PKR 109 million, but short-term investments were PKR 5.07 billion and available borrowing limits were PKR 10.02 billion. Liquidity therefore rested on a broader pool than the cash balance alone.
What weakened / needs attention
Other income remains material
Other income was PKR 594.6 million—about one quarter of profit before levy and tax. It included PKR 223.2 million of unrealized gains on investments measured through profit or loss, PKR 190.3 million of dividend income, PKR 78.1 million of gains on investment disposals, and PKR 48.6 million of bank-deposit and term-deposit returns. These are legitimate reported earnings, but they are not equivalent to textile manufacturing profit and some are sensitive to market prices or portfolio decisions. Other income declined 7.9% year on year, so the headline profit growth did not depend on its expansion; nevertheless, the earnings mix warrants monitoring.
Working-capital cash conversion may normalize
The operating cash-flow result is excellent on its face, but the PKR 3.79 billion working-capital release explains most of the jump. Inventory fell to PKR 5.17 billion from PKR 7.39 billion, while trade and other payables rose to PKR 4.58 billion from PKR 3.72 billion. A further release is possible, but a repeat of FY2026’s scale should not be treated as a baseline. Future cash quality will be stronger if profit converts to cash without another large inventory reduction or creditor build.
The cycle has improved, not fully normalized
FY2026 profit after tax exceeded FY2024’s PKR 1.01 billion by roughly 79%, even though revenue remained about 3.7% below FY2024. That confirms a strong recovery in profitability. But the current 9.82% gross margin remains roughly half the near-20% levels reported in FY2021 and FY2022, and FY2026 profit remains below FY2022’s PKR 2.79 billion. The company has repaired margins from the FY2023 trough, but the longer history still shows how exposed earnings are to cotton, energy, interest rates, demand and competitive imports.
Dividend and model scores
The proposed PKR 10 per-share final dividend is double the prior year’s PKR 5 and is covered about 3.7 times by FY2026 EPS. It was proposed after the reporting date and was not recognized as a liability in the June 30, 2026 accounts. The annual report stated that it was subject to shareholder approval at the October 22, 2026 annual general meeting; this analysis does not assume the subsequent approval outcome.
AlphaGen model scores for SURC are: Alpha QoQ Score 84.89; TTM Performance Score 99.77; 3Y Business Perf Score 53.45; and Sector Leadership Score 59.24. These are AlphaGen model outputs, not company-reported financial measures. The contrast is intuitive: recent and trailing performance score strongly after the earnings and cash-flow recovery, while the three-year and sector-relative readings are more moderate because the business is still emerging from a volatile cycle.
What to monitor next
- Gross-margin durability: whether procurement and alternative-energy benefits can hold the consolidated margin near or above FY2026’s 9.82%.
- Weaving demand: whether revenue stabilizes after the 8.7% decline, and whether utilization recovers without sacrificing margin.
- Spinning capacity: whether the Karachi unit remains suspended and how the lower reported capacity affects future output, fixed-cost absorption and sales.
- Cash conversion: whether operating cash remains positive after the exceptional inventory and receivables release of FY2026.
- Investment exposure: the contribution and volatility of dividend income, realized gains and unrealized gains within other income.
- Leverage and finance cost: whether the PKR 2.62 billion borrowing base continues to fall and whether lower financing charges persist.
Verdict in one line
Suraj Cotton Mills delivered a broad FY2026 recovery—better manufacturing margins, lower financing drag, stronger cash generation and a cleaner balance sheet—but the next test is whether the gains persist without another large working-capital release or heavy support from investment income.
Primary sources
Suraj Cotton Mills Ltd — audited Annual Report 2026 (PSX PDF)
Pakistan Stock Exchange — SURC company announcements and filings