Verdict
Towellers Limited’s audited standalone results for the year ended June 30, 2026 show a real operating recovery, but not a clean earnings or cash-flow recovery. Revenue declined 9.8% to Rs11.14 billion, yet gross profit rose 26.5% and operating profit increased 62.6% as cost of sales fell faster than sales. That improvement was overwhelmed below the line by a heavy tax charge and prior-year tax adjustment: profit after tax fell 47.4% to Rs150.9 million, or Rs8.88 per share.
The most important weakness is cash conversion. A Rs1.30 billion increase in stock-in-trade absorbed the operating improvement, while taxes, gratuity and finance payments pushed operating cash flow to negative Rs648.2 million. Short-term borrowings rose and cash fell sharply. The board declared no dividend, citing lower profitability, cash constraints and recent capital expenditure. The result is therefore best read as stronger production economics paired with weaker financial flexibility.
Results at a glance
- Reporting basis: audited standalone financial statements for the year ended June 30, 2026, presented in Pakistani rupees.
- Net sales: Rs11.14 billion, down 9.8% from Rs12.35 billion.
- Gross profit: Rs1.46 billion, up 26.5%; gross margin improved to 13.15% from 9.38%.
- Operating profit: Rs431.8 million, up 62.6%; operating margin rose to 3.88% from 2.15%.
- Profit before levies and tax: Rs390.4 million, up 65.5%.
- Profit after tax: Rs150.9 million, down 47.4%; EPS declined to Rs8.88 from Rs16.87.
- Operating cash flow: negative Rs648.2 million versus negative Rs171.4 million.
- Year-end cash: Rs457.5 million, down from Rs824.9 million; short-term borrowings increased to Rs1.18 billion from Rs790.0 million.
- Dividend: none for FY2026.
Reporting basis and evidence limits
The audited financial statements carry an unmodified audit opinion. The auditor’s key audit matter concerned the valuation of the company’s unfunded staff retirement benefit obligation, reported at Rs206.9 million; it was not a qualification of the accounts.
The annual report does not provide a quantified split of the sales decline between volumes, selling prices and product mix. Management describes subdued demand in key export markets, pricing pressure and regional competition, but does not quantify each factor. Production capacity and utilization are also described as indeterminable because Towellers makes multiple products with varying specifications and order lengths. This analysis therefore avoids invented volume or utilization claims and focuses on reported line items, segment results and cash flows.
What improved
The core arithmetic improved materially. Cost of sales fell 13.6% to Rs9.67 billion, faster than the 9.8% reduction in sales. That lifted gross profit by Rs306.3 million and expanded gross margin by 3.77 percentage points to 13.15%. This is the clearest positive signal in the result because it precedes taxes and most non-operating items.
Within manufacturing costs, utilities fell 24.5% to Rs374.4 million. However, not every input line improved: raw materials consumed rose 3.5%, salaries and wages increased 9.3%, and fabric dyeing and processing costs rose 22.5%. The filing does not isolate how much of the gross-margin recovery came from product mix, pricing, procurement, energy initiatives or inventory absorption. It is defensible to say the cost-to-sales relationship improved; it is not defensible to assign that gain to one unreported cause.
The garment segment carried the improvement. Garment sales declined 9.4% to Rs6.57 billion, but garment gross profit rose 38.2% to Rs1.15 billion and its gross margin expanded to 17.51% from 11.48%. Its segment result increased 53.5% to Rs709.6 million. The towel segment was steadier but less impressive: sales fell 10.4% to Rs4.57 billion, gross profit declined 3.7% to Rs313.6 million, and gross margin improved only modestly to 6.87% from 6.39%.
Operating profit rose 62.6% to Rs431.8 million despite higher distribution and administration costs. The gross-profit gain more than offset a 7.1% increase in distribution expense and a 13.8% increase in administrative expense. Other operating expenses fell 11.0%, while other income declined 31.7% to Rs89.8 million, mainly as profit on savings and mutual-fund income decreased.
What weakened / needs attention
The first weakness is demand. Management attributes the revenue decline to subdued textile and apparel demand in key export markets, lower order volumes, selling-price pressure and intense regional competition. Nearly all gross sales were exports, so Towellers remains highly exposed to overseas demand, freight conditions and currency movements. Export freight expense rose 26.8% to Rs280.6 million and clearing and forwarding costs increased 15.7% to Rs101.7 million.
The second weakness is the tax bridge. Profit before levies and income tax rose 65.5% to Rs390.4 million, but levies were Rs58.3 million and income tax expense was Rs181.2 million. The latter included a Rs63.3 million prior-year adjustment. Combined levies and tax consumed Rs239.5 million, equal to 61.4% of profit before levies and tax.
The year-on-year comparison is especially harsh because FY2025 contained a Rs227.1 million deferred-tax credit. After a Rs110.0 million levy, that credit helped lift FY2025 profit after tax above profit before tax. In FY2026 the direction reversed. The combined swing in levies and tax was about Rs290.3 million, more than offsetting the Rs154.5 million increase in profit before levies and tax. This accounting bridge—not a collapse in operating profit—is the principal reason reported profit after tax fell.
Finance costs rose 39.7% to Rs41.4 million. Mark-up on short-term borrowings more than doubled to Rs19.7 million, and bank charges increased to Rs20.2 million. The absolute finance burden remains manageable relative to operating profit, but its direction matches the increase in short-term funding and weaker cash position.
Segment and geographic mix
Europe remained the largest destination, accounting for Rs6.17 billion of FY2026 sales, followed by the United States at Rs4.93 billion. Asia, South America and Pakistan together contributed only about Rs270.6 million. This concentration helps explain why weak demand and pricing pressure in major Western export markets matter disproportionately.
Customer concentration also deserves monitoring. Two customers generated Rs5.26 billion of sales, compared with Rs6.71 billion in the prior year. That is roughly 47% of net sales. Concentration can support scale and relationships, but it can also amplify the effect of order timing, negotiations or demand changes at a small number of buyers.
The company says a factory that had been under construction became operational during the year, adding production capability. Towellers also installed a biomass boiler and another 340 kW of solar capacity as part of its energy and environmental program. These projects may reduce future cost exposure, but the annual report does not quantify their FY2026 profit contribution, so no immediate earnings benefit is assumed here.
Cash flow and balance sheet
Cash flow is the main counterweight to the income-statement improvement. Cash generated before working-capital changes increased to Rs794.2 million from Rs644.8 million, confirming that the operating profit recovery was not merely an accounting subtotal. Yet working capital then absorbed more than that amount.
Stock-in-trade increased by Rs1.30 billion during the year, while trade receivables released Rs311.9 million and trade payables added Rs182.0 million of funding. After all working-capital movements, cash used in operations before finance costs, taxes and employee-benefit payments was Rs18.8 million. Taxes paid were Rs484.0 million, gratuity payments Rs108.0 million and finance costs paid Rs39.1 million, producing negative operating cash flow of Rs648.2 million.
Capital expenditure was Rs306.2 million, lower than Rs676.6 million in FY2025 but still meaningful against negative operating cash flow. Operating cash flow less capital expenditure was therefore approximately negative Rs954.3 million. That gap was partly funded by a Rs387.0 million increase in short-term borrowings and by proceeds from short-term investments.
The balance sheet reflects that pressure. Stock-in-trade rose 62.5% to Rs3.37 billion. Cash fell 44.5% to Rs457.5 million, while short-term borrowings increased 49.0% to Rs1.18 billion. Including long-term debt, borrowings were about Rs1.21 billion and net debt was roughly Rs747.8 million, up from only about Rs25.8 million a year earlier. The current ratio eased to 1.91 from 2.03, while the company’s reported quick ratio fell to 0.62 from 1.01.
Equity still increased modestly to Rs9.01 billion, and borrowings represented 11.8% of total capital versus 8.74% previously. This is not a highly leveraged balance sheet in absolute terms, but the direction matters: liquidity became more dependent on inventory conversion and short-term funding.
Historical context
FY2026 marks a partial recovery from the margin compression of FY2024 and FY2025, not a return to Towellers’ peak profitability. Revenue increased from Rs5.22 billion in FY2021 to Rs12.35 billion in FY2025 before falling to Rs11.14 billion in FY2026. Gross margin peaked at 28.35% in FY2023, dropped to 10.01% in FY2024 and 9.38% in FY2025, then recovered to 13.15% in FY2026.
Net margin tells a weaker story because of taxes and cash-related pressures: it fell from 21.54% in FY2023 to 4.54% in FY2024, 2.32% in FY2025 and 1.35% in FY2026. The sharp reduction in FY2026 net margin should be interpreted alongside the prior year’s unusual deferred-tax credit, but the current year’s thin final margin still leaves limited room for demand, freight, wage or tax shocks.
AlphaGen model scorecard
These are AlphaGen model outputs, not figures reported by Towellers Limited:
- Alpha QoQ Score: 41.75
- TTM Performance Score: 15.36
- 3Y Business Perf Score: 9.89
- Sector Leadership Score: 61.43
The score pattern is consistent with the mixed financial evidence: some recent operating improvement and reasonable relative sector standing, but weak trailing and multi-year profitability after the sharp post-FY2023 normalization. The scores are analytical signals, not investment recommendations.
What to monitor next
- Whether the gross margin can hold near or above FY2026’s 13.15% when export demand and selling prices remain under pressure.
- Inventory conversion. Stock-in-trade of Rs3.37 billion is now the central cash-flow variable; a reversal would help liquidity, while another build would raise funding needs.
- The garment-versus-towel margin gap. Garments generated most of the improvement, while towel profitability remained comparatively thin.
- Tax normalization, including whether prior-year super-tax matters or other adjustments continue to distort the bridge from pre-tax profit to earnings.
- Short-term borrowing and finance costs, particularly if operating cash flow remains negative.
- Order and customer concentration in Europe and the United States, and the dependence on two large customers.
- Whether the new factory and energy projects translate into measurable sales growth, productivity or utility savings rather than only higher fixed capacity.
Bottom line
Towellers’ FY2026 result contains a credible operational improvement: gross and operating margins recovered even as revenue fell. But shareholders did not receive that improvement as higher earnings or cash. Tax charges reversed the pre-tax gain, inventory absorbed substantial liquidity, net debt rose and the board declared no dividend.
The next result needs to show that the margin recovery can survive without another large working-capital build. If inventory converts to cash and the tax bridge normalizes, FY2026’s operating progress could become more visible in net profit and financial flexibility. Until then, the correct reading is recovery in factory-level economics, offset by weak demand, concentrated exposure, tax volatility and poor cash conversion.
Primary sources
Towellers Limited — Annual Report 2026 (issuer-hosted PDF)
Pakistan Stock Exchange — Towellers Limited Annual Report 2026
Pakistan Stock Exchange — Towellers Limited FY2026 Financial Results