Gadoon Textile Mills Limited

Gadoon Textile Mills Limited (PSX: GADT) was set up in 1988 as a public limited company under the repealed Companies Ordinance, 1984. The company is part of the Yunus Brothers Group (YBG); the group was formed in 1962. Y.B. Holdings (Private) Limited is the ultimate holding company of the group. Gadoon Textile Mills manufactures and sells yarn and knitted fabrics.

Shareholding pattern

As at June 30, 2020, over 69 percent shares are held with the associated companies, undertakings and related parties. This category solely includes Y.B. Holdings (Private) Limited. Close to 22 percent shares are held by the local general public, followed by 7 percent in banks, FDIs, NBFIs, etc. The directors, CEO, their spouses and minor children hold less than 1 percent share in the company while the remaining roughly 2 percent shares are with the rest of the shareholder categories.

Historical operational performance

Gadoon Textile Mills has mostly seen a rising topline since FY08; revenue contracted thrice over the years, in FY12, FY16, and more recently in FY20. Profit margins declined until FY16, before rising again slightly and reduced again after FY19.

After contracting by 7.5 percent in FY16, revenue grew by 9.3 percent in FY17. Most of this increase was concentrated in local sales as the company faced competition in the export market from regional competitors; due to shortage of raw cotton in the local market, the industry players had to resort to imported cotton that increased the production cost, rendering products uncompetitive in global market.

Local sales, on the other hand, witnessed a 10.7 percent growth in FY17. The higher revenue decreased the share of production cost year on year, that reduced to 94 percent. This allowed gross margin to improve to 5.7 percent. Moreover, net margin was further supported by not only operating expenses making a lower share in revenue, but also other income contributing a bigger than usual share, along with share of profit from associates. The former was sourced through short term investment and rebate on export sales. Thus, net margin grew to 3.5 percent for the year.

During FY18, revenue growth stood at 18.5 percent, with topline crossing Rs 27 billion in value terms. Both export sales and local sales witnessed significant increases, by 36 percent and 10 percent, respectively. The rise in export sales was attributed to the government’s export package, combined with currency devaluation that made export products favorable in the international market; export sales of knitted fabric alone saw a 49 percent rise. Cost of production further reduced, although marginally, to almost 93 percent that took gross margin to 7 percent. With operating expenses seeing little changes year on year and other income and share of profit from associates continuing to contribute more towards the bottomline, net margin grew to 4.3 percent for the year, while net profit stood at over Rs 1 billion.

The company remained on its growth trajectory as its topline grew by over 13 percent, with most of the growth seen coming from local sales; it witnessed a 32.6 percent increase. Export sales, on the other hand, dropped by 19 percent. This was due to “non-availability of export rebate for spinning segment as compared to SPLY”, coupled with the trade war between world economies. This resulted in fewer orders from China, which is a primary export market for Pakistan. cost of production continued to fall gradually, consuming close to 91 percent of revenue. While the resultant higher gross margin of 9.3 percent reflected in the higher operating margin as well, net margin, however, reduced to 3.8 percent due to the escalation in finance expense. This was as a result of abrupt currency devaluation, along with the rise in interest rates that increased the cost of borrowing.

After rising consecutively for three years, revenue in FY20 contracted by 7 percent; most of the decline in revenue and profitability was seen in the last quarter due to the outbreak of the Covid-19 pandemic that brought operations, business activities, and trade to an abrupt halt. Cost of production rose to over 92 percent of revenue, while price of yarn also decreased due to high inventory levels. As a result, gross margin was trimmed down to 7.7 percent. While most other factors remained more or less similar, other expenses inclined drastically due to a significant exchange loss of Rs 889 million. thus, net margin fell to below 1 percent.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 18.3 percent year on year, however export sales have been lower due to the Covid-19 pandemic. Despite the overall higher revenue, profitability was considerably lower due to lower price of yarn, in addition to a significantly higher production cost at nearly 95 percent. The second quarter also saw higher revenue year on year, although marginally, by 3.8 percent. While exports generally have been lower, knitting segment saw an increase in export sales. Profitability has also been better on the back of higher share of profit from associate and lower finance expense due to lower interest rates.

The third quarter of FY21 saw significantly higher revenue year on year by 42 percent. This was due to the resumption of activities nearly a year after the Covid-19 outbreak. Yarn prices also improved as demand picked up from the value-added sector. Production cost was also lower; hence profitability was notably better at 9 percent compared to the loss of Rs 501 million in 3QFY20.

With rising prices of yarn due to increase in international prices of cotton, the company has been able to improve profitability. However, with the uncertainty arising again due to Covid-19 development, the risk remains.