Gatron Industries Limited

Gatron Industries Limi-ted (PSX: GATI) was established in 1980 as a public limited company. It manufactures Polyester Filament Yarn (PFY) from Polyester Polymer/Chips. The company also manufactures the latter. It also makes PET Preforms.

Shareholding pattern

As at June 30, 2022, the directors, CEO, their spouses and minor children own over 25 percent shares in the company, followed by close to 41 percent held by the local general public. Another 16 percent shares are held under banks, DFIs, NBFIs and investment companies. The remaining about 18 percent shares are with the rest of the shareholder categories.

Historical operational performance

Since FY15, the company has experienced a fluctuating topline, while gross and operating margins in the last six years have followed an upward trajectory except for FY20. Net margin grew between FY17 and FY19, declined thereafter until FY21, before exhibiting marginal growth in 2022.

In FY19, topline posted a whopping increase of over 36 percent, reaching Rs 17.7 billion in value terms. This was a result of an increase in volumes as well as selling price of Polyester Filament Yarn (PFY). Cost of production, on the other hand, was marginally higher as a share in revenue, keeping gross margin more or less flat around 9 percent. However, net margin received significant support from investment income in the form of dividends of over Rs 1 billion. Thus, it was recorded at over 10 percent that was the highest recorded. On the contrary, sales volumes for preforms were lower by 17 percent due to currency devaluation that raised the prices for soft drinks. This had an indirect impact on demand for preforms. In addition, exports were also adversely impacted due to imposition of high import duties by a major target market.

Revenue in FY20 contracted by nearly 27 percent falling to almost Rs 13 billion in value terms. This was largely attributed to the decline in sales volumes of Polyester Filament Yarn (PFY). The decrease in sales volumes, in turn, was due to imposition of sales tax of 17 percent on textile, compared to zero rating previously. Moreover, the outbreak of Covid-19 pandemic that resulted in strict lockdowns also impacted sales. Cost of production, on the other hand, increased to nearly 93 percent. Prices of raw material reduced around June 2020, which meant that raw materials had been obtained at higher prices previously. When they had turned into finished goods, prices reduced. Thus, gross margin fell to 7.3 percent, followed by net margin that decreased to 8 percent.

Topline recovered somewhat in FY21 as it posted a growth of nearly 28 percent to reach Rs 16.5 billion. This was attributed to an increase in sales volumes of both the products. Sales volumes improved due to capacity enhancement as well as an increase in selling prices, following an increase in prices of raw materials. Gross margin reached the highest thus far, at 11.3 percent as energy costs reduced due to removal of GIDC. In addition, the raw material price was lower as compared to when it is turned into a finished good, as the prices have increased by then. While this also reflected in the operating margin, net margin was lower at 6.4 percent due to fall in investment income from Rs 1.2 billion in the previous year, to Rs 113 million in the current period.

The company posted the highest growth in revenue in FY22 at almost 45 percent, to reach an all-time high topline of almost Rs 24 billion in value terms. This was attributed to an increase in “quantum of sales of Polyester Filament Yarn (PFY)”, in addition to an increase in selling prices, again in response to a rise in prices of raw material, and currency devaluation. Sales improved due to capacity enhancement, although the former could have been even higher but were curtailed due to a surge of imported PFY. Thus, gross margin was recorded at its highest of over 13 percent. This also trickled to the operating margin, but increase in net margin was less pronounced, as the latter was recorded at 7.6 percent. This was due to a higher taxation expense. Nonetheless, in value terms, bottomline was recorded at its peak at Rs 1.8 billion, whereas profit before tax was also considerably elevated at Rs 2.3 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY23 was marginally lower year on year, around Rs 5 billion in value terms. Although volumes have reduced for PFY by 28 percent and 37 percent for PET Preforms, revenue was not impacted due to the impact of currency devaluation. Inventory for finished PFY reached the highest due to the existence of imported PFY in the market. Gross margin was significantly lower at close to 4 percent, compared to 14.4 percent in 1QFY22, due to lower operating rates that increased production cost. Coupled with a relatively higher finance expense and no contribution from investment income, the company incurred a net loss of Rs 370 million, versus a net profit of Rs 643 million in the same period last year.

The company is continuously expanding its capacity, in terms of adding new plants, automating processes and diversifying to provide a range of products. With regulatory duty on imported yarn as well as anti-dumping, local production will be able to meet 60 percent of domestic demand in the future.