Gatron (Industries) Limited

Gatron (Industries) Limited (PSX: GATI) was incorporated in Pakistan as a public limited company in 1980. The company is engaged in the manufacturing of Polyester Filament Yarn through its self-produced Polyester Polymer/Chips. Besides, the company also produces PET Preforms, PET resin, PET bottles, BOPET films, PET sheets, fashion apparel, Home Textiles, etc. The company belongs to Gani & Tayub Group (G&T).

Pattern of Shareholding

As of June 30, 2023, GATI has a total of 76.729 million shares outstanding which are held by 1321 shareholders. Local General Public is the largest shareholder of GATI with a stake of 44.89 percent followed by Directors, CEO, and their spouse and minor children holding 32.69 percent shares of the company. Banks, DFIs, and NBFIs account for 16.36 percent of shares of GATI while associated companies, undertakings, and related parties hold 4.22 percent of shares. About 1.83 percent of GATI’s shares are owned by the foreign public. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for a plunge in 2020, GATI’s topline and bottom line have been growing sanguinely in all the years under consideration. Its bottom line plunged in 2020 and 2023. The gross margin of GATI which had been inching down until 2020 posted a rebound thereafter to boast its optimum high level in 2022. However, it dived down in 2023. Conversely, operating margin and net margin grew in 2019 and nosedived in 2020. Operating margin took an upward flight since 2021 and reached its peak in 2022. On the contrary, net margin shriveled in 2021 too. Although it inched up in 2022 but couldn’t gain much momentum – thanks to continuous upsurge in gearing ratio and high discount rate. In 2023, all the margins touched their lowest levels. The detailed performance review of the period under consideration is given below.

In 2019, GATI’s topline grew by 36.14 percent year-on-year on the back of a 26 percent rise in the sales volume coupled with an upward revision in the prices of Polyester Filament Yarn (PFY). The price revision was in line with an increase in the prices of raw materials as well as the Pak Rupee depreciation. Cost of sales grew by 36.5 percent year-on-year, resulting in 32.73 percent year-on-year growth in gross profit while GP margin ticked down from 9.6 percent in 2018 to 9.4 percent in 2019. Distribution expense sank by 3.43 percent year-on-year in 2019 despite higher sales volume on account of low advertisement and promotion budget and low handling, freight, and transportation charges incurred during the year. Administrative expenses rose by 9.99 percent year-on-year in 2019 due to higher payroll expenses as the company enhanced the production capacity of PFY from 29,074 MT in 2018 to 32,502 MT in 2019. Other expenses posted a 20.77 percent year-on-year spike in 2019 due to hefty exchange loss, higher provisioning for WPPF, and greater loss incurred on scrapped items of property, plant, and equipment. Other income also slumped by 30.34 percent year-on-year due to the high base effect created by the gain on the disposal of property, plant, and equipment in 2018. Despite higher expenses, a robust revenue stream saved the day for the operating profit of GATI which grew by 53.21 percent year-on-year in 2019 with OP margin also progressing from 5 percent in 2018 to 5.65 percent in 2019. Finance cost grew by 20.92 percent year-on-year in 2019 on the back of a high discount rate as well as increased long-term and short-term borrowings obtained during the year for the purchase of fixed assets and for working capital requirements respectively. The gearing ratio grew from 11 percent in 2018 to 15 percent in 2019. What proved to be the game changer for GATI’s bottom line in 2019 was a staggering 146 percent year-on-year rise in investment income which clocked in at Rs.1120.09 million. Investment income comprised of dividend income from a subsidiary company, Messrs Gatro Power (Private) Limited, and from an associated company, Messrs Novatex Limited. Massive investment income not only drove the bottom line up by 82.79 percent year-on-year in 2019 to clock in at Rs.1794.74 million but also resulted in a sizeable rise in NP margin from 7.55 percent in 2018 to 10.14 percent in 2019. It should also be noted that the investment income pushed the NP margin to a level higher than the GP margin and OP margin in 2019. EPS grew from Rs.25.59 in 2018 to Rs.46.78 in 2019.

In 2020, the effect of COVID-19 came into play resulting in a 26.93 percent year-on-year drop in GATI’s topline. The revenue compression was the result of a 30 percent decline in the sales volume of PFY, firstly because of extreme dumping and imposition of a 17 percent sales tax on textiles vis-à-vis zero rating earlier and then because of the outbreak of COVID-19. Cost of sales also slid by 25.28 percent year-on-year in 2020 due to 66 days of no production on account of the lockdown imposed during the year. Gross profit inched down by 42.92 percent year-on-year with GP margin marching down to 7.3 percent due to higher per unit fixed overhead cost on account of low capacity utilization. Just before COVID-19, the company also enhanced the production capacity of PFY to 36,974 MT but it also stayed idle due to lockdown. 8 percent drop in distribution expense in 2020 is a no-brainer given the depressed sales volume.

Administrative expenses, however, grew by 13 percent year-on-year in 2020 due to higher payroll expenses in line with inflation while the number of employees plummeted from 778 in 2019 to 772 in 2020. Other expenses slipped by 49.32 percent year-on-year in 2020 due to lower provisioning against WWF and WPPF and also because of the lower magnitude of exchange loss. Other income posted a tremendous rise of 547.62 percent year-on-year in 2020 due to a massive rise in the gain on disposal of property, plant, and equipment. Operating profit tapered off by 54.93 percent year-on-year in 2020 with OP margin sliding down to 3.5 percent. During 2020, GATI’s finance cost rose by 1082.75 percent year-on-year on account of a massive spike in borrowings to undertake capital expenditure and also for working capital requirements. This pushed GATI’s gearing ratio up from 15 percent in 2019 to 34 percent in 2020. However, an 8.27 percent growth in investment income due to considerably high dividend income from Messrs Novatex Limited diluted the impact of high finance costs on the bottom line. GATI’s bottom line sank by 40.90 percent year-on-year in 2020 to clock in at Rs.1060.63 million with an NP margin of 8.2 percent. EPS settled down to Rs.27.65 in 2020.

GATI’s net sales once again took an upward flight in 2021 with 27.97 percent year-on-year growth in topline due to an increase in the sales volume of both PFY and PET pre-forms during the year. The capacity utilization of PFY units stood at 82 percent in 2021 which was still lower than the capacity utilization of over 95 percent before 2014 due to the high quantity of imported yarn in the market. The cost of sales grew by a lower magnitude of 22.49 percent year-on-year in 2021 on account of a reduction in energy cost as GIDC was removed as per the directives of the Supreme Court of Pakistan. This resulted in a 97.53 percent rise in gross profit with GP margin climbing up to 11.3 percent in 2021. Distribution expense grew by 21.94 percent year-on-year in 2021 due to a rise in freight and transportation charges on account of higher sales volume. Administrative expenses tumbled by 2.74 percent year-on-year in 2021 due to lower payroll expenses as GATI reduced its workforce from 772 employees in 2020 to 769 employees in 2021. Other expenses spiraled by 52.2 percent year-on-year in 2021 due to higher provisioning against WWF and WPPF and also because of impairment and write-offs of fixed assets during the year. Other income built up by 38.87 percent year-on-year in 2021 due to reversal of provision for GIDC and re-measurement gain on the discounting of provision for GIDC. Operating profit mounted by 191.66 percent year-on-year in 2021 with OP margin rising up to 7.95 percent. Finance costs contracted by 38.15 percent year-on-year in 2021 due to monetary easing. This was despite an increase in borrowings which drove the gearing ratio up to 52 percent in 2021. Investment income fell by 90.69 percent year-on-year in 2021 as the company received no dividend income from Messrs Novatex Limited during the year. Lower investment income culminated in net profit rising by only 0.48 percent in 2021 with NP margin sinking to 6.44. EPS marginally grew to Rs.27.78 in 2021.

In 2022, GATI’s topline posted the highest year-on-year growth of 44.71 percent year-on-year on account of a higher quantum of sales of PFY coupled with high prices. During the year, the company increased its production capacity to 75000 MT and utilized 76 percent of its installed capacity. The cost of sales grew by 41.47 percent year-on-year on account of an increase in commodity prices and Pak Rupee depreciation. Higher off-take and better pricing resulted in a 70.15 percent year-on-year rise in gross profit with GP margin climbing up to 13.3 percent in 2022. Distribution expense grew by 41.84 percent on account of higher sales volume which drove up the handling, freight, and transportation charges. The administrative expense also grew by 23 percent year-on-year as higher installed capacity required more human resource induction. Employee headcount grew from 769 in 2021 to 832 in 2022, translating into higher payroll expenses. Other expenses posted year-on-year growth of 39.34 percent in 2022 due to higher provisioning against WPPF, higher impairment for long-term investment and slow-moving stores and spares as well as higher exchange loss. However, this was offset by a 210.70 percent growth in other income which was the result of a gain on the disposal of property, plant, and equipment. Operating profit grew by 101 percent in 2022 with OP margin hiking to 11 percent. Finance cost grew by 146 percent year-on-year in 2022 due to a high discount rate as well as increased borrowings which took the gearing ratio to 58 percent. However, investment income came to the rescue with 100 percent year-on-year growth in 2022 on account of higher dividend income from Messrs Gatro Power (Private) Limited. The bottom line grew by 71.46 percent year-on-year in 2022 to clock in at Rs.1827.24 million with an NP margin of 7.6 percent. This was despite the imposition of a super tax in 2022. EPS mounted to Rs.47.63 in 2022 which was restated to Rs.23.81 after the issuance of bonus shares.

During 2023, GATI’s net sales grew by 14.29 percent year-on-year, however, it couldn’t trickle down to produce a healthier bottom line. The main reason for the lackluster performance was low sales volume due to dumping by Chinese PFY producers, a slow supply of raw materials from Messrs. Lotte, and also because of a shortage of gas. Moreover, the low demand for PET pre-forms produced by the company from the downstream industry also affected sales volume. Due to import restrictions imposed by the government, the company wasn’t able to complete the import of machinery and spare parts for its new projects under installation which halted the timely commencement of their operations. The topline growth was merely the result of price revisions while sales volume remained depressed during the year. Furthermore, the high cost of sales due to the Pak Rupee depreciation, higher commodity prices as well as energy prices pushed gross profit down by 54.24 percent year-on-year in 2023 with GP margin falling down to 5.3 percent. Distribution expense rose by 28.66 percent in 2023 due to a spike in freight & distribution charges. Administrative expenses also multiplied by 43.54 percent in 2023 due to high inflation. Number of employees also grew from 832 in 2022 to 837 in 2023. Other expenses tumbled by 61.72 percent in 2023 as the company didn’t book any profit-related provisioning during the year. Other income also shrank by 79 percent in 2023 due to the high-base effect as GATI recorded gain on disposal of its property, plant & equipment and also wrote back some of the liabilities no more payable in 2022. Operating profit tapered off by 79 percent in 2023 with OP margin falling down to 2 percent. Finance cost mounted by 243.59 percent in 2023 due to the high discount rate and also because of increased short-term borrowings for working capital requirements and increased long-term borrowings for CAPEX. During the year, GATI completed phase 2 expansion of its PFY plant which increased its capacity from 75000 tons per annum to 99000 tons per annum. Furthermore, the company also installed a polymer plant with a capacity of over 230,000 tons. The company also commissioned an expansion project for recycled yarn from PET bottle flakes besides enhancing the production capacity of black yarn by 25 percent. Elevated borrowings drove up GATI’s gearing ratio to 68 percent in 2023. Investment income grew by 375 percent in 2023 which almost offset the finance cost incurred by the company during the year. Robust investment income was the result of a handsome dividend from Messrs Gatro Power (Private) Limited. GATI’s net profit slipped by 88.76 percent year-on-year to clock in at Rs.205.30 million in 2023 with EPS of Rs.2.68 and NP margin of 0.75 percent.

Recent Performance (9MFY24)

GATI’s net sales posted a 32.72 percent year-on-year rise during 9MFY24. On the basis of the half-yearly report published by GATI, the topline growth was the result of the introduction of a new product line film grade chips (FGC), and the impact of the Pak Rupee depreciation. Overall demand remained sluggish due to excessive dumping of imported yarn in the local market at exceptionally low prices. Moreover, low demand from downstream industry due to existing political and economic crises as well as elevated levels of inflation also took its toll on GATI’s sales volume during 9MFY24. As a result, the company had to operate on curtailed capacity despite the fact that the company had invested generously in increasing its annual capacity to around 95,000 tons. This resulted in a hefty increase in fixed cost per unit which included depreciation of its newly installed capacity. Gross profit grew by 36.89 percent during 9MFY24 with GP margin moving up from 4.78 percent in 9MFY23 to 4.93 percent in 9MFY24, signifying the impact of Pak Rupee depreciation. Distribution expense dropped by 22.84 percent year-on-year during 9MFY24 on account of lower sales volume, however, administrative expense surged by 14.51 percent on account of inflationary pressure. Other expenses plummeted by 62.46 percent during 9MFY24 supposedly on account of slashed provisioning for WWF and WPPF. Other income multiplied by 75.48 percent during 9MFY24. The detailed financial statements are not available to comment on the increase in other income. Operating profit mounted by 254.88 percent during 9MFY24 with an OP margin of 2.92 percent versus 1.09 percent during 9MFY23. What turned the tables for GATI was a drastic spike of 61 percent in its finance cost during the period which was the result of a record-high discount rate as well as high working capital requirements due to the heightened level of stock-on-trade and high unit value of stocks. Regrettably, there was no investment income to offset high finance costs as happened in the previous years. This was due to a disturbance in the operation of Messrs Gatro Power (Private) Limited due to an irregular gas supply. Consequently, GATI made a net loss of Rs.1030.51 million in 9MFY24 versus net loss of Rs.124.05 million during the same period last year, indicating a momentous spike of 730.70 percent year-on-year. Loss per share stood at Rs.12.55 in 9MFY24 versus a loss per share of Rs.1.43 in 9MFY23.

Future Outlook

The future performance of GATI is contingent upon how effectively the dumping of Chinese PFY is controlled by imposing and collecting anti-dumping duties (ADD) on the importers. This will not only benefit the local producers but will also take the indigenous PFY production to a level that will meet the local demand and create import substitution. This will be a good omen amidst the precarious state of foreign exchange reserves of the country. The ADD which was already low in Pakistan has now been terminated, further facilitating the importers.

While the market share of GATI and its cost element highly depend on the external circumstances, what GATI can do right now to build up its margins and bottom line is to undertake efficient capital risk management and scale down its gearing ratio which has been growing unabatedly, culminating into mounting financial cost. This can be done by issuance of the right shares.

Moreover, GATI can tap the export market and sell PFY to the countries that have high ADD or restrictions on the import of Chinese PFY. This will enable the company to utilize its idle capacity and also benefit from fluctuations in the value of local currency.