Gadoon Textiles Mills Limited

Gadoon Textiles Mills Limited (PSX: GADT) is part of the illustrious Yunus Brothers Group (YBG) and is one of the largest spinning units of Pakistan. YBG is one of the largest conglomerates in Pakistan with its presence spanning across textiles, building materials, real estate, power generation and a number of other sectors. Established thirty years ago with 14,000 spindles, Gadoon now has over 300,000 spindles and a modern environmental friendly plant, which utilises waste recovery and also has captive power generation. The company's core business activity involves fiber spinning and knitting sector. It operates in the B2B segment of the textile industry and processes all kinds of cotton and man-made fibers including home textile knitting and jerseys.
Textile sector dynamics
The textile industry in Pakistan has been going through tumultuous times for the past several years now. Lack of clear and consistent policies by the government have resulted in the Pakistan's share in the global textile trade becoming stagnant. A high cost of production has been consistently cited by industry stakeholders as a pertinent reason for the sector's lackluster performance. This coupled with an overvalued rupee has taken a toll on export competitiveness while Bangladesh, Vietnam and China have continued to gain more market share. The realisation of incentives under the PM Textile Incentive Package of Rs180 billion have also been elusive with a large number of refunds pending payment.
Shareholding pattern and stock performance
The majority of GADT shareholding is held by the parent company Y.B Holdings (Private) Limited, which owns 69.6 percent of the overall stock. Rest of the shareholding is divided amongst the public, which owns 21.3 percent and banks, DFIs, insurance companies, which cumulatively hold 8 percent of GADT stock.
GADT has consistently out-performed the KSE-100 index over the past year with the margin increasing substantially post Jun-18, which might be explained by the company's strong FY18 result that saw the company's EPS increasing from Rs28.79 in FY17 to Rs42.29 in FY18.
Historical performance
In Pakistan's textile value chain, spinning firms in particular had an especially difficult time when it comes to revenue and profitability growth. From FY14 to FY16, Gadoon's top-line grew at a marginal rate and profitability was kept in check due to both external and domestic factors. The company's share of exports as a percentage of revenue declined from 48 percent in FY13 to 32.6 percent in FY17, but it has managed to increase it to 42 percent in FY18.
The stress on the company's profitability over the years can mainly be attributed to weaker Chinese currency while an overvalued Pakistan rupee. The availability of subsidised Indian yarn has also made matter worse especially when the cost of production for spinning firms has increased massively over the past few years.
GADT's financial performance is also affected by local cotton dynamics. It is no secret that despite being amongst the top five cotton producing countries in the world, Pakistan's cotton crop over the past five years has seen more than its fair share of mishaps. Both the areas under cultivation as well as the yield have seen double-digit falls in the past five years, and the quality has not improved making raw material procurement more difficult for spinning firms such as GADT.
FY18 saw GADT bucking the overall bearish textile trend by managing to make decent progress in reclaiming its export share, which helped the company register a 19 percent increase in its top-line on a yearly basis. The rupee devaluation and incentives such as duty drawbacks have been helpful in increasing revenues. GADT's finance cost picked up by almost 68 percent as the company converted its foreign currency exposure into local currency.
For the 1QFY19, the company's export sales fell by 45 percent while local sales fared much better as compared to the same period in the previous year. The company's quarterly report cites the dip in export sales to the discontinuation of last year's export package as well as tense prevailing global economic conditions. Local sales primarily performed better due to an increase in international yarn prices, which had an inflationary effect on domestic prices too.
Future outlook
GADT's continued focus on balancing, modernisation and replacement (BMR) activities have helped the firm sail through rough times. It positions the company in a good spot to capitalise from the government's efforts to decrease the cost of production for textile manufacturers and continuation of the GSP plus status. The PTI government has made good on its promise to provide subsidised gas to the textile sector at $6.5/mmbtu, which was a long standing demand by local players. Similar relief might also be in the offing for electricity provided to textile firms. The need is to encourage the production of high quality cotton, which is the basic ingredient for spinning firms such as Gadoon. More importantly, both the private and public sector need to come together to ensure research and development for local cotton crop.

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Table: FBR Tax Collection (2001-02 to 2017-18)

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(million rupees)

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Fiscal Year    Direct       Sales    Excise   Customs    Total of       Total

                Taxes                                    Indirect         Tax

                                                            Taxes  Collection

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2001-02       142,505     166,561    47,186    47,818     261,565     404,070

2002-03       151,898     195,139    44,754    68,836     308,729     460,627

2003-04       165,079     219,167    45,552    91,045     355,764     520,843

2004-05       183,372     238,537    53,104   115,374     407,015     590,387

2005-06       224,988     294,798    55,272   138,384     488,454     713,442

2006-07       333,737     309,396    71,804   132,299     513,499     847,236

2007-08       387,862     377,430    92,137   150,663     620,230   1,008,092

2008-09       440,271     452,294   116,055   148,382     716,731   1,157,002

2009-10       528,649     517,302   121,182   161,489     799,973   1,328,622

2010-11       602,451     633,357   137,353   184,853     955,563   1,558,014

2011-12       738,822     804,846   122,460   216,898   1,144,204   1,883,026

2012-13       743,410     842,525   120,922   239,459   1,202,906   1,946,316

2013-14       877,274     996,100   138,064   242,799   1,376,963   2,254,237

2014-15     1,033,720   1,087,790   162,248   306,220   1,556,258   2,589,978

2015-16     1,194,609   1,321,685   177,580   406,181   1,905,446   3,100,055

2016-17     1,344,226   1,328,965   197,911   496,772   2,023,648   3,367,874

2017-18     1,536,638   1,491,297   205,877   608,324   2,305,498   3,842,136

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