Azgard Nine Limited

Azgard Nine Limited (PSX: ANL) was established as a public limited company in 1993 by the name “Indigo Denim Mills Limited”. This was later changed to “Legler-Nafees Denim Mills Limited” before finally becoming “Azgard Nine Limited” in 2004.

The company has four business units: spinning, weaving, dyeing and stitching within which it manufactures and sells yarn, denim and denim products.

Shareholding pattern

Almost 20 percent of the shares are held under the investment companies’ category, followed by joint stock companies which held around 19 percent of the shareholding. The directors, CEO, their spouses and minor children own close to 8 percent of the shares of the company. A little over 46 percent of the shares were distributed with the local general public. The details of each category were not known.

Historical operational performance

While the topline of the company has been fluctuating, profit margins have gradually been on a rise after dipping in FY15 once.

In FY15, the company saw a 20 percent decline in its revenue- the highest seen in almost a decade. This was attributable to a myriad of reasons. On the supply side, the company faced gas and electricity interruptions which led to loss in the production process. There was also a fire incident that affected the inventories. Although the fire did not spread to the production areas of the plant, it caused delays in the production.

On the demand side, Europe is the main export market for the company which saw a demand contraction due to the prevalent uncertainty in the Euro zone. In addition, the devaluation of the Euro currency also affected demand. Coming to the costs, the main deterrent to profitability was the exorbitant ‘other expenses’ figure which was driven by provision against trade debts and impairment on long term investment and mark up. This further pushed the company into loss.

Azgard Nine recovered during FY16, as its topline grew by 23 percent. Most of the increase was seen in export sales. This was attributed to uninterrupted power supply which allowed the production process to run smoothly. Note that the company mostly sells denim and denim related goods. While a lot of the companies in the textile sector which largely focused on sales of yarn suffered losses, or saw decreased sales during FY16, Azgard Nine, on the other hand, saw better revenue as its product offering is differentiated. The company also brought down costs; thus, despite a significant reduction in other income, the company lowered its losses incurred during the year.

During FY17, the revenue of the company declined by almost 3 percent. Weaving segment saw a 30 percent decline due to lower demand. Turkish Lira devalued against USD which made locally manufactured more competitive, thus reducing imports from Pakistan. The garments segment performed relatively better, however, it was not sufficient to lift overall sales revenue. The company maintained effective control on costs, which consumed 85 percent of the revenue, down from more than 90 percent seen in previous years. This allowed margins to improve and gradually lowered losses in rupee terms.

During FY18, Azgard Nine saw revenue climbing up by double digit percentage of nearly 25 percent. Both the weaving segment and the garments registered positive growth of almost 20 percent and 43 percent, respectively. The overall textile sector also performed relatively better, as total exports from this sector increased by 9 percent as per Pakistan Bureau of Statistics. Cost of production reduced marginally to almost 84 percent, as a percentage of revenue. This lifted profit margins. With other elements of the financial statement mostly reducing, the company saw a positive bottomline after a period of four consecutive years of losses.

Revenue further increased by 26 percent during FY19. Spinning, weaving and garments- all three divisions saw a positive growth in its sales, primarily triggered by rupee devaluation. This is evident from a nearly 28 percent increase in export sales. Costs continued to reduce as a percentage of revenue, even though only marginally. However, with higher sales, it helped to lift profit margins. The higher interest rates increased the finance cost, to consume 7.5 percent of the revenue; although if it were to be compared by that seen in previous years, it has drastically reduced.

Quarterly results and future outlook

During 9MFY20, revenue increased by nearly 6 percent year on year which could be attributed to currency devaluation that favoured exports. Cost of production also reduced as per the trend seen in the past, to consume 83 percent of the revenue. The effect of this was seen in profitability which improved. The company’s efforts to turn around the company from a loss of Rs 6 billion in FY12, to a profit of Rs 305 million in FY19 is commendable. Although it is yet to recover the full amount of loss incurred between FY12 and then FY14 to FY17, positive performance can be seen. However, with the fairly recent development of the ongoing pandemic, the future cannot be ascertained, a negative impact on financials cannot be denied, given the reduced trade and general business activity.