Artistic Denim Mills Limited

Artistic Denim Mills Limited (PSX: ADMM) was set up in 1992. It started production a year later in 1993. The company manufactures and sells denim fabrics, yarn and value-added textile products at its manufacturing facility located in Karachi.

Shareholding pattern

As at June 30, 2020, the directors, CEO, their spouses and minor children held over 81 percent of the shares in the company. Within this, Mr. Muhammad Faisal Ahmed, the CEO, holds majority of the shares. Over 14 percent of the shares are owned by local individuals. The remaining 5 percent shares are with the rest of the shareholder categories.

Historical operational performance

In the last five years, topline has mostly been growing while profit margins were more or less stable before rising in FY19, and then dropping drastically in FY20.

During FY17, the company recorded a near 7 percent growth in its topline. This was a result of increase in volumes and sales from the garments division, in particular. Looking at the sales distribution, most of the increase in revenue was brought about by export sales, that registered a 7.2 percent rise. With cost of production increasing only marginally, gross margin remained close to 10.7 percent, slightly lower from 10.9 percent seen in FY16. However, operating and net margin improved on the back of other income that nearly doubled to Rs 100 million during the year. This came primarily came from “reversal of WWF provision” that amounted to Rs 47 million. thus, net margin was recorded at 6.2 percent.

The company saw the highest growth in revenue during FY18, at over 19 percent, crossing Rs 8 billion in value terms. Export sales, that makes up a dominant part of the total revenue pie, saw a 20 percent jump, while local sales saw a near 5 percent incline. Within the several business divisions of the company, denim fabric and garment segment saw a growth in sales. On the other hand, cost of production increased to 90 percent of revenue, that brought gross margin below 10 percent. This was due to increases in labour costs and other input costs. However, other income contributed Rs 268 million towards the bottom line, that allowed net margin to remain stable around 6 percent. The sudden rise in other income was mostly from a net exchange gain.

Revenue during FY19 contracted by 5.7 percent. Both, export and local sales declined by nearly 3 percent and 40 percent respectively. The decline in sales was due to a low demand and fierce competition in the international market. Note that the company’s majority of the revenue is generated through export sales. Despite the fall in sales, the company managed to improve its gross margin to over 11 percent, due to a decrease in cost of production to 88 percent of revenue. This was in some part due to currency devaluation and decrease in salaries and fuel expense. Moreover, other income added another Rs 582 million towards the bottom line; this came primarily from a net exchange gain along with “profit on treasury call account”. Thus, net margin was recorded at its highest of 11 percent.

In FY20, the company witnessed a marginal revenue growth of over 2 percent. Again, both export and local sales saw an incline of 2.5 percent and 55 percent, respectively. Most of these increases were seen in the first half of the year as volumes of the second half were impacted by the outbreak of Covid-19 pandemic that nearly brought global trade to a halt, with order cancellations, and delays and supply chain disruptions. Cost of production, on the other hand, increased to consume 92 percent of revenue, bringing gross margin down to nearly 8 percent. Moreover, with other income, that had been contributing significantly to the bottom line, shrunk to Rs 199 million. thus, net margin was recorded at an all-time low of 1.4 percent.

Quarterly results and future outlook

The first quarter of FY21 saw higher revenue year on year by almost 28 percent. This was attributed to a better product mix and volume growth. This also led to a higher gross margin year on year, at 12.8 percent, compared to 11.9 percent in 1QFY20. There has also been support from the government to revive the sector. During the first quarter of FY21, textile exports for the country increased by 2.9 percent to reach US $3.46 billion.

Revenue was slightly lower in the second quarter of FY21, both, compared to the same time last year as well as quarter on quarter. Despite this, due to a lower cost of production, gross margin was higher at over 17 percent. However, this was consumed by the rise in other expenses arising from exchange loss. Although, collectively, 1HFY21 fared better year on year in terms of profitability due to the company’s performance in the first quarter.

While the company foresees growth in the second half of FY21, not only for the company but also the country’s textile exports, there are certain hindrances that could keep the industry from growing. Raw material and fuel and power expenses are significant elements of the production. Given the situation of the energy sector, along with crop shortage, growth can be hindered.