Gatron Industries Limited

Gatron Industries Limited (PSX: GATI) was set up in 1980 as a public limited company. The company manufactures Polyester Filament Yarn (PFY) from Polyester Polymer/Chips, that it also produces. It also makes PET Preforms.

Shareholding pattern

As at June 30, 2020, close to 33 percent shares of the company are owned by the directors, CEO, their spouses and minor children, followed by over 44 percent held by the local general public. A little over 16 percent shares are with the banks, DFIs, and NBFIs; 4 percent with the associated companies, undertakings and related parties. The remaining about 3 percent shares is with the rest of the shareholder categories.

Historical operational performance

Gatron Industries Limited has seen a fluctuating topline over the years, whereas profit margins reached a peak in FY18 and FY19 before witnessing a gradual decline in FY20.

After declining for two consecutive years, revenue witnessed a nearly 41 percent growth. This was attributed to the performance of PET Preforms segment that saw higher production due to additional capacity. Not only higher sales, but prices for preform sales were also higher due to increasing trend for MEG prices. On the other hand, cost of production also reduced, falling below 100 percent, thereby allowing the company to post a positive gross margin of 2 percent. With further decreases in administrative and distribution expenses as a share in revenue, the company was able to post a positive bottomline for the period, at Rs 57 million, compared to a loss of Rs 254 million seen in the preceding year.

Growth in revenue was relatively subdued in FY18, at 5.5 percent. Nonetheless, the company crossed Rs 13 billion in sales revenue during the year. It saw the highest production and sales of Polyester Filament Yarn in the last three years. This was due to the regulatory duty imposed on imports; this helped to compete against the imported products dumped into the country. As a result, profit margins also improved. In addition, prices also increased relative to the inputs that were purchased before at lower prices, allowing higher profitability. This was reflected in the highest gross margin at 9.6 percent. profitability was also supported by dividend income, thus net margin stood at 7.5 percent for the year.

Revenue grew by double digits again in FY19, at over 36 percent. This was attributed to an increase in both, volumes and selling price of Polyester Filament Yarn (PFY). Cost of production increased very marginally to almost 91 percent of revenue, keeping gross margin more or less flat at over 9 percent. While operating expenses did make a smaller share in revenue, dividend income provided significant support to the bottomline, taking net margin to an all time high of 10 percent. Preforms segment, on the other hand, saw a decline in sales volumes by 17 percent. This was due to currency devaluation that increased the price of soft drinks, indirectly affecting demand for preforms. Moreover, exports of the same were also affected due to high import duties imposed by one of the major target markets.

After growing for three consecutive years, revenue fell by nearly 27 percent in FY20, primarily because of decline sales volumes of Polyester Filament Yarn (PFY). Part of the reason for the latter was due to imposition of 17 percent sales tax on textile compared to zero rating previously. Secondly, sales volume also declined as a result of the lock down imposed in the event of Covid-19 pandemic. Hence, gross margin fell to 7.3 percent. Raw material prices went down by June 2020; this meant that raw materials were purchased at a higher price, and by the time they were turned into a finished good, prices had gone down. With finance expense also rising as a share in revenue, net margin was also recorded at a lower 8 percent.

Quarterly results and future outlook

Topline was higher by 9.4 percent in the first quarter of FY21 year on year. This was due to the gradual resumption of activities after the lockdown that eased by mid of 2020. As a result, demand also recovered slightly; the effect of this also trickled down to the polyester chain. In addition, due to border closure, dumped imports were also fewer; this worked in the favor of the company. Net margin, however, was better in the same period last year due to substantial support from dividend income towards the bottomline.

The second quarter of FY21 also saw revenue higher year on year, by 14 percent. This was attributed to volume gains in both products; Polyester Filament Yarn saw a 26 percent rise, while Preforms volumes went up by 24 percent. Despite this, since costs remained similar, net margin was near 3 percent for 2QFY21 and 2QFY20.

Revenue continued to rise in the third quarter of FY21 as well, by over 26 percent year on year. cumulatively, topline of 9MFY21 was higher by 17 percent year on year. This was because same period last year saw the start of the pandemic and crash in oil prices that slowed down businesses. Moreover, this year, prices for PTA/MEG was higher which meant raw materials were sourced at lower costs and final product was sold at a higher price. This also offset the absence of dividend income, that was recorded at Rs 465 million for 9MFY20. Thus, net margin was higher at 5.9 percent.

The company forecasts that the expansions made by Gatron Industries, as well as other Filament Yarn producers, can take production of PFY to a level where 70 percent of the local demand can be fulfilled.