Artistic Denim Mills Limited

Artistic Denim Mills Limited (PSX: ADMM) was established in 1992 under the repealed Companies Ordinance, 1984. It manufactures and sells rope dyed denim fabrics, yarn and value-added textile products. Its manufacturing facility is located in Karachi.

Shareholding pattern

As at June 30, 2021, over 81 percent shares were held by the directors, CEO, their spouses and minor children. Within this category, majority were held by Mr. Muhammad Faisal Ahmed, the CEO of the company. Close to 15 percent shares are with the local general public, while the remaining about 4 percent shares were with the rest of the shareholder categories.

Historical operational performance

Since FY16, the company has mostly seen a growing topline with the exception of FY19 when it contracted by 5.7 percent. Profit margins, on the other hand, increased in FY19 after remaining stable for two years, dropped in FY20 before rising again in FY21.

At 19.3 percent, the company witnessed the largest growth in revenue thus far, with topline crossing Rs 8 billion in value terms. Majority of the revenue is sourced from export sales that saw an increase of 20 percent, to reach Rs 7.8 billion. Local sales, on the other hand, also experienced an increase, of 5 percent. Regarding the various segments of the business, denim fabric and garment segment saw a rise in sales. However, the higher topline did not translate into higher profitability as cost of production consumed over 90 percent of revenue that reduced gross margin to 9.6 percent, versus 10.7 percent in FY17. The increase in cost of production was attributed to an increase in labour costs and other inputs, but the rise in other income to Rs 268 million arising from a net exchange gain allowed operating margin to increase that also reflected in the bottomline. Net margin was recorded at a marginally higher 6.26 percent.

Revenue in FY19 fell by 5.7 percent with topline falling to Rs 7.7 billion. Export sales fell by 3 percent while local sales fell by 40 percent. However, the net impact on net revenue was close to 5 percent as local sales made a small share in revenue. The decline in revenue however was attributed to a low demand and competition in the international market. But the decrease in salaries and fuel expense, combined with currency depreciation made cost of production to fall to 88 percent of revenue. Therefore, gross margin improved to 11.4 percent. Additionally, other income also increased further year on year to Rs 582 million that raised the net margin to an all-time high of 11 percent. The rise in other income came from a net exchange gain and “profit on treasury call account”.

Topline recovered somewhat in FY20 as it grew marginally by 2.2 percent. Again, export sales increased by 2.5 percent while local sales saw an incline of 55 percent. These increases were predominantly witnessed in the first half of the year as the second half of FY20 was impacted by the outbreak of the Covid-19 pandemic that led to nationwide strict lockdowns rendering production processes to come to a halt while border closures impacted trade and supply chains. On the other hand, cost of production grew to 92 percent of revenue that reduced gross margin to 7.9 percent. With other income also reverting to its previous levels, net margin fell to an all-time low of 1.4 percent.

During FY21 the company saw the biggest increase in revenue at 23.6 percent with topline nearing Rs 10 billion. This was attributed to a better product mix. Export sales were higher by almost 21 percent while local sales grew by almost 52 percent. With cost of production consuming close to 89 percent of revenue, gross margin was recorded at a higher 11.3 percent, whereas gross profit was at an all-time high of Rs 1.1 billion. This also trickled to the net margin that was recorded at 3.6 percent. However, the increase in net margin was less pronounced due to the increase in finance expense that made up more than 2 percent of revenue.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was almost double year on year as the company witnessed a growth in volumes. However, owing to a rise in cost of production due to increase in cotton prices, and prices of raw materials, dyes and chemicals, increase in gas tariff in addition to a rise in ocean freight, profitability was lower year on year as net margin as recorded at 4 percent compared to 5.4 percent seen in the same period last year.

The second quarter of FY22 saw revenue higher by almost 63 percent year on year as sales volumes continued to grow. But yet again, cost of production shrunk profitability as in the winter months the company had to resort to usage of diesel to fulfil orders that raised costs further. Thus, net margin was recorded at 1.8 percent for the year versus 4.4 percent seen in 2QFY21.

While demand exists and revenue has been increasing for a lot of the textile companies, the rise in costs have not allowed profitability to take off accordingly. In order to avoid fluctuations in raw material prices, Artistic Denim has booked purchase of raw material for all production programs.