Azgard Nine Limited

Azgard Nine Limited (PSX: ANL) was established as a public limited company in Pakistan. It has a composite spinning, weaving, dyeing and stitching unit. The company manufactures yarn, denim and denim products.

Shareholding pattern

As at June 30, 2021, close to 25 percent shares are held in associated companies, undertakings and related parties. The local general public owns over 40 percent shares while the directors, CEO, their spouses and minor children hold close to 12 percent shares. About 15 percent shares are held in joint stock companies while the remaining roughly 8 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has seen a fluctuating topline over the years. Gross margins and operating margins have remained stable between FY16 and FY21, while net margin grew between FY16 and FY19, declined slightly in FY20 and inclined sharply in FY21.

At almost 25 percent, the company witnessed the highest growth in topline thus far in FY18 to reach close to Rs 16 billion. The increase was largely attributed to export sales that posted a growth of 26 percent. Local sales, on the other hand declined by 19 percent. Segment-wise, the weaving segment grew by 18.8 percent while the garments division experienced a growth of 42.8 percent. The overall textile sector of the industry saw a rise of 9 percent in exports, except for the spinning sector. The company saw healthy profit margins in the garments division while the denim segment saw declining profit margins due to diminishing demand from Turkey. The overall rise in revenue reflected in the bottomline as gross margin grew to 16.2 percent and the company posted a net profit of Rs 197 million versus a net loss of Rs 134 million in FY17.

Revenue growth was even higher in FY19 as it grew by 26.5 percent to cross Rs 20 billion. Export sales registered a growth of 28 percent while local sales grew by 58 percent. Note that export sales make up majority of the sales of the company. The company undertook BMR activities in the garments division that improved the capacity utilization of the division resulting in better volumes. This resulted in a 39 percent growth in sales from the garments division while the weaving segment grew by over 6 percent. The spinning segment increased by 41 percent. With cost of production reducing further to almost 83 percent, gross margin increased to 17.25 percent. Net margin was also higher at 1.5 percent, but the increase was less pronounced due to the rise in distribution and finance expense as a share in revenue.

The company saw the biggest contraction in revenue in FY20 since FY16 by over 16 percent with topline falling close to Rs 17 billion. Export sales fell by nearly 14 percent. Local sales also followed with a decrease by 33 percent. Majority of the loss in revenue was seen in the second half of FY20 when Covid-19 was declared a pandemic. Due to lockdowns and border closures, orders were delayed and cancelled along with a volatility in raw material costs and other inputs as supply chains were disrupted too. With costs intact, the company posted a net loss of Rs 389 million.

Topline saw the biggest growth in FY21 by 30.5 percent. Revenue cross Rs 22 billion in value terms, with export sales growing by 24.4 percent and local sales nearly doubled year on year to reach Rs 2 billion. Although cost of production remained close to 85 percent, thus keeping gross margin also around 14 percent, operating margin improved on the back of a decline in operating expenses as a share in revenue. Additionally, the company undertook restructuring whereby it sold a stitching unit and is in the disposal process of another unit. Through this and the proceeds from a rights issue, the company settled its debt and related mark-up thus significantly reducing its finance expense as a share in revenue. The gain on restructuring of loans amounted to Rs 7 billion that led net margin to peak at over 34 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 grew by 43.5 percent year on year. However, profit margins were trimmed due to rise in expenses. Rising commodity prices is noted to be a worldwide phenomenon. The company experienced increases in prices of cotton, yarn, fabric and chemicals while sea freight charges have also risen. The entire burden of a higher production cost cannot be passed on to the customer, thus net margin was recorded at a lower 2.1 percent for the quarter compared to 4.2 percent in 1QFY21.

The second quarter also saw higher revenue year on year, by nearly 27 percent. While cost of production continued to make a larger of revenue year on year, 2QFY21 witnessed an additional reduction in profitability of Rs 196 million due to loss on sale of non-current asset held for sale that affected profit margins. In addition to absence of this loss, finance expense was also notably lower in 2QFY22 that helped improve net margin to 4 percent versus 1.4 percent in 2QFY21. The company managed to bounce back after FY20 in terms of growth in sales, however, the rising cost of inputs is a challenge for the company’s profitability.