Gadoon Textile Mills Limited

Gadoon Textile Mills Limited (PSX: GADT) was established as a public limited company in 1988 under the repealed Companies Ordinance, 1984. It manufactures and sells yarn and knitted fabrics. The company is part of the Yunus Brothers Group (YBG) that was formed in 1962. Y.B. Holding (Private) Limited is the ultimate holding company of the group.

Shareholding pattern

As at June 30, 2021, over 69 percent shares are held in associated companies, undertaking and related parties. Within this category, Y.B Holding (Private) Limited is the sole shareholder. The local general public owns 20 percent shares followed by nearly 10 percent in banks, DFIs, NBFIs, etc. The directors, CEO, their spouses and minor children own less than 1 percent share while the remaining close to 1 percent share is with the rest of the shareholder categories.

Historical operational performance

Gadoon Textile Mills has mostly seen a growing topline with the exception of a few years. Profit margins, on the other hand, increased between FY16 and FY18, declined in FY19 and FY20, before rising again in FY21.

In FY18, revenue grew by 18.5 percent to reach Rs 27.5 billion in value terms. There was an increase in export sales as well local sales by 36 percent and 10 percent, respectively. Export sales were encouraged by the government’s export package, while currency devaluation further boosted exports. Export sales of knitted fabric alone saw a 49 percent rise. Moreover, cost of production reduced marginally to 93 percent that allowed gross margin to improve to 7 percent. With little changes in other elements, and continued support from other income and share of profit from associates, net margin also increased to 4.3 percent for the year.

Revenue growth in FY19 stood at over 13 percent. Most of this was associated with local sales that witnessed a growth of 32.6 percent. Export sales, however, declined by 19 percent. This was attributed to “non-availability of export rebate for spinning segment as compared to SPLY” in addition to trade war between world economies. As a result, the country received fewer orders from China- a prime export destination for Pakistan. Gross margin increased to 9.3 percent as cost of production fell to 90.7 percent of revenue. However, net margin was lower at 3.8 percent due to an escalation in finance expense owing to high interest rates.

Revenue in FY20 contracted by 7 percent. Most of the loss in sales and profitability was concentrated in the last quarter that saw the onset of Covid-19 pandemic. With strict lockdowns in place, inventory levels rose that increased the price of yarn. Thus, gross margin reduced to 7.7 percent. With a significant exchange loss of Rs 889 million, other expenses alone consumed over 3 percent of revenue. Thus, net margin contracted to less than 1 percent.

At 41.5 percent, the company saw the largest growth in revenue in FY21 seen since FY12. Topline reached Rs 41 billion with local sales registering a growth of close to 58 percent and export sales increasing by 3.2 percent. The growth was attributed to better sales volumes and price as demand increased particularly in the value-added sector of the textile industry after subdued activity of several months during the Covid-19 pandemic. With cost of production reducing to almost 88 percent, gross margin increased to 12 percent. Net margin increased to 8.6 percent as operating expenses consumed a smaller share in revenue, coupled with additional contribution to the bottomline from other income and share of profit of associates. At Rs 3.5 billion, bottomline stood at an all-time high.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by over 46 percent year on year. This was attributed to resumption of economic activity that was unusually low in the same period last year due to Covid-19. There was a significant increase in export sales of knitted sheets as the international customer base expanded while local sales increased on the back of demand from the value-added sector. With a rise in selling prices, net margin increased drastically year on year from 2 percent in 1QFY21 to 17.3 percent in 1QFY22.

The second quarter also saw higher revenue year on year by almost 40 percent as growth momentum continued with higher exports and local sales. Moreover, higher selling price owing to rise in global commodity prices also contributed to a higher topline that resulted in a higher net margin for the quarter at 9.6 percent compared to 6.8 percent in 2QFY21.

The company remained on its growth trajectory in 3QFY22 as revenue grew by 18.4 percent year on year for similar reasons- higher demand and higher selling prices. With a decline in cost of production as a share in revenue from 87.6 percent in 3QFY21 to almost 84 percent in 3QFY22, profitability improved from a net margin of 9 percent in same period last year to 11 percent in 3QFY22. Unlike previous two quarters, the difference in net margin was less pronounced as distribution expense made a larger share in revenue year on year due to increase in sales, in freight charges due to shipping supply constraints and global oil prices. While topline for the company has been growing on the back of higher prices, it has also managed to maintain or decrease its costs effective procurement strategy and cost rationalization as is reflected in higher profit margins despite inflationary pressures witnessed in the economy.