Gadoon Textiles Mills Limited

Gadoon Textile Mills Limited (PSX: GADT) was incorporated in Pakistan as a public limited company in 1988. The company is engaged in the manufacturing and sale of yarn and knitted bedding products. Besides, the company also operates a dairy segment where its prime activity is the production and sale of milk. As of June 2022, the company had a herd size of 1100 animals. Y.B Holdings (Private) Limited is the holding company of GADT.

Pattern of Shareholding

As of June 30, 2022, GADT has a total of 28.029 million shares outstanding which are held by 2018 shareholders. Y.B Holdings (Private) Limited has the majority shareholding of 69.57 percent in GADT. This is followed by local general public holding 20.03 percent of the company’s shares. Banks, NBFIs, Insurance, Joint Stock Companies, Pension Funds, Charitable funds and REIT collectively have 9.4 percent stake in the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

During the period under consideration, GADT’s topline has plunged only once i.e. in 2020, however, its bottomline fell twice i.e. 2020 and 2022. The gross margin and operating margin of the company grew in 2019 and then tumbled in 2020. Both then took off until 2022 and then dropped in 2023. Conversely, net margin followed a downward trajectory until 2020 and then followed the similar route as gross and operating margin since 2021. The detailed performance review for the period under consideration is given below.

In 2019, GADT’s topline grew by 13 percent year-on-year on the back of improved demand and better pricing. While export sales contribute 26.7 percent to the net sales revenue in 2019, the majority of the sales revenue was concentrated in the local market. In 2019, the net sales from export posted a 19.2 percent year-on-year dip due to intense competition in the international market from countries like India and Bangladesh which have cost advantage over Pakistan. Moreover, there was non-availability of export rebate for the spinning segment in 2019. However, local sales revenue grew by 32.78 percent in 2019. Cost of sales grew by 11 percent in 2019 on account of soaring inflation, Pak Rupee depreciation and rising global commodity prices particularly yarn. However, with better product mix, upward price revisions and generation and utilization of energy mix at an optimum level by using more natural gas than furnace oil, GADT was able to attain a 49 percent growth in its gross profit with GP margin climbing up to 9.3 percent in 2019 versus 7.1 percent in 2018. Distribution expense slid by 8 percent year-on-year in 2019 due to lesser export sales which drove the freight charges. However, administrative cost posted a 24 percent spike during the year due to higher payroll expense on account of inflation coupled with an uptick in the number of employees during the year to 4983 from 4975 in 2018. Other expense slid by 39 percent year-on-year in 2019 on account of no exchange loss incurred on foreign currency transactions while other income shrank by 62 percent year-on-year in 2019 as export rebate for spinning business wasn’t extended in 2019. All these factors culminated into a 45 percent rise in operating profit with OP margin improving to 7.3 percent in 2019 versus 5.7 percent in 2018. Finance cost grew by a massive 91 percent year-on-year in 2019 which was not only the result of higher discount rate as the company shifted from foreign currency borrowings to local borrowings on account of Pak Rupee depreciation. Moreover, the company also availed LTFF to finance its new plant and machinery during the year which coupled with an increase in working capital requirements resulted in a steep rise in GADT debt-to-equity ratio from 7.24 percent in 2018 to 29.05 percent in 2019. Share of profit from Gadoon Holdings (Private) Limited posted a marginal 1 percent growth in 2019. High finance cost coupled with a reduction of tax credit on capital investment from 10 percent to 5 percent dampened the bottomline growth to 0.1 percent in 2019. Net profit stood at Rs.1186.10 million in 2019 with an NP margin of 3.8 percent versus 4.3 percent in 2018. EPS also posted a marginal growth to settle at Rs.42.32 in 2019 as compared to Rs.42.29 in the previous year.

GADT’s topline registered a 7 percent plunge in 2020. During 9MFY20, the company’s sales volumes were robust and the topline grew by 11.07 percent during the period. However, with the outbreak of COVID-19, the company’s performance was severely affected, translating into a 7 percent topline decline for the overall year. It is pertinent to note that export sales improved in 2020, particularly the indirect export of yarn stood at Rs.10,837 million. Direct exports also grew by 3.54 percent in 2020. The dent to the topline came on account of local sales which shrank by 51.54 percent in 2020. Cost of sales dropped by a lower percentage of 6 percent due to higher gas prices during the year and a steep rise in inventory holding cost due to lockdown imposed in the last quarter of 2020. This coupled with low prices of yarn impacted the gross margin of the company which settled at 7.7 percent in 2020 with a 23 percent plunge in gross profit. Distribution expense continued to grow by 18 percent year-on-year in 2020 due to high export sales. Administrative expense fell by 3 percent in 2020. Other expense drastically grew by 980 percent in 2020 due to a massive exchange loss of Rs.889.35 million incurred on foreign currency transactions in 2020. This was the result of converting the foreign currency denominated loans to low cost local borrowings where Pak Rupee depreciation came into effect. Huge other expense was one major factor that diluted GADT’s earnings in 2020 and culminated into a descend of 67 percent in GADT’s operating profit in 2020 with OP margin slipping to 2.6 percent – the lowest among all the years under consideration. Finance cost posted a respite and ticked down by 17 percent in 2020 due to the reason mentioned above. However, the long-term and short-term borrowings continued to mount in 2020 which included LTFF and working capital related borrowings respectively and took GADT’s debt-to-equity ratio to 39.57 percent in 2020. The bottomline posted a freefall of 96 percent in 2020 with net profit clocking in at Rs.45.5 million. This translated into the lowest NP margin of 0.2 percent and an EPS of Rs.1.62 in 2020.

GADT’s topline posted a strong rebound and grew by 41 percent in 2021. This was backed by accelerating prices of yarn coupled with higher volumes sold during the year. Local sales, indirect export and direct export grew by 54.4 percent, 61.9 percent and 2.9 percent respectively in 2021 owing to demand escalation as the economy gained momentum post COVID-19. Gross profit built up by 144 percent in 2021 with GP margin significantly rising to 12.1 percent due to robust volume and pricing. Higher freight charges for local and foreign sales coupled with increased volumes resulted in a 33 percent spike in distribution cost in 2021. Administrative expense also registered an 18 percent rise due to bigger payroll expense on account of inflation as well as increase in the number of employees increased from 4886 in 2020 to 4918 in 2021. Other expense which grew abnormally in the previous year shed its value by 69 percent in 2021 as the company didn’t incur any exchange loss on its foreign currency transactions. Other income posted an encouraging 37 percent growth in 2021 which was the effect of exchange gain, coupled with higher rebate on export sales and higher scrap sales in 2021. Operating profit escalated by 428 percent in 2021 with OP margin climbing up to 9.7 percent. Finance cost tumbled by another 31 percent in 2021 on the back of monetary easing and repayment of short-term borrowings due to better cash generation. Share of profit from an associate company (ICI Pakistan Limited now known as Luck Core Industries Limited) also grew by 38 percent and was able to offset the finance cost resulting in over 76 times growth in net profit in 2021. Net profit stood at Rs.3534.10 million in 2021 with an NP margin of 8.6 percent and an EPS of Rs.126.08.

The growth trajectory continued in 2022, however, the momentum was a little lower than the previous year. A year-on-year topline growth of 34 percent was recorded in GADT’s topline in 2022. This was on account of a momentous rise in the yarn prices; increase in knitting business customer base as well enhanced international presence. Indirect export which was the second largest source of revenue for GADT until 2021 after local sales became the largest source of revenue in 2022 after attaining a 49 percent growth. Local sales and direct export also grew by 14.99 percent and 43.87 percent respectively in 2022. Cost of sales grew by 29 percent year-on-year in 2022 owing to steep plunge in the value of Pak Rupee coupled with global commodity price hike owing to Russia Ukraine crisis, gas curtailment and spike in gas and electricity prices. However, increased proportion of export sales in the overall sales mix provided better returns to the company and its GP margin grew to 15.2 percent – the highest among all the years under consideration. Distribution expense posted a 135 percent spike in 2022 owing to an increase in export sales and increase in freight charges due to petroleum price hike coupled with supply chain constraints. Inflationary pressure also resulted in a 15 percent escalation in administrative expenses in 2022. Higher provisioning against WWF and WPPF resulted in a 50 percent hike in other expense. Gain arising from changes in the fair value of livestock coupled with higher scrap sales translated into a 24 percent bigger other income. Operating profit grew by 60 percent year-on-year in 2022 with OP margin also rising up to 11.6 percent. Despite multiple rounds of monetary tightening during the year, the company was able to trim down its finance cost by 13 percent and reduce its debt-to-equity ratio to 27.85 percent in 2022 from 38.38 percent in 2021. This was due to better working capital management and also because the company took optimum benefit of lower benchmark rates. Share of profit posted a healthy 63 percent growth in 2022 which offset the finance cost by a high margin. Bottomline grew by 62 percent in 2022 to clock in at Rs.5713.57 million with an NP margin of 10.4 percent – the highest since 2018 and an EPS of Rs.203.84.

Recent Performance (FY23)

GADT drew curtains on FY23 with a marginal 6 percent growth in its topline. While the detailed financial statements are awaited to discover the sales performance, 9MFY23 reports clearly shows that the sales volume of both yarn and knitted sheets remained tamed during the year and the topline growth was merely the result of price increases. Cost of sales grew by 11 percent in 2023 on account of a rise in gas and electricity prices, high raw materials charges due to global commodity super cycle and Pak Rupee depreciation. This resulted in 26 percent shrinkage in gross profit with GP margin sliding down to 10.6 percent from 15.2 percent in 2022. Distribution expense took a dip of 43 percent due to depressed volume and a drop in global freight charges due to some respite seen in the global petroleum prices in 2023. However, market induced rise in salaries and wages pushed the administrative expense up by 32 percent in 2023. Other expense nosedived by 32 percent maybe on account of lower provisioning for WWF and WPPF in 2023. Other income grew by 133 percent. Operating profit dwindled by 18 percent in 2023 with OP margin slipping to 9 percent versus 11.6 percent in 2022. Finance cost grew by a massive 293 percent in 2023 due to high discount rate coupled with increased working capital requirement on account of inflation and also because of long-term borrowings for the purchase of plant and machinery and investment in value-added sectors. Share of profit grew by 53 percent in 2023 due to one-time gain recorded by Lucky Core Industries Limited on account of sale of its investment in NutriCo Morinaga Private Limited. The net profit contracted by 42 percent year-on-year in 2023 to clock in at Rs.3291.87 million with an NP margin of 5.7 percent versus 10.4 percent in 2022. EPS also slumped from Rs.203.84 in 2022 to Rs.117.44 in 2023.

Future Outlook

Depressed demand in the local and international market coupled with high cost of production, high cost of borrowing, Pak Rupee depreciation and a surge in global commodity prices will keep GADT’s profitability and margins dampened in the near term. The company is actively looking to enhance the customer base of its value added segment in the international market which will result in cost rationalization and enable the company to build profitable synergies, consequently buttressing the margins.