Gul Ahmed Textile Mills

Gul Ahmed group has been operating as a textile trader since 1900s. However, the group commenced its manufacturing operations as Gul Ahmed Textile Mills (PSX: GATM) in 1953. It turned into a public limited entity in 1955.GATM is a composite textile mill engaged in the manufacturing and sale of textile products. Besides having a strong presence in the manufacturing sector, the company has a foothold in the retail business too. The retail business started from Karachi and stretched to more than 40 stores across the country offering products ranging from fashion and clothing to home accessories. GATM is a subsidiary of Gul Ahmed Holdings (Private) Limited

Pattern of Shareholding

As of June 30, 2022, GATM has a total of 740.059 million shares outstanding which are held by 7394 shareholders. Around 69 percent of the shares are held by associated parties, undertakings and related parties. Within this category, Gul Ahmed Holdings (Private) Limited leads with a shareholding of 55.85 percent in GATM. Individuals account for 11.56 percent shares while Directors have 7.4 percent stake in the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-23)

GATM’s topline has been riding a growth trail in all the years under consideration except 2020. Conversely, its bottomline slid twice during the period i.e. in 2020 and 2023. Its margins also took a significant dip in those years. In the remaining years, the margins largely followed an upward trajectory except for a marginal dip in gross margin in 2019 and 2021 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, GATM’s topline grew by 26 percent year-on-year. Owing to satisfactory demand in the local and export market, the company’s spinning unit achieved a capacity utilization of 94.18 percent which was equivalent to 44,871 kilograms while it’s weaving unit registered a capacity utilization of 88.5 percent equivalent to 148,564 sq. meters. Cost of sales grew by 26 percent year-on-year in 2019, resulting in 25 percent increase in gross profit while GP margin slightly dipped from 21 percent in 2018 to 20.92 percent in 2019. The company foresaw the depreciation of Pak Rupee and invested in building raw material inventory. This increased its working capital borrowings, however, helped the company to maintain its GP margin amid no considerable price increase by its customers. Distribution and administrative expense hiked by 18 percent and 16 percent respectively in 2019 mainly on account of increased payroll expense and higher freight charges. During the year, the company also increased its workforce from 13,076 employees in 2018 to 14,862 employees in 2019. Tremendous rise in exchange gain due to Pak Rupee depreciation drove up other income by 473 percent in 2019. GATM recorded 65 percent bigger operating profit in 2019. OP margin also rose from 7.27 percent in 2018 to 9.57 percent in 2019. Finance cost surged by 49 percent year-on-year in 2019 which was the result of higher discount rate and increased borrowings. GATM closed the year with 74 percent rise in its net profit which clocked in at Rs.3609.22 million with EPS of Rs.10.12 versus Rs.5.82 in 2018. NP margin also progressed from 4.55 percent in 2018 to 6.3 percent in 2019.

GATM succumbed to the subdued demand and halted business activity on account of COVID-19 and registered a drop in its local sales by around 21 percent year-on-year in 2020. Export sales managed to post a year-on-year uptick of 6 percent due to vigorous demand from its export markets in the 1HFY20, however,it couldn’t sustain the topline which plummeted by 6 percent year-on-year in 2020.Owing to weak demand in the 2HFY20 and COVID-19 related lockdowns, GATM achieved capacity utilization of 81.75 percent and 88.44 percent in its spinning and weaving units respectively. Cost of sales slid by 1 percent year-on-year as fixed overhead couldn’t be absorbed. This resulted in 24 percent year-on-year decline in GATM’s gross profit in 2020. GP margin also dropped to 16.8 percent in 2020. Distribution expense slid by 3 percent year-on-year in 2020 primarily on account of a plunge in rent & ancillary charges incurred during the year. Administrative expense posted a marginal 1 percent uptick in 2020 which was the effect of inflation as the company trimmed its workforce to 13,480 employees during the year. No WPPF booked during the year squeezed other expense by 15 percent in 2020. Other income couldn’t help the bottomline either and slipped by 68 percent year-on-year in 2020 mainly on account of a massive decline in foreign currency exchange gain. GATM operating profit thinned down by 65 percent in 2020 with its OP margin sliding down to 3.58 percent. Finance cost mounted by 36 percent year-on-year in 2020 and increased borrowings. Exchange loss on foreign currency loans and interest on liability against right-of-use assets also contributed towards a taller finance cost in 2020.As a result, GATM registered net loss of Rs.479.36 million in 2020 with loss per share of Rs.1.12

2021 recompensed the company for the losses it suffered in 2020 as its net sales posted a year-on-year growth of 46 percent in 2021. The growth came on the heels of a rebound in both local and export sales. The gross profit also grew by 42 percent year-on-year but high cost of raw material, increase in utility prices and supply chain and logistics challenges contained the GP margin which slightly slipped to clock in at 16.34 percent in 2021. The company was able to limit its administrative and distribution costs in 2021, other expenses grew by 96 percent year-on-year on the back of profit related provisioning. However, other expense was offset a massive 134 jump in other income mainly because of re-measurement of government grant and provision of GIDC. This translated in 289 percent jump in GATM’s operating profit in 2021 with OP margin climbing up to 9.53 percent. Besides, Finance cost also showed a downtick on the back of low discount rate. The company posted net profit of Rs.4424.54 million in 2021, culminating in to a PAT margin of 5.62 percent

2022 was characterized bygrave macroeconomic challenges such asfrequent power disruptions, high discount rate, weaker local currency and persistent political uncertainty. Massive floods in the country added further insult to the injury. The local sale of the company dropped by 62 percent year-on-year on account of muted demand as record high inflation considerably affected the purchasing power of consumers. Conversely, export sales boasted an impressive jump of 68 percent year-on-year in 2022. High export sales enabled the company to operate on its optimum capacity resulting in a year-on-year topline growth of 27 percent in 2022.High raw material prices, supply chain disruptions, Pak Rupee depreciation as well as increasing power cost coupled with power disruptions pushed up the cost by 26 percent year-on-year in 2022. Gross profit posted 35 percent rebound in 2022 with GP margin moving up to 17.32 percent. The company managed to cut back on its selling and distribution cost by 41 percent year-on-year in 2022mainly in the category of salary, wages and benefits as well as advertisement and publicity. Administrative cost also showed a plunge of 7 percent in 2022 due to lower payroll expense incurred during the year. Elevated profit related provisioning and loss on sale of fixed assets drove other expense up by 66 percent in 2022. Other income slipped by 6 percent year-on-year in 2022 particularly due to lower gain on re-measurement of GIDC. GATM was able to record 75 percent bigger operating profit in 2022 with OP margin of 13.10 percent. Higher discount rate, increased borrowings as well as finance cost on provision for GIDC drove the overall finance cost up by 37 percent in 2022. Yet, the company registered 100 percent enhancement in its net profit which clocked in at Rs.8861.65 million in 2022 with EPS of Rs.11.97 and NP margin of 8.84 percent - the highest ever since 2018.

In 2023, GATM’s topline posted a marginal 12 percent uptick. Revenue from export sales grew by 10 percent year-on-year in 2023 while local sales revenue registered 28 percent year-on-year progress. Export volume remained largely comparable to last year. Conversely, in local market, the company recorded increase in sales volume due to improved market share. Cost of sales surged by 15 percent year-on-year in 2023 due to hike in the prices of raw materials particularly on account of ban on imports from India, Pak Rupee depreciation as well as higher utility charges. This resulted in 4 percent erosion in GATM’s gross profit in 2023 with GP margin marching down to 14.9 percent – the lowest among all the years under consideration. Distribution expense spiked by 12 percent year-on-year in 2023 due to longer shipping period and exposure to higher exchange rates amid ban on imports from India. Administrative expense escalated by 54 percent year-on-year in 2023 driven by higher payroll expense, utility charges and travel expenditures. During the year, GATM’s workforce grew to 15,624 employees from 15,493 employees in the previous year. 50 percent lower other expense incurred by the company in 2023 was the result of lower profit related provisioning and lesser loss incurred in the disposal of its fixed assets. Other income also shrank by 16 percent in 2023 as there was no government grant, gain on re-measurement of GIDC as well as no reversals of provisioning like previous year. These factors overshadowed the improved foreign currency gain booked by the company during the year. GATM posted 14 percent thinner operating profit in 2023 with OP margin clocking in at 10.09 percent. Finance cost spiraled by 100 percent in 2023 which was the consequence of higher discount rate while the company trimmed down its short-term borrowings during the year. Net profit slipped by 55 percent in 2023 to clock in at Rs.3986.02 million with EPS of Rs.5.39 and NP margin of 3.56 percent.

Recent Performance (1QFY24)

GATM posted 29.62 percent year-on-year rise in its net revenue in 1QFY24. This came on the back of 33.67 percent increase in export sales to clock in at Rs.33,339 million while local sales slid by 9.89 percent to clock in at 2,303 million. Cost of sales soared by 32.68 percent in 1QFY24 on account of increased raw material prices, Pak Rupee depreciation, limited availability of natural gas which forced the company to switch to costly alternatives such as diesel, furnace oil and grid electricity. Gross profit grew by 9.57 percent in 1QFY24, however, GP margin rode down from 13.24 percent in 1QFY23 to 11.19 percent in 1QFY24. Selling & administrative expense magnified by 47.42 percent and 25.29 percent respectively during the period. The main factors behind higher operating expense were higher utility cost, adjustment in minimum wages, elevated ocean freight charges and Pak Rupee depreciation. Other income greatly buttressed operating profit as it multiplied by 282.65 percent in 1QFY24. While detailed financial statements are not yet released by the company, we can assume exchange gain to be one of the key factors behind this growth in other income. Operating profit enlarged by 13 percent in 1QFY24, however, OP margin marched down from 8.72 percent in 1QFY23 to 7.6 percent in 1QFY24. 127.58 percent spike in finance cost was the consequence of higher borrowing rates. GATM net profit declined by 56.52 percent in 1QFY24 to clock in at Rs.596.79 million with EPS of Rs.0.81 versus Rs.1.85 during the same period last year. NP margin also dropped from 4.99 percent in 1QFY23 to 1.67 percent in 1QFY24.

Future Outlook

Incredible improvement in cotton harvest has resulted in reduced cotton prices which could benefit local producers. However, high power cost, uncertain availability of natural gas as well as elevated finance cost will continue to erode the margins. Moreover, lower anticipated global growth as well as shrinking disposable income in the local market will further fade the demand.