Ghazi Fabrics International Limited

Ghazi Fabrics International Limited (PSX: GFIL) was incorporated in Pakistan as a private limited company in 1989 and was ultimately converted into a public limited company the very next year. The company is engaged in textile manufacturing, cotton and P.C. yarn as well as grey cloth that are marketed both within and outside Pakistan.

Pattern of Shareholding

As of June 30, 2023, GFIL has a total of 32.636 million shares outstanding which are held by 4740 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of GFIL with around 63.45 percent shares followed by foreign general public having 19.75 percent stake in the company. Local general public accounts for 16.099 percent shares of GFIL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

GFIL’s topline has slid twice i.e. in 2020 and 2023 during the period under consideration. Conversely, its bottomline appears to be in a mess, registering net losses since 2015. GFIL posted net profit in 2021 for the first time after 2014; however the bottomline sustained a massive decline the very next year and ended up in red zone yet again in 2023. GFIL’s margins have been oscillating over the years. The gross and operating margins of the company considerably improved in 2019 but doomed in 2020. In 2021, they maxed out only to plunge again in subsequent years. On the contrary, GFIL’s net margin posted positive figure after seven years in 2021 and 2022 which also turned negative in 2023. The detailed performance review of the period under consideration is given below.

In 2019, GFIL’s topline registered a splendid 42.71 percent year-on-year growth which came on the back of local sales while export sales inched down during the year due to increased cost of doing business on account of spike in electricity tariffs, replacement of local gas with RLNG, Pak Rupee depreciation as well as high discount rate. As a consequence, the local companies lost many international orders to competitor countries. Effective cost control measures put in place resulted in 70.53 percent improvement in GFIL’s gross profit in 2019 with GP margin reasonably improving from 5.9 percent in 2018 to 7.1 percent in 2019. Selling and distribution expense tapered by 18 percent year-on-year in 2019 on account of lesser carriage and freight as well as reduced export development surcharge on account of lower export volumes. Administrative expense showed no significant movement in 2019. The company earned exchange gain of Rs.18.867 million on its export sales in 2019 which drove the other income up by 70.55 percent year-on-year. Operating profit posted an impressive rebound of 1029.29 percent in 2019, resulting in OP margin of 3.8 percent versus 0.5 percent in 2018. Finance cost grew by 20.83 percent year-on-year in 2019 which was the consequence of increased borrowings and high discount rate during the year. GFIL’s gearing ratio grew from 52 percent in 2018 to 55 percent in 2019. The company was able to post profit before tax of Rs.61.95 million in 2019 as against the loss before tax of Rs.101.70 million incurred in the previous year. However, higher amount of deferred tax paid during the year again shoved GFIL into losses in 2019. Net loss clocked in at Rs.51.44 million in 2019 which was 70.64 percent lesser than the net loss registered by the company in 2018. Loss per share also climbed down from Rs.5.37 in 2018 to Rs.1.58 in 2019.

GFIL’s topline plummeted by 13.19 percent year-on-year in 2020 which was the combined effect of the imposition of sales tax on textile products and the outbreak of COVID-19. The decline in sales was primarily on account of lesser export sales. Conversely, local sales posted a marginal uptick during the year. Cost of sales also slid by 9.29 percent year-on-year, however, high electricity and gas prices and overall elevated level of inflation pushed the gross profit down by 64 percent year-on-year in 2020. GP margin also sank to 2.9 percent in 2020. Selling and distribution expense registered a cut of 22.56 percent year-on-year in 2020 mainly due to lesser carriage and freight charges as export volume slumped. Moreover, export development surcharge and other export expense also narrowed down during the year. Administrative expense dropped by only 2.91 percent year-on-year in 2020 essentially due to lower travelling and conveyance charges, vehicles running and maintenance as well as utilities due to lockdown imposed during the last quarter of FY20. Other expense stayed almost the same as last year while other income slipped by 58 percent year-on-year due to considerable decline in exchange gain as the company underperformed on exports front. GFIL registered operating loss of Rs.31.85 million in 2020 as against operating profit of Rs.206.98 million in the previous year. To add to ado finance cost grew by 19.32 percent year-on-year in 2020 as discount rate was high for the most part of the year. As a consequence, net loss magnified by 334.64 percent year-on-year in 2020 to clock in at Rs.223.59 million with loss per share of Rs.6.85.

2021 marked the pinnacle of success for GIFL characterized by robust topline growth to the tune of 34.79 percent year-on-year coupled with unparalleled escalation in bottomline and recovery from net losses after seven long years. However, it is discouraging to witness a downfall in export sales in 2021 too. Conversely, local sales performed quite well. Cost of sales inched up by 26.81 percent year-on-year in 2021, culminating into 299.32 percent year-on-year rise in gross profit with GP margin touching its optimum level of 8.7 percent. Selling and administrative mounted by 7.93 percent and 9.22 percent respectively in 2021. This was on account of higher sales volume which drove up the freight charges and increased human resources requirement which inflated the payroll expense. Other expense posted an extraordinarily steep growth of 1489.24 percent in 2021 on account of exchange loss to the tune of Rs.6.96 million due to depreciation of Pak Rupee and general increase in the prices of raw materials. Other expense was largely offset by 57.2 percent higher other income earned during the year as the company made lofty scrap sales in 2021. GIFL posted operating profit worth Rs.346.75 million in 2021 which translated into OP margin of 5.5 percent – the highest level since 2014. Finance cost also registered a reduction due to monetary easing and significantly lesser external financing obtained during the year as the company had an improved liquidity (see graph for liquidity ratios). GFIL’s gearing ratio also ticked down from 54 percent in 2020 to 39 percent in 2021. GFIL registered net profit of Rs.196.56 million in 2021 yielding a commendable net margin of 3.1 percent and EPS of Rs.6.02.

GFIL’s net sales sustained their upward trajectory in 2022 by posting a 36.17 percent year-on-year rise, yet, regrettably, it couldn’t be manifested into robust bottomline performance. Export sales continued to tick down while local sales performed impressively in 2022. Below target production of cotton crop drove up the prices. This coupled with sharp increase in electricity tariff, RLNG prices and declining value of Pak Rupee pushed the cost of sales up by 42.44 percent year-on-year in 2022. Gross profit sank by 29.88 percent year-on-year in 2022 with GP margin marching down to 4.5 percent from 8.7 percent in the previous year. Higher sales volume as well as increased prices of petroleum products resulted in higher freight charges, resulting in 44.14 percent year-on-year spike in selling and distribution expense in 2022. Administrative expense soared by 14.11 percent year-on-year on account of higher payroll expense. Other expense plunged by 71.63 percent in 2022 due to lesser profit related provisioning and no exchange loss incurred during the year. Other income grew by 48.14 percent in 2023 on account of exchange gain. Operating profit witnessed 53.98 percent year-on-year plunge in 2022 with OP margin falling down to 1.8 percent in 2022. Finance cost grew by 4.78 percent year-on-year in 2022 due to higher discount rate. Net profit witnessed 96.12 percent year-on-year decline in 2022 to clock in at Rs.7.625 million. This was reflected in a thin NP margin of 0.1 percent and EPS of Rs.0.23 in 2022.

Unfortunately, the onset of FY23 didn’t yield any favorable news for the organization. GIFL net sales declined by a massive 50.36 percent year-on-year in 2023. Not only did export sales take a slide in 2023, local sales which were performing well previously, also tapered off due to the prevailing economic and political crises in the country. Category-wise break-up of sales show that while the sale proceeds from cotton & viscose increased in 2023, fabric and yarn sales slumped. Cost of sales also dropped during the year, however, with a lower magnitude of 46.39 percent year-on-year. This was on account of devastating floods in the 1HFY23 which destroyed the cotton crop resulting in lower output and higher prices. This coupled with commodity super cycle in the international market and Pak Rupee depreciation, high electricity tariff and gas prices culminated into gross loss of Rs.135.58 million in 2023. The production remained halted due to shortage of raw materials amid restrictions on the opening of L/Cs during the year. Selling and administrative expense nosedived by 37.84 percent and 8.75 percent respectively due to lesser plant operations and low sales volumes. The company incurred significantly lesser carriage & freight charges and sales commission during the year. Workforce was also considerably squeezed from 2080 employees in 2022 to 655 employees in 2023, resulting in lesser payroll charges. GFIL registered operating loss of Rs.289.259 million in 2023. Finance cost grew by 32.65 percent year-on-year in 2023 owing to unprecedented level of discount rate prevailing in the country. This was despite the fact that GFIL reduced its debt profile during the year, resulting in a gearing ratio of 28 percent in 2023 versus 40 percent in 2022. Higher finance cost further worsened the financial performance of the company and resulted in net loss of Rs.451.259 million in 2023 with loss per share of Rs.13.83 in 2023.

Recent Performance (9MFY24)

GFIL’s net sales plummeted by 2.27 percent year-on-year in 9MFY24 due to depressed local and export sales during the period. Despite bumper cotton crop, prices couldn’t slide, resulting in 3.93 percent higher cost of sales in 9MFY24. This resulted in gross loss of Rs.367.18 million in 9MFY24, up 165 percent year-on-year. 32.89 percent year-on-year decline in selling & distribution expense during the period was the result of lower sales volume. Administrative expense posted 9.5 percent uptick during 9MFY24 due to high inflation. Lackluster export performance resulted in no exchange gain during the period, resulting in 88.19 percent lower other income during 9MFY24. Conversely, other expense surged by 26.54 percent during the period under consideration supposedly due to exchange loss. GFIL registered operating loss of Rs.500.02 million in 9MFY24, up 96.88 percent year-on-year. Finance cost inched up by 2.22 percent in 9MFY24 due to elevated discount rate. GFIL paid off a huge chunk of its outstanding loans during the period by obtaining interest free directors’ loan (classified as equity at face value) GFIL’s net loss surged by 64.64 percent year-on-year to clock in at Rs.629.409 million in 9MFY24 with loss per share of Rs.19.29 versus loss per share of Rs.11.71 recorded in 9MFY23.

Future Outlook

Elevated prices of raw materials in the international market coupled with Pak Rupee depreciation urged the local textile manufacturers to consume locally produced cotton. Higher demand of local cotton didn’t allow the prices to taper despite impressive output achieved during the period. In near term, high energy prices, conversion cost as well as elevated level of inflation and discount rate took will continue to take toll on the competitiveness of local textile industries in the export market amid depressed demand in the home market.