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 2024, the company had a herd size of over 1300 animals. Y.B Holdings (Private) Limited is the holding company of GADT.

Pattern of Shareholding

As of June 30, 2024, GADT has a total of 28.029 million shares outstanding which are held by 2065 shareholders. Y.B Holdings (Private) Limited has the majority shareholding of 69.57 percent in GADT followed by the local general public holding 19.87 percent of the company’s shares. Banks, NBFIs, Insurance, Joint Stock Companies, Pension Funds, Charitable funds and REIT collectively account for 9.57 percent shares of GADT. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-24)

During the period under consideration, GADT’s topline has plunged only once i.e. in 2020, however, its bottom line fell thrice i.e. in 2020, 2022 and 2023. The gross margin and operating margin of the company grew in 2019 and then tumbled in 2020. Both the margins then took off until 2022 followed by a plunge thereafter. Conversely, net margin followed a downward trajectory until 2020 followed by a rebound in 2021 and 2022. GADT’s net margin then shrank in 2023 and 2024. The detailed performance review of the period under consideration is given below.

In 2019, GADT’s topline grew by 13.29 percent year-on-year on the back of improved demand and better pricing. While export sales contributed 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 exports posted 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 10.6 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 48.73 percent growth in its gross profit with GP margin climbing up to 9.27 percent in 2019 versus GP margin of 7.1 percent recorded in 2018. Distribution expense slid by 8.13 percent year-on-year in 2019 due to lesser export sales which drove down the freight charges. However, administrative cost posted 23.52 percent spike during the year due to higher payroll expense on account of inflation coupled with an uptick in the number of employees to 4983 in 2019 from 4975 in 2018. Other expense slid by 38.8 percent year-on-year in 2019 on account of no exchange loss incurred on foreign currency transactions while other income shrank by 61.98 percent year-on-year in 2019 as export rebate for spinning business wasn’t extended in 2019. All these factors culminated into 45.5 percent rise in operating profit in 2019 with OP margin moving up to 7.3 percent versus OP margin of 5.7 percent posted in 2018. Finance cost grew by a massive 91.42 percent year-on-year in 2019 which was 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 1.13 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 bottom line growth to 0.1 percent in 2019. Net profit stood at Rs.1186.10 million in 2019 with NP margin of 3.8 percent versus NP margin of 4.3 percent registered in 2018. EPS also posted a marginal growth to settle at Rs.42.32 in 2019 as compared to the EPS of Rs.42.29 in the previous year.

GADT’s topline registered 7.15 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 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 5.58 percent in 2020 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 down at 7.73 percent in 2020 with 22.52 percent plunge in gross profit in absolute terms. Distribution expense continued to grow by 18 percent year-on-year in 2020 due to high export sales. Administrative expense fell by 3.29 percent in 2020. Other expense drastically grew by 829.90 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. A 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 offered some respite and ticked down by 17.36 percent in 2020. However, 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 bottom line posted a freefall of 96.16 percent in 2020 to clock in at Rs.45.5 million. This translated into the lowest NP margin of 0.16 percent and EPS of Rs.1.62 in 2020.

GADT’s topline posted a strong rebound and grew by 41.48 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 122 percent in 2021 with GP margin significantly rising to 12.13 percent due to robust volume and pricing. Higher freight charges for local and foreign sales coupled with increased volumes resulted in33.49 percent spike in distribution cost in 2021. Administrative expense also registered17.52 percent rise in 2021 due to bigger payroll expense on account of inflation as well as an 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 by 68.96 percent in 2021 as the company didn’t incur any exchange loss on its foreign currency transactions. Other income posted an encouraging 36.59 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 427.62 percent in 2021 with OP margin climbing up to 9.7 percent. Finance cost tumbled by another 30.58 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 37.55 percent in 2021 and was able to offset the finance cost. This resulted in 7667.43 percent growth in net profit in 2021 which stood at Rs.3534.10 million with NP margin of 8.62 percent and EPS of Rs.126.08.

The topline growth trajectory continued in 2022; however, the momentum was a little lower than the previous year. GADT topline grew by 33.7 percent in 2022. This was on account of a momentous rise in the yarn prices, an increase in the knitting business customer base as well as an 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 49 percent year-on-year growth. Local sales and direct exports 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, the 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. In absolute terms, gross profit strengthened by67.64 percent in 2022. Distribution expense posted 134.82 percent spike in 2022 owing to higher export sales and increase in freight charges due to petroleum price hike coupled with supply chain constraints. Inflationary pressure resulted in 14.98 percent escalation in administrative expenses in 2022. Higher provisioning against WWF and WPPF resulted in 49.54 percent hike in other expense in 2022. Gain arising from changes in the fair value of livestock coupled with higher scrap sales translated into 24.2 percent bigger other income in 2022. Operating profit grew by 59.83 percent 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 13.44 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 62.91 percent growth in 2022 which offset the finance cost by a high margin. Bottom line grew by 61.67 percent in 2022 to clock in at Rs.5713.57 million with NP margin of 10.42 percent – the highest since 2018 and an EPS of Rs.203.84.

GADT ended 2023 with a marginal 5.78 percent growth in its topline. Sales volume of both yarn and knitted sheets remained tamed during the year and the topline growth was merely the result of price increase to factor in higher prices of yarn and Pak Rupee depreciation. Cost of sales grew by 11.49percent 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 a 26 percent shrinkage in gross profit with GP margin sliding down to 10.63 percent. Distribution expense took a dip of 43.10 percent due to depressed volume and a drop in global freight charges due to some respite seen in the global petroleum prices in 2023. Market induced rise in salaries and wages pushed the administrative expense up by 32.11 percent in 2023. This was despite the fact that the number of employees was reduced from 4874 in 2022 to 4183 in 2023. Other expense nosedived by 32.23 percent on account of lower provisioning for WWF and WPPF in 2023. Other income grew by 133 percent in 2023 mainly on account of gain arising from changes in fair value of livestock. Higher scrap sales and gain on sale of fixed assets also contributed to driving up other income in 2023. Operating profit dwindled by 17.6 percent in 2023 with OP margin slipping to 9 percent. Finance cost grew by a massive 293.36 percent in 2023 due to high discount rate coupled with increased working capital requirement and also because of long-term borrowings for the purchase of plant and machinery and investment in value-added sectors. Share of profit from associates grew by 53.10 percent in 2023 due to one-time gain recorded by Lucky Core Industries Limited on account of sale of its investment in Nutri Co Morinaga Private Limited. GADT’s net profit contracted by 42.39 percent year-on-year in 2023 to clock in at Rs.3291.87 million with NP margin of 5.68 percent. EPS also slumped to Rs.117.44 in 2023.

GADT recorded 25.39 percent year-on-year enhancement in its net sales in 2024. This was the consequence of improved sales volume coupled with upward price revision. However, export prices were affected in dollarized terms due to availability of cheaper yarn in the international market. While the company tried to rationalize its cost by altering its procurement mix, increase in power generation from alternate sources, unprecedented hike in natural gas tariff resulted in 30.63 percent surge in cost of sales in 2024. This squeezed the gross profit by 18.65 percent in 2024 with GP margin falling down to 6.9 percent. Distribution expense ticked up by 5.71 percent in 2024 due to higher salaries, loading & other charges, travelling &conveyance and bank charges on export documents. Administrative expense escalated by 12.63 percent in 2024 on account of higher payroll expense even though the workforce was right sized to 4013 employees in 2024. Other expense slumped by 65.6 percent in 2024 as no profit related provisioning was done during the year. Other income also eroded by 34.45 percent in 2024 due to lower gain recorded from changes in the fair value of livestock. GADT recorded 24.94 percent decline in its operating profit in 2024 with OP margin slipping to 5.41 percent. Finance cost mounted by 84.94 percent in 2024 on the back of higher discount rates and increased working capital related borrowings. The share of profit from associate ticked down in 2024 due to high-base effect as Lucky Core Industries Limited recorded a one-off gain on sale of its stake in Nutri Co Morinaga Private Limited in the previous year. GADT recorded 75.86 percent year-on-year drop in its net profit which stood at Rs.794.55 million in 2024 with EPS of Rs.28.35 and NP margin of 1.1 percent.

Future Outlook

The company is actively looking to enhance the customer base of its value-added segment in the international market. One such project is completed in 2024 which will result in cost rationalization and enable the company to build profitable synergies, consequently buttressing the margins. Political and economic stability will also enable the company to operate at its optimum potential and grab opportunities both at home and in the export market. The company needs to curtail its finance cost and power cost to fully reflect the positive effect of the aforementioned developments on its profitability.