Azgard Nine Limited (PSX: ANL) was incorporated as “Indigo Denim Mills Limited” as a public limited company in Pakistan in 1993. The company is a textile composite unit engaged in the manufacturing and sale of yarn, denim, and denim products.
Pattern of Shareholding
As of June 30, 2024, the company has 485.410 million shares held by 6342 shareholders. The local general public holds 34.05 percent of the company’s shares followed by associated companies, undertakings, and related parties having a stake of 24.96 percent in ANL. Directors, CEO, their spouses, and minor children account for 24.48 percent of the company’s shares followed by joint stock companies holding 13 percent of ANL’s shares. Banks, DFIs, and NBFIs own 1.96 percent of the company’s shares while insurance companies hold 1.47 percent shares of ANL. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-2024)
Barring year-on-year declines in 2020 and 2023, ANL has recorded a sizeable growth in its net revenue during the period under consideration. The bottom line of ANL succumbed to the economic downturn in 2020 resulting in net loss. In 2021, the bottom line posted the highest year-on-year growth. 2022 shows a distinct pattern whereby the company attained the highest revenue growth, but the bottom line didn’t follow suit and dropped drastically. ANL’s bottomline staggeringly rebounded in 2023 followed by a plunge in 2024. The company’s margins which registered reasonable growth in 2019 nosedived in 2020. In 2022, gross margin dipped, however, operating and net margins recovered. 2022 saw erosion of ANL’s margins followed by a rebound in 2023. In 2024, all the margins eroded. The detailed performance review of the period under consideration is given below.
In 2019, ANL registered a 26.48 percent year-on-year rise in its topline which clocked in at Rs.20,214.97 million. This was on the back of a 41 percent improvement in the sales of the spinning division and a 39.4 percent increase in the sales of the garment division. The weaving division also posted a 6.4 percent rise in 2019. Both export and local sales posted tremendous growth of 28 percent and 58 percent respectively in 2019. Depreciation in the value of the Pak Rupee also proved to be a boon for the export sales of the company and resulted in a healthy GP margin of 17.26 percent in 2019 versus a GP margin of 16.21 percent posted in the previous year. In absolute terms, gross profit enlarged by 34.63 percent year-on-year in 2019. Selling & distribution expenses inflated by 35.12 percent year-on-year in 2019 which was the consequence of higher payroll expenses, freight, advertising & marketing expenses as well as commission incurred during the year. Administrative expenses posted a marginal 3.94 percent uptick in 2019 which was primarily due to higher payroll expenses. ANL expanded its workforce from 5992 employees in 2018 to 6763 employees in 2019 as the company undertook BMR in its garment division which resulted in better capacity utilization. 43.16 percent lower other income recorded by the company in 2019 was because the company didn’t book any reversal of provision for trade debt as it did last year. Other expenses mounted by 283.23 percent in 2019 on account of profit-related provisioning and a deficit on the revaluation of assets. Operating profit increased by 39.65 percent year-on-year in 2019 with OP margin marching up to 10.04 percent from OP margin of 9.09 percent in the previous year. Exchange loss on foreign currency borrowings and higher discount rates coupled with increased borrowings translated into 32.41 percent higher finance cost recorded by ANL in 2019. Net profit grew by 55.28 percent year-on-year in 2019 to clock in at Rs.305.32 million with EPS of Rs.0.67 versus EPS of Rs.0.43 recorded in 2018. NP margin also improved from 1.23 percent in 2018 to 1.51 percent in 2019.
In 2020, the topline of ANL plunged by 16.35 percent year-on-year to clock in at Rs.16,909.30 million. This was because the major customers of the company either canceled or delayed their orders due to the lockdown imposed by the government owing to the spread-out of the global pandemic. The export sales of the company took a hit and shrank by 14 percent year-on-year to clock in at Rs. 15,547 million while local sales also plunged by 33 percent year-on-year to clock in at Rs.1047 million. ANL also operated on a curtailed capacity which enabled it to reduce its cost of sales; however, GP margin dropped to 14.56 percent in 2020 due to high volatility in raw material prices, Pak Rupee depreciation, and supply chain disruptions on the back of COVID-19. The company tried to keep its operating expenses in check. Distribution expenses slid by 2.9 percent year-on-year in 2020 due to lower freight expenses. Administrative expenses posted a meager uptick of 7 percent in 2020 on the back of higher payroll expenses despite the fact that the number of employees was reduced from 6973 in 2019 to 5605 in 2020. Other income performed exceptionally well due to lucrative return on bank deposits, yet operating profit slipped by 43.15 percent year-on-year in 2020 with OP margin sliding down to 6.82 percent in 2020. Finance costs also dropped by 16 percent year-on-year mainly on account of a massive plunge in the exchange loss on foreign currency borrowings. The interest/markup expense kept growing during the year due to increased short-term and long-term borrowings and a high discount rate in the first three-quarters of FY20. ANL posted a net loss of Rs.389.45 million with a loss per share of Rs.0.84 in 2020.
As the economy entered the phase of a nascent recovery in 2021, ANL made the most of it and was able to attain 30.52 percent year-on-year growth in topline which clocked in at Rs.22,070.23 million. This was the result of 24 percent year-on-year growth in export sales and 93 percent year-on-year growth in local sales to clock in at Rs.19,377 million and Rs. 2,017 million respectively. However, high prices of raw materials such as cotton, yarn, and fabric resulted in a slightly lesser GP margin of 14.45 percent in 2021 despite a 29.5 percent rise in gross profit in absolute terms. Another factor that affected the gross margin of the company was the stability in the value of Pak Rupee against the greenback which resulted in lesser translation gain. Distribution expense inched up by 10.53 percent in 2021 on account of higher freight and commission. Administrative expenses also rose by 10.89 percent during the year as a result of higher utility charges and elevated payroll expenses as ANL’s workforce expanded to 6889 employees in 2021. Other expenses took a massive jump of 526.41 percent in 2021 due to an increase in provisioning done against trade receivables, WPPF, and impairment loss on investments. ANL registered a 40.27 percent escalation in its operating profit in 2021 with OP margin slightly rising up to 7.33 percent. Finance cost buttressed the bottom line as it slid by 29.18 percent in 2021 due to a low discount rate during the year coupled with exchange gain on foreign currency borrowings as against exchange loss recorded in the previous year. The major shift to the bottom line came on the back of debt restructuring during the year which enabled the company to book a gain worth Rs.7062.85 million which not only improved the equity of the company but also resulted in the highest-ever bottom line seen by the company. ANL posted a net profit of Rs.7559.40 million with EPS of Rs.15.38 and NP margin of 34.25 percent in 2021.
In 2022, the company attained the highest year-on-year growth of 53 percent in its topline which clocked in at Rs.33,768.79 million. Export sales were the major growth propeller which grew by 62 percent year-on-year to clock in at Rs.31,480 million. Local sales showed a marginal uptick of 3.2 percent year-on-year in 2022 to clock in at Rs.2083 million. Despite handsome sales growth, the margins remained under pressure owing to a significant increase in energy tariffs and prices of gas and other raw materials. Gross profit rebounded by 46 percent year-on-year in 2022, however, the GP margin dropped to 13.79 percent. High freight charges and commission exacerbated the distribution expense which surged by 81.39 percent in 2022. The administrative expense also soared by 20.77 percent in 2022 as a result of higher payroll expenses as the number of employees increased to 7110 in 2022. Higher traveling, conveyance, and entertainment also contributed to inflating the administrative expenses in 2022. ANL’s operating profit rose by 30.34 percent in 2022; however, its OP margin slid to 6.25 percent. Financial restructuring greatly reduced the debt burden and hence the finance cost of the company shrank by 15.87 percent in 2022. However, the lower gain on the restructuring loan in 2022 when compared to 2021 considerably affected the bottom line. This coupled with the amortization of notional income resulted in 90.83 percent year-on-year erosion in ANL’s net profit in 2022 which clocked in at Rs.693.05 million with EPS of Rs.1.41 and NP margin of 2.05 percent.
ANL’s topline dropped by 6.51 percent year-on-year to clock in at Rs. 31,571.12 million in 2023. This was because the demand for textiles experienced a massive slowdown during the period due to the recession and slowdown of economic activity both locally and internationally. During the year the company faced myriad challenges such as high raw material prices, energy tariffs, and devastating floods which resulted in lower crop yields. Its export sales dipped by 8 percent in 2023 while local sales grew by 14 percent. However, depreciation in the value of local currency helped the company attain a better GP margin of 16.11 in 2023 with gross profit having grown by 9.21 percent. ANL registered a 24.90 percent dip in its distribution expense in 2023 which was due to significantly lesser commission and freight expense incurred during the year. Administrative expenses surged by 15 percent in 2023 on account of higher payroll expenses, traveling & conveyance, repair & maintenance, fuel, and power as well as fuel & power charges coupled with depreciation. Other income amplified by 353.44 percent in 2023 mainly on the back of higher profit on saving deposits. This greatly helped ANL’s operating profit to grow by 47.3 percent in 2023 with OP margin climbing up to 9.84 percent. 6.6 percent higher finance cost was the result of the higher discount rate. ANL’s net profit grew by 112.17 percent to clock in at Rs.1470.45 million in 2023 with EPS of Rs.2.99 and NP margin of 4.66 percent.
In 2024, ANL posted 16.37 percent year-on-year growth in its topline which clocked in at Rs.36,738.69 million. This came on the back of 19 percent year-on-year growth in export sales. Conversely, local sales slid by 14 percent in 2024. Cost of sales mounted by 20.58 percent in 2024 due to increased raw material and energy costs. This resulted in a 5.55 percent decline in gross profit with GP margin falling down to its lowest level of 13 percent. Distribution expenses mounted by 42.49 percent in 2024 due to a spike in sea freight costs on account of attacks on commercial ships passing through the lower Red Sea by the Houthi rebels in Yemen. Moreover, an increase in the advertising & promotion budget, salaries & wages of the sales force as well as traveling & conveyance charges also contributed to driving up the distribution expense in 2024. Administrative expenses ticked up by 7.49 percent in 2024 due to higher payroll expenses as the number of employees increased from 6190 in 2023 to 8082 in 2024. Other income strengthened by 62.68 percent in 2024 due to hefty returns on mutual funds and return on bank deposits. Other expenses slid by 38.47 percent in 2024 due to lesser provisioning done for WPPF. This translated into a 21.91 percent diminution in operating profit with OP margin ticking down to 6.61 percent. Finance costs escalated by 34 percent in 2024 due to higher discount rates and increased utilization of working capital lines. Amortization of notional income on redeemable capital and zero coupons privately placed TFCs. Net profit slumped by 64 percent to clock in at Rs.529.57 million in 2024. This translated into EPS of Rs.1.08 and NP margin of 1.44 percent.
Recent Performance (1HFY25)
During the first half of FY25, ANL posted 29.86 percent year-on-year growth in its topline which clocked in at Rs.21,979.36 million. This was due to gradual demand recovery. Higher energy costs and raw material prices pushed down the GP margin to 12 percent in 1HFY25 versus the GP margin of 12.76 percent recorded in 1HFY24. This was despite 23 percent year-on-year growth in gross profit in absolute terms. Geopolitical tensions in the Middle East resulted in higher freight charges which pushed up distribution expense by 48.59 percent in 1HFY25. Inflationary pressure pushed up administrative expenses by 10.50 percent in 1HFY25. Other income slid by 4.66 percent in 1HFY25 probably due to lower profit from financial assets on the back of monetary easing. Lower profit-related provisioning appears to be the reason for the 8 percent slide in other expenses in 1HFY25. ANL posted a 6.65 percent uptick in its operating profit in 1HFY25, however, OP margin dipped to 5.78 percent in 1HFY25 versus OP margin of 7 percent in 1HFY24. Finance cost multiplied by 22.77 percent in 1HFY25 due to delays in government funds which tightened the liquidity position of the company. Amortization of notional income grew by 2.87 percent in 1HFY25. All these factors translated into a 32.57 percent drop in net profit which clocked in at Rs.200.03 million in 1HFY25. EPS dipped from Rs.0.60 in 1HFY24 to Rs.0.41 in 1HFY25. NP margin tumbled from 1.75 percent in 1HFY24 to 0.91 percent in 1HFY25.
Future Outlook
With the anticipation of demand resurgence in both local and export markets, ANL’s topline is expected to enlarge. Lower inflation and discount rates also support the business setting. Regional conflicts and elevated energy costs are the downside risks for the company.
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