Indus Dyeing & Manufacturing Company Limited

Starting from two ginning factories in the 1950s, the Indus Group has grown to become a leading name in the Pakistani textile business. With a market capitalisation of over Rs 11.3 billion, Indus Dyeing & Manufacturing Company Limited now ranks in the top four textile stocks on the KSE, up there with the likes of Gul Ahmed and Feroze1888.
The company has three plants in Hyderabad, two in Muzaffargarh, and one in Karachi. It is a prime example of a vertically integrated textile company; Indus operates in four segments - ginning, yarn spinning, towels, and power generation. Of these, yarn-spinning is its core business and accounts for over 80 percent of sales amount and workforce.
The towel division began production in 2005 and has an integrated plant with the most modern Air-Jet weaving machines other equipment. For power generation, Indus has natural gas generators from leading companies of Europe and USA, ensuring continuous supply of electricity.
With annual sales north of $150 million, Indus Dyeing & Manufacturing has under its belt a number of export markets where it sells its quality products, and it has received many awards and recognitions, including the Best Export Performance Trophy.
PRIOR PERFORMANCE Indus has seen consistent growth in its top line, but the bottom line tells an entirely different story. Sales have grown steadily, showing a 71 percent increase over FY10 to nearly Rs 19 billion as of FY14. However, over the same five-year period, net profit has fluctuated greatly, and as of FY14 registered an overall decline of 36 percent from FY10. Naturally, this has to do with the global commodity prices.
The company's gross margins and net margins also show a highly fluctuating trend for the same reason. As can be seen from the bar chart, FY10 was a golden year for the company, with skyrocketing international yarn prices. However, as of FY14, gross margins and net margins declined by around 800 and 700 basis points year-over-year, respectively.
Indus relies far too heavily on exports. It's presence in the local market is considerably lower than the revenues it makes of exports. As of FY14, the company's exports made up almost 84 percent of net sales. Of these, its core business is cotton yarn. This does not bode well due to the fluctuations in the international market, not to mention the depressed prices as of late.
RECENT PERFORMANCE For the nine months ended FY15, Indus reported dismal financial results. Much like its peers, the company was not immune to the problems plaguing the textile industry. While top line managed to register growth, both gross and net margins took severe hits.
It seems the company suffered lowered margins as it had to emphasise volume over value due to depressed international yarn prices. As of the ten months ended April, Pakistan's cotton yarn exports declined by over 13 percent year-over-year. Raw cotton and towels suffered a similar fate, declining by 4 and 5 percent year-over-year, respectively.
Sales have not been increasing accordingly with costs and gross profits and margins are being hit. The usual suspects are to blame - an overvalued Rupee against the dollar, competition from India and other regional players, energy crisis, depressed international prices on lackluster demand from China.
Although lower fuel costs and raw cotton costs should have helped in providing some cushion to profitability, the slump in yarn prices was far greater. And given its low presence in the domestic market, this was the perfect recipe for disaster for Indus.
Outlook Supposedly, a business-friendly budget for the dying textile industry was announced by Ishaq Dar earlier this month. There were some positives, such as lowering of export refinance rate and long-term refinance rate. The promise of Rs 64 billion to the textile industry from 2014-2019 and the repayment of duty drawbacks also bodes well, but only if implemented.
On the flipside, the call for zero-rated exports was denied and tax was actually increased from 2 percent to 3 percent. This will further strain the liquidity of textile companies. The dollar-rupee parity remains unaddressed. Moreover, fuel prices have been increased and the GIDC still remains in place. All this will further hurt profitability.
Despite the gloomy state of the industry, Indus has been expanding and installing more spindles and power generation equipment to its plants. However, it may be time to start expanding the company's local footprint.

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Indus Dyeing & Mfg Co Limited

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Rs (Million)          9MFY15     9MFY14            YoY

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Sales                 16,116     13,751            17%

Cost of Sales         14,531     11,873            22%

Gross Profit           1,584      1,879           -16%

GP Margin                 10%       14%   down 400 bps

Other Operating Income     5         45           -89%

Administrative Expenses  168        185            -9%

Distribution Expenses    373        294            27%

Other Operating Expenses  12          9            33%

Finance Cost             318        283            12%

Profit Before Taxation   599      1,081           -45%

Taxation                 124         -

Profit After Tax         475      1,081           -56%

NP Margin                  3%         8%  down 500 bps

EPS                    26.28      59.81           -56%

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