Gul Ahmed Textile Mills Limited

One of the biggest names in the business, Gul Ahmed Textile Mills Limited was founded in 1953. Since its listing on the Karachi Stock Exchange in 1970, the company has amassed a whopping market capitalisation north of Rs11 billion, making it the largest textile composite in the country. The composite unit makes everything from cotton yarn to finished products.
Gul Ahmed is fully vertically integrated; it has its own captive power plant comprising gas engines, gas and steam turbines, and backup diesel engines. It boasts an installed capacity of more than 130,000 spindles, 300 state-of-the-art weaving machines and yarn dyeing, processing, and stitching units.
Moreover, the firm's competitive advantage truly lies in its strong presence in the retail business. Its flagship store - Ideas by Gul Ahmed - is a heavy hitter in the fashion industry. Starting from Karachi in 2003, Ideas by Gul Ahmed now has a chain of over 40 retail stores across the country, offering a diverse range of products - from fashion clothing to home accessories.
Gul Ahmed categorises its operations into two broad segments: spinning and processing. The spinning segment is defined as the production of different qualities of yarn using both natural and artificial fibers, while the processing segment involves the production of greige fabric, its processing into various types of fabrics for sale, as well as the manufacture and sale of made-ups and home textiles.
Prior Performance
Gul Ahmed has seen robust growth in its top line over the past five fiscal years, with net sales increasing by 68 percent over the period. Profits have gone up too, albeit in a more topsy-turvy manner. Save for FY12, when the company made losses, gross and net margins have been within the 16-18 percent and 2-4 percent range, respectively.
A segment-wise analysis shows an interesting development over the years - the growth of Gul Ahmed's spinning segment has been sluggish while the processing segment has seen a boom. Sales of the processing segment grew by 110 percent from FY10 to FY14, while the spinning segment's sales only improved by some 31 percent over the same period. Moreover, processing's share in the revenue pie also improved; the segment went from accounting for 64 percent of sales in FY10 to 74 percent of sales as of FY14.
The reason for the apparent emphasis on processing is quite obvious. As can be seen from the graph, the processing segment's margins are quite superior to its counterpart. This is because by definition, the processing segment accounts for the more value-added products and fetch a higher price both domestically and internationally.
Another breakdown of the top line reveals that Gul Ahmed is a largely export-oriented business - from FY10 through to FY14, the firm's exports have largely outnumbered its domestic sales, with exports exactly doubling over the five-year period while domestic sales grew by 25 percent. Exports peaked in FY14, when they amounted to 65 percent of total sales. The company's largest overseas market by far is Germany, followed by the US and the UK, to name a few of its markets.
Recent Performance
Gul Ahmed's numbers for the nine months ended FY15 are alarming; a 4 percent increase in sales year-on-year but a whopping 56 percent fall in net profit. This was due to higher cost of sales, which eroded gross margins, and higher other operating expenses, which contracted net margins. Exports grew by around 8 percent while local sales fell by a near 3 percent year-on-year.
Cotton prices have been at multi-year lows this past fiscal year. Subsequently, yarn is down and fetching a lower price. Exports are suffering because of an overvalued rupee and the availability of cheaper cotton from competitors like India. All this hit Gul Ahmed particularly hard, considering that the bulk of its sales come from exports.
Lower fuel prices had a positive effect on the costs (and subsequently margins), as fuel and energy account for over 17 percent of cost of sales (as of FY14). Nevertheless, this was offset due to losses in the spinning segment thanks to the depressed yarn prices, lower local sales, and a reduction in export orders from the European market due to steep devaluation of the Euro without any corresponding change in the rupee-dollar parity.
Outlook
Being one of the largest textile companies in Pakistan with a portfolio spanning yarn, fabrics, home textiles, and apparel, Gul Ahmed's recent results reflect the fact that no corner of the textile business is safe these days. And there seems to be no easy fix on the horizon.
The textile industry continues to suffer from energy crisis, high cost of doing business, floundering competitiveness, not to mention liquidation of rebates. With all this in mind, one can't be too optimistic about the upcoming year.

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Gul Ahmed Textile Mills Limited

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Rs (Million)               9MFY15 =   9MFY14      YoY

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Sales                      25,516    24,499        4%

Cost of Sales              20,968    19,718        6%

Gross Profit                4,547     4,781       -5%

GP Margin                      18%       20%     down

                                              170 bps

Other Operating Expenses    3,089     2,683       15%

Other Income                  189        94      101%

Operating Profit            1,647     2,192      -25%

Finance Cost                1,053     1,012        4%

Profit Before Taxation        594     1,180      -50%

Provision For Taxation        151       180      -16%

Profit After Taxation         444      1000      -56%

NP Margin                       2%        4%     down

                                              230 bps

EPS                          1.94      4.38      -56%

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