Starting 1993, Artistic Denim Mills (PSX:ADMM) has since become a big name in the textile sector. It is one of the key players in the denim industry, offering premium fabrics with unique colours and shades, and garments with an extensive array of washes. The company has a market capitalisation of over Rs 5.4 billion.
Artistic Denim reports its business under one single segment, but it has three main operating segments - spinning, weaving, and garments. The spinning unit is equipped with 18,000 spindles producing 1.6 million kg of yarns per month.
The company's dyeing unit employs German machinery capable of processing 140,000 metres in one run. The weaving unit consists of Airjet looms with great flexibility in processing fabrics of different weights, with a total of 154 looms and an annual capacity of almost 24 million meters of fabric. After this, there is the process of finishing, cutting, stitching, and finishing and packaging. The company also has its own power generation set-up with power production capacity of 15MW and a water treatment plant with a flow rate of 1,900 cubic meter/h.
Artistic Denim markets its products to high-end customers all over the globe, frequenting fashion events the world over. Its fabrics and garments - Lycra, HyperStretch, Pure Dark Indigo, and so on - have a huge international following.
Prior Performance
Artistic Denim Mills has seen a continuous and almost linear top line growth over the past five fiscal years; the company has been improving its sales like clockwork. Profits have also largely been increasing each year, though the recent year saw a decline in net profits (owing to higher finance costs and decrease in other income that year). But by and large, the growth seems robust, all things considered.
The most salient feature of ADM (and denim manufacturers in general) is that it is almost entirely export-oriented. The company's export orders have been growing every year, and amount to over 94 percent of top line as of FY15. This is particularly commendable given the state of the textile industry - lack of competitiveness owing to high cost of doing business and an overvalued Rupee. Its main markets are the US and EU. The company's sensitivity analysis reveals that a 10 percent appreciation in US Dollar rate would impact sales by almost Rs 50 million. Regional competition from China, Bangladesh and India is another threat to the denim prospects. With all this weighing down on the growth, it is unfortunate for denim manufacturers that there isn't much of a market for denim in Pakistan.
More importantly, however, the company has been enhancing its focus on garments. The graph shows the gradual rise in the production of garments while the spinning and weaving segments have seen lower production. Although the capacities of each segment are much higher, under-utilisation was due to quality change downtime and global recession, as per the company's annual report.
The enhanced focus on garments is a welcome strategy as the value addition brings in bigger dollars and helps margins. Although the segment-wise data is unavailable, there is no doubt that the margins from the sale of garments are far higher and their slice in the revenue pie isn't small either; the company has mentioned in its annual report that the enhanced sales as of FY15 were driven mainly by the sale of garments and aggressive marketing efforts. However, it isn't exactly known how much of the sales come from fabrics and how much from garments.
Recent Performance
Things have gone wrong for ADM in FY16. For the half year ended, the company's sales dropped by a third year-on-year while gross profit halved. The bottom line drop for the period was a whopping 57 percent year-on-year.
As per the Director's Report, the drop in sales was due to a decrease in selling prices, depressed international market conditions, and stiff competition from Turkey - the main competitor for Pakistani products in Europe. In addition to geographical proximity, the Lira has also depreciated by 40 percent against the Euro. Thus, Turkey has taken up the market share of Pakistani companies in the EU.
Moreover, margins were hurt by increase in gas tariff and labour costs, as per the Director's Report. However, finance cost was much lower over the period. This was due to lower interest rates. Nevertheless, it did little to quell the net margins, which took a hit of almost 500 basis points.
Outlook
ADM constantly strives to explore new markets and in its last annual report mentioned that the company would be opening a liaison office in Bangladesh. Moreover, the company developed new shades in denim last year through its technical marketing and product development team. It also undertakes BMR activities to be more competitive.
That being said, until and unless the high cost of doing business is addressed and a steady supply of energy is provided, not much can be done. However, these things are on the cards, and recently the textile industry in Punjab was given uninterrupted supply of gas.
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