Azgard Nine Limited

Azgard Nine Limited (PSX: ANL) is a composite textile unit, which manufactures and sells yarn, denim and denim products. The company is involved in spinning, weaving, dyeing and stitching, and has three production units located in Punjab. ANL was incorporated in 1993 as a public listed company under the name of 'Indigo Denim Mills Limited' and took on the name of 'Legler-Nafees Denim Mills Limited' before being renamed as 'Azgard Nine Limited' in 2004, a name it has kept since.
Stock performance and shareholding pattern
The largest stake in the company is held by the public, which owns almost 41 percent followed by associated companies which hold almost 25 percent. ANL has continued to under perform the benchmark KSE-100 index during the past year which does not come as a surprise given the overall weak fundamentals of the textile sector and the company's struggling financial performance.
Textile sector outlook
Textile exports have failed to record any impressive surge in the past quarter which does not come as a surprise given the barrage of issues plaguing the sector in recent times. Whether it is the high cost of production or a lack of seriousness on the part of the government, Pakistan has steadily lost its competitiveness in international markets. The fault is also on local textile firms who have failed to reinvent themselves for the modern consumer. This not involves investing in the latest plant and machinery but also improving the fabric mix in favour of man-made fibres and away from predominantly cotton based exports.
Historical performance
ANL has gone through a rough patch over the past few years. Sector specific issues which include a rising cost of production and an overvalued currency have taken a toll on the company's profitability which has mostly been negative since FY13.
The company has also been subject to delay in completion of restructuring of its financial debt and provision of working capital for operational purposes. FY17 saw the weaving division's revenues decrease by 30 percent which the company attributes to lower international demand. In particular, ANL noted that the devaluation of the Turkish Lira curtailed demand from Turkey. However, the company's garments division managed to increase sales by almost 47 percent on a year-on-year basis due to a surge in demand from Europe.
FY18 was the year ANL broke its loss-making streak with the company posting a PAT of Rs 197 million. The company's revenues increased by almost 25 percent on a yearly basis thanks to a healthy surge of 43 percent in the garment segment revenues. Even the weaving division managed to increase its top-line by a decent 19 percent as compared to the same period last year.
ANL's garments segment also registered better profitability margins but the denim segment continued its lacklustre performance with subpar margins. In its FY18 annual report, the company highlights the devaluation of Turkish Lira as a major cause of pressure on margins and sales of the denim export business in Pakistan. The devaluation made local Turkish denim manufacturers more competitive which led to less reliance on imports.
As far as the cost of production was concerned, the industry in Punjab mostly utilised expensive RLNG and was only given 28 percent system based gas. However, the ECC has recently approved provision of gas to the textile industry
Snapshot 1QFY19
ANL managed to increase its top-line by 11 percent in 1QFY19 on a year-on-year basis, which was below the company's expectations. The company highlighted that garment sales are seasonal with the first and third quarters being slow, which meant the garment segments revenue could not augment the overall top-line. The reduction in duty drawback of taxes also had an adverse impact on the company's bottom-line. International competition remained tough for the company particularly in the denim space and focus is now on exploring new export markets.
During the earlier part of the quarter, there was an upward trend in cotton and yarn prices, which adversely affected margins while the provision of cheaper gas remained elusive. The company's second financial restructuring is pending approval in the Lahore High Court and is of paramount importance for the company's debt financing needs.
Future outlook
ANL needs to establish market linkages and explore non-traditional markets for exports given the tough competition and saturation in traditional North American and European markets. The company's denim exports to Turkey have suffered considerably in light of the devaluation of the Turkish Lira and while it still aims to regain footing in the market, the high cost of production will make it difficult.
However, the rupee has also devalued by more than 20 percent during the past year and the cost of utilities is set to go down. The remaining year might prove to be more profitable if the company can keep its denim and garment exports up while also focusing on cost minimisation and operational efficiencies.

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Pattern of Shareholding (as on June 2018)

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Categories of Shareholders                           Share

Directors, CEOs and their spouse(s) and minor chil   6.82%

Associated Companies, and related parties           24.96%

Banks, development finance institutions,             5.00%

insurance, non-banking finance companies etc

Public                                              41.16%

Others                                              22.06%

Total                                                 100%

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Source: Company accounts

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Azgard Nine Limited

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Rs (Mn)                          1QFY19   1QFY18     YoY chnge

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Sales                              3970     3574           11%

Cost of sales                      3347     2989           12%

Gross profit                        623      585            6%

Selling and distribution expenses   196      158           24%

Admin expenses                      126      118            7%

Profit from operations              301      309           -3%

Finance cost                        276      264            5%

PBT                                  29       49          -41%

Tax                                  38       34           12%

PAT                                   9       15          -40%

EPS                              (0.02)     0.03         -167%

Gross margins                     15.7%    16.4%   down 67 bps

Net margins                       0.23%    0.42%   down 19 bps

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