Gul Ahmed Textile Mills

Gul Ahmed Textile Mills Limited (PSX: GATM) was established in 1953 as a private limited company and converted into a public limited company two years later in 1955. GATM has fully integrated textile operations, and is in the business of making cotton yarn, finished goods and everything in between. GATM also has retailing operations for its textile products under the brand name “Ideas”.

Shareholding pattern

The company is a subsidiary of Gul Ahmed Holdings (Private) Limited (GAHPL) which owns about 67 percent of the shares as of June 30, 2019. Nearly 80 percent of the shares are held by the investment companies and mutual funds, of which the largest number of shares are held by CDC-Trustee MCB Pakistan Stock Market fund. Individuals hold around 10 percent shares. Remaining 10 percent is distributed between the rest of the categories.

Historical operational performance

Topline has been fluctuating over the years, growing at various rates while profit margins have also followed suit.

Looking at the last five years’ performance specifically, topline grew only marginally by 1 percent year on year during FY15. Export sales make a larger part of the total revenue. Between FY14 and FY15, other countries such as India, Turkey, Europe, Japan etc devalued their currencies against USD significantly, whereas PKR was devalued by around 3 percent, making exports unfavourable. In addition, China, which is a major importer of yarn from Pakistan, saw a declining demand which impacted sales. While cost of manufacturing was kept in check to keep gross margin unchanged, administrative, distribution and other costs noted an increase which reduced operating and net margins. These were driven by advertisement costs, utilities, and “GIDC paid in preceding years written off”. During the period, short-term borrowings increased which drove finance cost upwards causing net margin to reduce by half.

Topline saw negative growth in FY16 as demand remained low from China. Moreover, price for yarn also fell which forced the company to reduce yarn production. Although revenue fell as a result, it also kept the company from incurring losses. Lower revenue did not translate into lower profit margins. Instead, profit margins improved due to notable reduction in cost of manufacturing as a percentage of sales as well as in absolute terms. The resultant higher margin made room for higher distribution costs to be absorbed which were driven by staff costs and advertisement. While the high gross margins were consumed by distribution costs keeping operating margins flat, net margin increased due to significantly lower finance cost despite high short-term borrowings. It could perhaps be due to lower mark up relative to that in FY15.

During FY17, topline increased considerably by 24 percent. This rate of growth had not been seen since FY11 when it grew by 29 percent. Growth was experienced in both domestic sales as well export sales. Sales to Europe in particular increased by 30 percent due to improved quality of products. However, this notable rise in revenue seemed volumetric gain as prices could not be increased, while costs deterred gross margins from taking off. Rather, gross margins reduced as cost of input rose, specifically cotton. An increase in minimum wages also drove the costs higher, consuming 82 percent of the revenue as compared to last year’s about 77 percent. The effect of reduced gross margins trickled down to the bottomline as most other costs remained largely unchanged. Although other expenses more than halved during the year, it made less than 1 percent of the revenue.

Growth in topline continued during FY18 as domestic sales and export sales both increased during the year. With higher revenue, higher volumes, and better capacity utilization came the ability to better absorb costs. During the past few years, the company had also aimed its financial borrowings at maintaining and modernising machinery, the result of which could be seen as cost of manufacturing went down due to better efficiency. Other costs also changed in line with larger volumes, thus operating and net margins also improved with the latter more than doubling.

In FY19, the company saw a further boost in its revenue as it grew by more than 26 percent. This was driven by an increase in both domestic sales as well as export sales, with domestic sale seeing a greater incline. Costs saw little to no change keeping profit margins in check. Other income increased notably as devalued currency gave rise to net exchange gain. Finance costs also escalated, however, its share in revenue remained more or less similar at around 2 percent thus bottomline also saw an improvement.

Quarterly results and outlook

Although topline grew year on year by almost 12 percent during the quarter ended March 2020, it was accompanied by an increase in cost. Costs were driven up due to higher cotton prices, as well as higher cost of dyes, chemicals, and additional materials. Moreover, most of the orders placed were from USA and Europe which subsequently demanded price reductions and quantity reduction along with rescheduling. This resulted in low sales during February and March. With the implementation of a lock down, the retail sector was also heavily impacted as it came to complete halt driving up inventory levels.

The company is looking to identify new sources of revenue as organizations such as IMF predicted global economic contractions. As the local government has recently eased down lock down measures the company has started to operate with limited capacity, with the sole objective of keeping the business running and afloat.