Azgard Nine Limited (PSX: ANL) was incorporated as “Indigo Denim Mills Limited” as a public limited company in Pakistan in 1993. The company is a textile composite unit engaged in the manufacturing and sale of yarn, denim and denim products.

Pattern of Shareholding

As of June 30, 2022, the company has 485.409 million shares held by 7812 shareholders. Local general public hold 33.15 percent of the company’s shares, forming the largest category of shareholders. This is followed by Associated companies, undertakings and related parties having a stake of 24.86 percent in ANL. Directors, CEO, their spouse and minor children account for 23.32 percent of the company’s shares followed by Joint stock companies holding 13.14 percent of ANL’s shares. Banks, DFIs and NBFIs own 2.07 percent of the company’s shares while Insurance companies and Modarba Funds have an ownership of 1.69 percent and 1.17 percent respectively. The remaining shares are held by other categories of shareholders such as NIT and ICP, Investment Companies, Provident funds etc., each having a shareholding of less than 1 percent.

Historical Performance (2018-22)

The topline of ANL has only plunged in 2020 owing to widespread slowdown in economic activity on account of COVID-19. In all other years under consideration, ANL has attained a sizeable growth in its sales revenue. The bottomline of ANL also succumbed to the economic downturn in 2020 and not only posted a dip but also resulted in a net loss worth Rs. 389.45 million. While the bottomline of ANL followed the same pattern as its topline in 2020, 2022 shows a distinct pattern whereby the company attained the highest revenue growth, but bottomline didn’t show the same pattern and nosedived by 86 percent year-on-year. 2021 was another unique year whereby the company recorded the highest ever net profit of Rs. 7559.40 million and an NP margin of 34 percent.A sneak into the financial statements will reveal the underlying details.

In 2020, the topline of ANL plunged by 16 percent year-on-year as the major customers of the company either cancelled or delayed their orders due to lockdown imposed by the government owing to the spread-out of global pandemic. The export sales of the company took a hit of 14 percent year-on-year to clock in at Rs. 15,547 million while local sales also plunged by 33 percent year-on-year to clock in at Rs.1047 million. ANL also operated on a curtailed capacity which enabled it to reduce its cost of sales; however GP margin still dropped to 14.6 percent in 2020 as against 17 percent in the previous year due to high volatility in raw material prices, Pak Rupee depreciation and supply chain disruptions on the back of COVID-19. The company tried to keep its operating expenses in check. Other income also performed exceptionally well due to lucrative return on bank deposits, yet OP margin slipped to 7 percent in 2020 as against 10 percent in 2019. Finance cost also dropped by 16 percent year-on-year mainly on account of a massive plunge in the exchange loss on foreign currency borrowings. The interest/markup expense kept growing during the year due to increased short-term and long-term borrowings and high discount rate in the first three quarters of FY20. The bottomline plunged by over 2 times to translate in a net loss in 2020.

As the economy started showing fragile recovery in 2021, ANL made the most of it and was able to attain a 31 percent year-on-year growth in topline. This was the result of a 24 percent year-on-year growth in export sales and 93 percent year-on-year growth in local sales to clock in at Rs.19,377 million and Rs. 2,017 million respectively. However, high prices of raw materials such as cotton, yarn and fabric resulted in a slightly lesser GP margin during the year. Another factor which affected the gross margin of the company was the increase in the value of Pak Rupee against Dollar which resulted in lesser exchange gains. Other expenses took a massive jump in 2021 due to an increase in provisions against trade receivables, WPPF and impairment loss on investments. Yet, OP margin slightly grew to 7.33 in 2021 as against 7 percent in the previous year. Finance cost also buttressed the bottomline due to low discount rate during the year coupled with exchange gain on foreign currency borrowings as against exchange loss in the previous year. The major shift to the bottomline came on the back of debt restructuring during the year which enabled the company to book gain worth Rs.7063 million which not only improved the equity of the company but also resulted in the fattest ever bottomline seen by the company.

In 2022, the company attained the highest sales growth of 53 percent year-on-year. Export sales were the major growth propeller which grew by 62 percent year-on-year to clock in at Rs.31,480 million. Local sales showed a marginal uptick of 3.2 percent year-on-year in 2022 to clock in at Rs.2083 million. Despite handsome sales growth, the margins remained under pressure owing to a significant increase in energy tariffs and prices of gas and other raw materials. GP margin clocked in at 14 percent in 2022. High freight charges also exacerbated the distribution expense. Consequently, OP margin slid to 6.25 percent in 2022. Financial restructuring has greatly reduced the debt burden and finance cost of the company. However, lower gain on the restructuring loan in 2022 when compared to 2021 not only resulted in a drop in bottomline but also resulted in an NP margin of 3 percent in 2022 as against 34 percent in 2021.

Financial Performance (1HFY23)

The company’s performance in 1HFY23 is not commendable as its topline dropped by 3 percent year-on-year with a bottomline dip of 69 percent year-on-year as demand for textiles experienced a massive slowdown during the period due to recession and slowdown of economic activity both locally and internationally. This coupled with high prices of cotton and other raw materials, energy tariffs, gas charges, finance cost and freight has resulted in constricted margins for ANL. The GP margin clocked in at 12 percent in 1HFY23 as against 14 percent during the same period last year while OP margin slipped to 5 percent in 1HFY23 from 6.4 percent during the same period last year. Financial charges also grew on the back of high discount rate. Consequently, NP margin came out to be lesser than 1 percent in 1HFY23 as against 3 percent during the same period last year.

Future Outlook

The future of ANL sees challenging as the major chunk of its sales comes from the export sales which are under pressure as most of its export destination countries are facing severe recession. The same is the case at home where low purchasing power has resulted in lesser demand resulting in stockpiles of inventory with the company. Besides, high cost of production, operating expenses and financial charges are constantly squeezing company’s margins. Super tax is another bane which will keep on shrinking the bottomline. The future is incumbent on economic stability not only locally but also internationally.