Ghazi Fabrics International Limited (PSX: GFIL) was incorporated in Pakistan as a private limited company in 1989 and was ultimately converted into a public limited company the very next year. the company is engaged in textile manufacturing, cotton and P.C. yarn as well as grey cloth that are marketed both within and outside Pakistan.
Pattern of Shareholding
As of June 30, 2022, GFIL has a total of 32.635 million shares outstanding which are held by 4757 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of GFIL with over 63.45 percent shares. This category is followed by foreign general public having a stake of 19.75 percent in the company. Local general public accounts for 16.096 percent shares of GFIL. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
Since 2018, GFIL’s topline has been posting sizeable growth with the exception of 2020. Conversely, its bottomline appears to be in a mess, registering net losses since 2015. GFIL posted a net profit in 2021 for the first time after 2014; however the bottomline sustained a massive decline the very next year. GFIL’s margins have been oscillating over the years. The gross and operating margins of the company considerably improved in 2019 but doomed in 2020. In 2021, they maxed out only to plunge again in the subsequent year. On the contrary, GFIL’s net margin posted a positive figure after seven years in 2021 which also sank in 2022. The detailed performance review of each of the years under consideration is given below.
In 2019, GFIL’s topline registered a splendid 43 percent year-on-year growth which came on the back of local sales while export sales inched down during the year due to increased cost of doing business on account of spike in electricity tariffs, replacement of local gas with RLNG, Pak Rupee depreciation as well as high discount rate. As a consequence, the local companies lost many international orders to competitor countries. Effective cost control measures put in place resulted in a 71 percent improvement in GFIL’s gross profit in 2019 with GP margin reasonably improving from 5.9 percent in 2018 to 7.1 percent in 2019. Selling and distribution expense tapered by 18 percent year-on-year in 2019 on account of lesser carriage and freight as well as reduced export development surcharge on account of lower export volume. Administrative expense showed no significant movement in 2019. The company earned exchange gain of Rs.18.867 million on its export sales in 2019 which drove the other income up by 71 percent year-on-year. Operating profit posted an impressive rebound of over 10 times in 2019, resulting in an OP margin of 3.8 percent versus 0.5 percent in 2018. Finance cost grew by 21 percent year-on-year in 2019 which was the product of increased borrowings and high discount rate during the year. The company was able to post a profit before tax of Rs.61.95 million in 2019 as against the loss before tax of Rs.101.70 million incurred in the previous year. However, higher amount of deferred tax paid during the year again shoved GFIL into losses in 2019. Net loss clocked in at Rs.51.44 million in 2019 which was 71 percent lesser than the net loss registered by the company in 2018. Loss per share also climbed down from Rs.5.37 in 2018 to Rs.1.58 in 2019.
GFIL’s topline plummeted by 13 percent year-on-year in 2020 which was the combined effect of the imposition of sales tax on textile products and the outbreak of COVID-19. The decline in sales was primarily on account of lesser export sales. Conversely, local sales posted a marginal uptick during the year. Cost of sales also slid by 9 percent year-on-year, however, high electricity and gas prices and high overall inflation pushed the gross profit down by 64 percent year-on-year in 2020. GP margin also shank to 2.9 percent in 2020. Selling and distribution expense registered a cut of 23 percent year-on-year in 2020 mainly due to lesser carriage and freight charges as the export volume slumped. Moreover, export development surcharge and other export expense also narrowed down during the year. Administrative expense dropped by only 3 percent year-on-year in 2020 essentially due to lower travelling and conveyance charges, vehicles running and maintenance as well as utilities due to lockdown imposed during the last quarter of FY20. Other expense stayed almost the same as last year while other income slipped by 58 percent year-on-year due to a considerable decline in exchange gain as the company underperformed on exports front. GFIL registered an operating loss of Rs.31.85 million in 2020 as against an operating profit of Rs.206.98 million in the previous year. To add to ado finance cost grew by 19 percent year-on-year in 2020 as discount rate was high for the most part of the year. As a consequence, net loss magnified by 335 percent year-on-year in 2020 to clock in at Rs.223.59 million with a loss per share of Rs.6.85.
2021 marked the pinnacle of success for GIFL characterized by robust topline growth to the tune of 35 percent year-on-year coupled with unparalleled escalation in bottomline and recovery from net losses after seven long years. However, it is discouraging to witness a downfall in export sales in 2021 too. Conversely, local sales performed quite well. Cost of sales inched up by 27 percent year-on-year in 2021, culminating into a 299 percent year-on-year rise in gross profit with GP margin touching its optimum level of 8.9 percent. Selling and administrative mounted by 8 percent and 9 percent respectively in 2021. This was on account of higher sales volume which drove up the freight charges and increased human resources requirement which inflated the payroll expense. Other expense posted an extraordinarily steep growth of around 15 times on account of exchange loss to the tune of Rs.6.96 million due to depreciation of Pak Rupee and a general increase in the prices of raw materials. Other expense was largely offset by 57 percent higher other income earned during the year as the company made lofty scrap sales in 2021. GIFL posted an operating profit worth Rs.346.75 million in 2021 which translated into an OP margin of 5.5 percent – the highest level since 2014. Finance cost also registered a reduction due to monetary easing and significantly lesser external financing obtained during the year as the company had an improved liquidity (see graph for liquidity ratios). GFIL’s gearing ratio also ticked down from 54 percent in 2020 to 39 percent in 2021. GFIL registered a net profit of Rs.196.56 million in 2021 yielding a commendable net margin of 3.1 percent and an EPS of Rs.6.02.
GFIL’s net sales sustained their upward trajectory in 2022 by posting a 36 percent year-on-year rise, yet, regrettably, it couldn’t manifest in a robust bottomline performance. Export sales continued to tick down while local sales performed impressively in 2022. Below target production of cotton crop drove up the prices. This coupled with sharp increase in electricity tariff, RLNG prices and declining value of Pak Rupee pushed the cost of sales up by 42 percent year-on-year in 2022. Gross profit sank by 30 percent year-on-year in 2022 with GP margin marching down to 4.5 percent from 8.7 percent in the previous year. Higher sales volume as well as increased prices of petroleum products resulted in higher freight charges which manifesting as 44 percent year-on-year spike in selling and distribution expense in 2022. Administrative expense soared by 14 percent year-on-year on account of higher payroll expense. Operating profit witnessed a 54 percent year-on-year plunge with OP margin falling down to 1.8 percent in 2022. Finance cost grew by 5 percent year-on-year in 2022 due to higher discount rate. Net profit witnessed a 96 percent year-on-year decline in 2022 to clock in at Rs.7.625 million. This was reflected in a thin NP margin of 0.1 percent and an EPS of Rs.0.23 in 2022.
Recent Performance (9MFY23)
Unfortunately, the onset of FY23 has not yielded favorable news for our organization. GIFL net sales declined by a massive 45 percent year-on-year in 9MFY23. The local sales which were performing well previously, have experienced a decline due to the prevailing economic and political crises in the country. . The company didn’t make any export sales during the period Cost of sales dropped during the period, however, with a lower magnitude of 40 percent year-on-year. This was on account of devastating floods in the 1HFY23 which destroyed the cotton crop resulting in lower output and higher prices. This coupled with commodity super cycle in the international market and Pak Rupee depreciation, high electricity tariff and gas prices culminated into a gross loss of Rs.138.57 million in 9MFY23 versus a gross profit of Rs.309.58 million during the same period of last year. The production remained halted due to shortage of raw materials amid restrictions on the opening of L/Cs during the period. Selling and administrative expense nosedived by 7 percent and 13 percent respectively due to lesser plant operations and low sales volumes. GFIL registered an operating loss of Rs.253.97 million in 9MFY23 versus an operating profit of Rs.158.53 million during the same period last year. Finance cost grew by 29 percent year-on-year in 9MFY23 owing to unprecedented level of discount rate prevailing in the country. This further worsened the financial performance of the company and resulted in a net loss of Rs.382.29 million during 9MFY23 as against the net profit of Rs.6.01 during the same period last year. GFIL posted a loss per share of Rs.11.71 during the period under consideration versus an EPS of Rs.0.18 in 9MFY22.
Future Outlook
The expected bumper crop of cotton this year will be a good omen for the textile manufacturers as they wouldn’t have to import the commodity amid precipitous decline in the value of local currency. Moreover, the forecasted cotton production of US is to fall in 2023 which will further heighten cotton prices in the global market. This will place Pakistani textile manufacturers in a better position in terms of availability of its basic raw materials. However, with the prevailing economic and political mayhem not likely to subside anytime soon, will GFIL be able to muster sales orders? Fingers crossed.