Artistic Denim Mills Limited (PSX: ADMM) was incorporated in Pakistan in 1992. The principal activity of the company is the manufacturing and sale of rope-dyed denim fabrics, yarn, and value-added textile products.

Pattern of Shareholding

As of June 30, 2023, ADMM has 84 million shares outstanding which are held by 915 shareholders. Directors, CEOs, their spouses, and minor children are the major shareholders of ADMM with a stake of 81.11 percent in the company followed by the local general public holding 14.98 percent shares of ADMM. State Life Insurance Corporation of Pakistan accounts for 2.10 percent shares of ADMM while Artistic Properties (Private) Limited holds 1.68 percent shares. The remaining shares are held by other categories of shareholders.

Performance Trail (2019-23)

ADMM’s topline has only dipped in 2019 over the period under consideration. Conversely, its bottom line registered a year-on-year decline in 2020. ADMM’s margins which showed considerable growth in 2019, dipped in 2020 followed by a rebound in 2021. In 2022, gross margin drastically fell while operating and net margins continued to tick up. ADMM’s margins staggeringly improved in 2023. The detailed performance review of the period under consideration is given below.

In 2019, ADMM’s revenue shrank by 5.74 percent year-on-year on the back of tamed demand and cut-throat competition in the export market. However, ADMM was able to drive up its gross profit by 12.16 percent year-on-year due to effective cost control measures and Pak Rupee depreciation which rendered export sales more valuable. GP margin also inched up from 9.6 percent in 2018 to 11.4 percent in 2019. Distribution costs inched up moderately by 7.78 percent year-on-year in 2019 due to a rise in payroll expenses, advertising expenses, traveling expenses as well as quality control charges. However, freight charge, which is the biggest component of ADMM’s distribution expense, nosedived in 2019 due to lackluster export sales. Admin expense almost remained intact during the year despite the fact that the number of employees grew from 499 in 2018 to 504 in 2019. Higher payroll expense was offset by a decline in legal & professional charges in 2019. Other expenses magnified by 49.37 percent year-on-year on the back of higher provisioning for WWF and WPPF. Other income posted a stunning 117.5 percent year-on-year growth in 2019 due to considerable exchange gain. Other income stood at 7 percent of sales in 2019 as against 3 percent in 2018. Operating profit grew by 54.11 percent year-on-year in 2019 with an OP margin of 13.7 percent as against 8.4 percent in 2018. Finance costs rose by 20.93 percent year-on-year due to a high discount rate in 2019 coupled with higher working capital requirements. ADMM’s debt-to-equity ratio flew from 65.5 percent in 2018 to 92.44 percent in 2019. The net profit posted 67.82 percent year-on-year growth in 2019 to clock in at Rs.866.82 million in 2019 with an NP margin of 11.2 percent versus 6.3 percent in 2018. EPS stood at Rs.10.32 in 2019 as against Rs.6.15 in 2018.

In 2020, the company’s sales were drastically affected due to COVID-19. The top line could only muster 2.23 percent year-on-year growth. While revenue tamed down, the cost of sales kept rising due to fixed costs and payment of full salaries and wages to the employees during the lockdown period. This shoved the gross profit down by 29.45 percent year-on-year. GP margin also shrank to 7.9 percent in 2020. Distribution cost increased by 15.06 percent year-on-year despite low sales as freight and transportation charges increased due to supply chain impediments on account of COVID-19. Export development surcharge and clearing charges as well as traveling, boarding, and lodging charges also rose during the year. Administrative expenses posted a marginal 7 percent year-on-year growth in 2020. Other expenses and other income also inched down during the year due to lesser provisioning for WWF and WPPF and lesser exchange gain respectively. Operating profit plunged by 63.54 percent year-on-year in 2020 while OP margin slid to 4.9 percent. Finance costs substantially grew due to higher working capital requirements and rising discount rates before the outbreak of COVID-19. ADDM’s debt-to-equity ratio soared to 122 percent in 2020. The bottom line slipped by 86.88 percent year-on-year in 2020 to clock in at Rs.113.69 million with an NP margin of 1.4 percent. EPS fell to Rs.1.35 in 2020.

With topline growth of 23.58 percent year-on-year, ADMM made a strong comeback in 2021. This came on the heels of a better product mix and aggressive marketing drives undertaken by the company during the year. Despite revision in gas tariff, an increase in the price of raw cotton, and severe supply chain issues in the winter season, gross profit magnified by 77.44 percent year-on-year while GP margin also greatly increased to 11.3 percent in 2021. A massive drop in traveling, boarding, and lodging charges kept distribution expenses in check which only grew by 4 percent year-on-year despite high freight and transportation due to stronger export sales. Admin expenses grew by 17.14 percent year-on-year due to higher fees and subscription charges. The improved value of the Pak Rupee from Rs.168 at the beginning of the year to Rs.152 in March 2021 resulted in an exchange loss which escalated other expenses by 127 percent. Other income didn’t turn out to be favorable either as it fell by 47.77 percent year-on-year due to no exchange gain and a significant drop in the profit on the treasury call account. Despite growing expenses, operating profit climbed up by 74.26 percent year-on-year and OP margin improved to 6.9 percent. Finance costs grew despite discount rate cuts as the company availed SBP’s TERF scheme for technological advancements and other value additions coupled with higher working capital requirements. The net profit boasted a tremendous year-on-year growth of 211 percent in 2021 to clock in at Rs.353.90 million in 2021 with an NP margin of 3.6 percent. EPS stood at Rs.4.21 in 2021.

2022 was a year full of macroeconomic challenges. Political uncertainty, record high inflation, rising discount rate, elevated energy and gas prices, and deteriorating value of Pak Rupee, couldn’t suppress ADMM’s sales from growing which boasted staggering year-on-year growth of 72.63 percent in 2022. Not only did the volume grow substantially, product mix and favorable Rupee/Dollar parity played a role in keeping the topline strong. However, the depreciation of the Pak Rupee coupled with an increase in cotton prices, dyes and chemicals, and other imported raw materials, a sharp increase in ocean freight and gas tariff as well a shortage of gas compelled the company to use diesel drove up the cost of sales by 73.52 percent year-on-year in 2022. ADMM’s gross profit mounted by 65.62 percent year-on-year in 2022 but its GP margin moved down to 10.9 percent. High ocean freight prices had an adverse effect on the distribution expense which grew by 38.45 percent in 2022. Administrative expenses grew by 15.5 percent in line with inflation and also because of higher payroll expenses on account of workforce expansion. ADMM’s workforce stood at 667 employees in 2022 versus 619 employees in 2021. Other income tumbled by 36.61 percent in 2022 due to lower dividend income and no exchange gain recorded during the year. Other expenses also slumped by 36.61 percent in 2022 due to the absence of exchange loss. Operating profit grew by 91.12 percent year-on-year in 2022 while OP margin also moved up to 7.6 percent. Finance costs enlarged by 86.11 percent due to multiple upward revisions in the discount rate. ADMM also availed TERF scheme during the year and its working capital requirements also increased. The bottom line posted healthy year-on-year growth of 84.87 percent in 2022 to clock in at Rs.654.25 million with an NP margin of 4 percent. EPS ticked up to Rs.7.79 in 2022.

In 2023, ADMM’s topline grew by a paltry 0.78 percent year-on-year. This was mainly on account of Pak Rupee depreciation which coupled with effective cost control measures drove up the GP margin to 17.1 percent in 2023. Gross profit also grew by 58.58 percent year-on-year in 2023. Operating expenses grew on account of record-breaking inflation. 17 percent higher distribution expense was the consequence of elevated freight & transportation charges. Administrative expenses also surged by 23.36 percent in 2023 due to higher payroll expenses. This was despite the fact that ADMM squeezed its workforce from 667 employees in 2022 to 583 employees in 2023. Other expenses also moved up by 24.25 percent because of higher provisioning for WWF and WPPF. Other income improved by 54 percent in 2023 due to higher scrap sales, gain on sales of fixed assets, and also higher income from financial assets. This resulted in a 76.75 percent higher operating profit recorded by ADMM in 2023 with an OP margin of 13.4 percent. Finance cost escalated by 137.96 percent in 2023 due to elevated discount rates and higher long-term loans obtained during the year for the import of plant & machinery under SBP’s LTFF scheme. ADMM’s net profit climbed up by 62.11 percent in 2023 to clock in at Rs.1060.63 million with EPS of Rs.12.63 and NP margin of 6.2 percent.

Recent Performance (9MFY24)

During 9MFY24, ADMM’s net sales grew by 29.64 percent on account of favorable due to favorable sales mix, higher sales volume, and upward revision in sales price. Despite robust topline, ADMM couldn’t sustain its GP margin on account of unabated hikes in raw material prices, energy costs, a spike in ocean freight charges due to the Red Sea crisis, and also higher conversion costs. Gross profit tumbled by 1.37 percent in 9MFY24 with GP margin falling down to 12.44 percent from 16.35 percent in 9MFY23. Distribution expense surged by 11.55 percent in 9MFY24 due to improved sales volume and higher shipping charges. Administrative expenses also escalated by 15.99 percent in line with soaring inflation. 23.51 percent lower other expenses incurred during the period is supposedly the consequence of lower profit-related provisioning. Other income mounted by 68.51 percent during 9MFY24 allegedly on account of exchange gain. ADMM recorded 1.1 percent lower operating profit in 9MFY24 with an OP margin of 9.69 percent versus 12.7 percent recorded during the same period last year. Finance costs grew by 64.71 percent in 9MFY24 due to higher discount rates and elevated working capital requirements. All these factors translated into a 61.32 percent decline in ADMM’s net profit which stood at Rs.316.204 million in 9MFY24 with EPS of Rs.3.76 versus EPS of Rs.9.73 in 9MFY23. NP margin also nosedived from 6.56 percent in 9MFY23 to 1.96 percent in 9MFY24.

Future Outlook

The company has been able to muster stronger volumes during FY24 by tweaking its sales mix, however, higher cost of sales, elevated freight & shipping charges, and taller finance costs are diluting its margins and profitability. The company not only needs to sustain its volumes by tapping new geographical markets but also undertake cost optimization and effective capital management to enable its sales to produce a trickledown effect on its profitability and margins.