Gadoon Textile Mills Limited (PSX: GADT) was established in 1988 as a public limited company. It is part of the Yunus Brothers Group (YBG) that has several companies in various sectors such as textiles, cement, and power generation; YBG was formed in 1962.
At its two manufacturing facilities located in the province of Sindh and Khyber Pakhtunkhwa, the company manufactures and sells yarn and knitted fabrics. It operates in the B2B market.
Over 50 percent of the shares of Gadoon Textile Mills is owned by Y.B. Holdings (Private) Limited making it the ultimate holding company. Close to 22 percent of the shares are with the local general public, followed by the banks, DFIs, NBFIs that hold 7 percent. The directors, CEO and their spouses hold less than 1 percent shares in the company, while the remaining 2 percent shares are distributed with the rest of the categories.
Historical operational performance
The company’s topline has been increasing although at varying rates, whereas profit margins have been on a rise after bottoming out in FY15 and FY16.
The textile sector of the country faced trouble during FY15 and onwards. There was a slowdown in demand, particularly from China. This is also reflected in the company’s topline contraction by a little over 7.5 percent in FY16. The cost of production, that jumped to 95 percent of revenue in FY15, further increased to more than 96 percent in FY16 as local cotton crop was affected by floods, forcing manufacturers to resort to imported cotton for their production. The effect of lower revenue was seen in declining gross and operating margins, while net margin, although negative, was marginally improved on the back of share of profit from associates that rose to Rs 183 million, up from Rs 166 million in FY15.
The global scenario regarding demand and competition remained similar in FY17; therefore, the 9.3 percent increase in revenue during the year was largely brought about by local sales. With lower than targeted cotton production, and hence having to import cotton, it remained a challenge for local manufacturers to compete in the global market, thus the focus shifted to the local market. With higher revenue, cost of production made a comparatively lower share in revenue, at 94 percent that improved gross margin. However, a major increase in operating margin (4.5 percent) and net margin (3.5 percent) was brought about higher other income and share of profit from associates that together made 3 percent of revenue. A gain on short term investment and rebate on export sales contributed to the higher other income for the year.
In FY18, both export sales and local sales picked up, causing total revenue to increase by 18.5 percent, the highest seen since FY13. Export sales increased due to government’s export package and devaluation of rupee most of the increase in export sales was brought about by sales of knitted fabric. The increase in local sales was a result of withdrawal of sales tax; there was an increase in both segments, yarn as well knitted fabric. Cost of production continued to reduce, nearly 93 percent of revenue, although at a marginal rate. Administrative and distribution expenses remained similar while other income and share of profit from associates continued to incline and contribute significantly to the bottomline. Thus, net margin was recorded at 4.3 percent.
Revenue growth remained in double digits during FY19 at 13.3 percent. Most of the increase in export sales was seen in the second half of the year when the situation stabilized after a trade war that ensued between economies in the first half of FY19. Local sales increased due to demand from the value-added sector. With cost of production nearing 90 percent of revenue, gross margins improved. However, this was not the case for net margin, that reduced to 3.8 percent. The reduction was due to an escalation of finance expense which in turn was a result of an increase in discount rate.
In FY20, Gadoon Textiles saw a 7 percent contraction in revenue. The company fared well in the first nine months of FY20, but its sale and profitability were significantly during the last quarter due to the outbreak of Covid-19 that resulted in shut down of businesses as well as majority of the trade. The pandemic not only resulted in loss of sales but costs in terms of inventory holding increased that hampered profit growth. A drastic increase in other expenses also contributed to lower profit margins; this was due to a significant net exchange loss of Rs 889 million. Thus, net margin was recorded at less than 1 percent.
Recent result and future outlook
During 1QFY21, year on year sales increased by a little over 18 percent. Most of this increase was brought about by the knitted segment within the export sales division, while yarn sales suffered due to lower prices in the aftermath of coronavirus pandemic. The lower sales adversely affected the gross margins, the effect of which was also seen in the bottomline that reduced year on year with a net margin of 2 percent, despite the increase in sales.
With some recovery in sight, as currency and inflation rate remain stable, in addition to a lower interest rate in response to the pandemic, the company hopes for improved business activity. In addition, the increase in international price of cotton will help to increase yarn price as well, whereas the company faces threat from the removal of custom duty on the import of yarn that will increase competition in the local market.