Artistic Denim Mills Limited

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, 2022, ADMM has 84 million shares outstanding which are held by 1035 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of ADMM with a stake of 81.11 percent in the company. This is followed by general public holding 15.03 percent shares of ADMM. State Life Insurance Corporation of Pakistan accounts for 2.10 percent shares of ADMM while Artistic Properties (Private) Limited hold 1.68 percent shares. The remaining shares are held by other categories of shareholders.

Performance Trail (2018-22)

Among all the years under consideration, the topline of ADMM has only dipped in 2019. The topline has not only been expanding thereafter, but the magnitude of growth has also been escalating, reaching the highest ever year-on-year topline growth of 67 percent in 2022. It is to be noted that ADMM is able to attain a bottomline growth in 2019 despite revenue drop. However, in 2020, the bottomline massively plunged despite topline growth. Let’s look into the detailed financial performance of ADMM in each of the year under consideration.

In 2019, ADMM’s revenue shrank by 6 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 percent year-on-year due to effective cost control measures and Pak Rupee devaluation which rendered the export sales more valuable. GP margin also inched up from 9.6 percent in 2018 to 11.4 percent in 2019. Distribution cost inched up moderately by 8 percent year-on-year due to rise in salaries and wages, advertising and publicity expense, traveling, boarding and lodging expense 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. Other expense magnified by 49 percent year-on-year on the back of higher WWF and WPPF due to rise in profitability. Other income posted a stunning 118 percent year-on-year growth 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 percent year-on-year in 2019 with an OP margin of 13.7 percent as against 8.4 percent in 2018. Finance cost rose by 21 percent year-on-year due to 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 managed to post a 68 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 topline could only muster a 2 percent year-on-year growth. While revenue tamed down, cost of sales kept rising due to the impact of fixed cost and payment of full salaries and wages to the employees during the lockdown period. This shoved the gross profit down by 29 percent year-on-year while GP margin also shrank to 7.9 percent in 2020. Distribution cost increased by 15 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 travelling, boarding and lodging charges also rose during the year. Admin expense posted a marginal 7 percent year-on-year growth in 2020. Other expense 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 64 percent year-on-year in 2020 while OP margin slid to 4.9 percent. Finance cost substantially grew due to higher working capital requirements and rising discount rate before the outbreak of COVID-19. ADDM’s debt-to-equity ratio soared to 122 percent in 2020. The bottomline slipped by 87 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 a topline growth of 24 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, increase in the price of raw cotton and severe supply chain issues in the winter season, gross profit magnified by 77 percent year-on-year while GP margin also greatly increased to 11.3 percent in 2021. A massive drop in travelling boarding and lodging charges kept distribution expense in check which only grew by 4 percent year-on-year despite high freight and transportation due to stronger export sales. Admin expense grew by 17 percent year-on-year due to higher fee and subscription charges. The improved value of Pak Rupee from Rs.168 at the beginning of the year to Rs.152 in March 2021 resulted in exchange loss which escalated the other expense by 127 percent. Other income also didn’t turn out to be favorable as it fell by 48 percent year-on-year due to no exchange gain and a significant drop in the profit on treasury call account. Despite growing expenses, operating profit climbed up by 74 percent year-on-year and OP margin improved to 6.9 percent. Finance cost 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, despite being the year full of macroeconomic challenges due to political uncertainty, record high inflation, rising discount rate, energy and gas prices and deteriorating value of Pak Rupee, couldn’t suppress ADMM’s sales from growing which boasted a staggering year-on-year growth of 67 percent in 2022 culminating into the highest ever sales achieved by the company. Not only did the volume grow substantially, product mix and favorable Rupee/Dollar parity played its role in keeping the topline strong. Devalued Pak Rupee coupled with increase in cotton prices, dyes and chemicals and other imported raw materials, sharp increase in ocean freight and gas tariff as well as shortage of gas which compelled the company to use diesel drove up the cost of sales by 73 percent year-on-year. The gross profit inched up by 14 percent year-on-year in 2022 while GP margin moved down to 7.8 percent. High ocean freight prices had an adverse affect on the distribution expense which grew by 38 percent in 2022. Admin expense grew in line with inflation and also because of a rise in minimum wage rate. Other income boasted a stunning growth of 516 percent on account of handsome exchange gain. Operating profit grew by 91 percent year-on-year in 2022 while OP margin also moved up to 7.9 percent which is not only higher than the last year’s mark but also larger than the GP margin of 2022. Finance cost didn’t spare the company and enlarged by 86 percent due to multiple upward revisions in discount rate coupled with availing TERF scheme and higher working capital requirements. The bottomline posted a healthy year-on-year growth of 85 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.

Recent Performance (1HFY23)

During 9MFY23, the topline grew by 3 percent year-on-year which was on the back of Pak Rupee devaluation. Effective cost control also contained the cost of sales which greatly improved the GP margin to 16.4 percent in 9MFY23 from 9.7 percent during the same period last year. Gross profit grew by 74 percent year-on-year during the period under review. Operating expenses grew on account of record breaking inflation. Other expense also moved up by 32 percent may be because of higher provisioning for WWF and WPPF. Other income growth can be presumed to be coming on the back of high exchange gain and higher profit on deposits. Operating profit spiraled by 102 percent in 9MFY23 while OP margin improved to 12.7 percent from 6.5 percent in 9MFY22. Finance cost nearly doubled during the period due to higher borrowings and unprecedented level of discount rate reached during 9MFY23. The bottomline boasted a 129 percent year-on-year growth in 9MFY23 to reach Rs.817.51 million with an NP margin of 6.6 percent up from 3 percent in 9MFY23. EPS also showed an uptick from Rs.4.25 in 9MFY22 to Rs.9.73 during the period under review.

Future Outlook

The future seems turbulent for ADMM. With dwindling foreign exchange reserves and related import restrictions, the company is and will continue to face supply chain barriers which will adversely affect the sales volume of the company. While Rupee depreciation will continue to provide exchange gain, it will also drive up the cost of sales. Finance cost is another serious problem for the company with soaring discount rate. How the company turns the odd into its favor in the coming times is yet to be seen.