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, 2023, the company has 485.410 million shares held by 7085 shareholders. Local general public hold 33.84 percent of the company’s shares followed by associated companies, undertakings and related parties having a stake of 24.96 percent in ANL. Directors, CEO, their spouse and minor children account for 24.48 percent of the company’s shares followed by Joint stock companies holding 13.11 percent of ANL’s shares. Banks, DFIs and NBFIs own 1.99 percent of the company’s shares while Insurance companies hold 1.47 percent shares of ANL. 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)
Barring year-on-year decline in 2020 and 2023, ANL has attained a sizeable growth in its net revenue during the period under consideration. The bottomline of ANL succumbed to the economic downturn in 2020 and not only posted a dip but also resulted in net loss. 2022 shows a distinct pattern whereby the company attained the highest revenue growth, but bottomline didn’t follow the suit and dropped drastically. ANL’s bottomline staggeringly rebounded in the subsequent year. The company’s margins which registered reasonable growth in 2019 nosedived in 2020. In the following year, gross margin further dipped, however, operating and net margins recovered. 2022 saw erosion of ANL’s margins followed by a rebound in 2023. The detailed performance review of each of the years under consideration is given below.
In 2019, ANL registered 26.5 percent year-on-year rise in its topline. This was on the back of 41 percent improvement in the sales of spinning division and 39.4 percent increase in the sales of garment division. Weaving division also posted 6.4 percent rise in 2019. Both export and local sales posted tremendous growth of 28 percent and 58 percent respectively in 2019. 30 percent depreciation in the value of Pak Rupee also proved to be a boon for the export sales of the company and resulted in healthy GP margin of 17.26 percent in 2019 versus 16.21 percent in the previous year. Gross profit also enlarged by 34.5 percent year-on-year in 2019. Selling & distribution expense inflated by 35 percent year-on-year in 2019 which was the consequence of higher payroll expense, freight, advertising & marketing expense as well as commission. Administrative expense posted a marginal 3.9 percent uptick in 2019 which was primarily due to higher payroll expense. During 2019, ANL expanded its workforce from 5992 employees in 2018 to 6763 employees in 2019 as the company undertook BMR in its garment division which resulted in better capacity utilization. 43 percent lower other income recorded by the company in 2019 was because the company didn’t book any reversal of provision for trade debt as it did last year. Other expense mounted by 283 percent in 2019 on account of profit related provisioning and deficit on revaluation of assets. Operating profit enlarged by 40 percent year-on-year in 2019 with OP margin marching up to 10.04 percent from 9.09 percent in the previous year. Exchange loss on foreign currency borrowings, higher discount rate coupled with increased borrowings translated into 32.4 percent higher finance cost recorded by ANL in 2019. Net profit grew by 55.3 percent year-on-year in 2019 to clock in at Rs.305.32 million with EPS of Rs.0.67 versus EPS of Rs.0.43 in 2018. NP margin also improved from 1.23 percent in 2018 to 1.51 percent in 2019.
In 2020, the topline of ANL plunged by 16.4 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 the global pandemic. The export sales of the company took a hit and shrank by 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 14.56 percent in 2020 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. Distribution expense slid by 2.9 percent year-on-year in 2020 due to lower freight expenses. Administrative expense posted a meager uptick of 7 percent in 2020 on the back of higher payroll expense despite the fact that the number of employees was reduced from 6973 in 2019 to 5605 in 2020. Other income performed exceptionally well due to lucrative return on bank deposits, yet operating profit slipped by 43 percent year-on-year in 2020 with OP margin sliding down to 6.82 percent in 2020. 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 227.6 percent to translate into net loss of Rs.389.45 million with loss per share of Rs.0.84.
As the economy entered the phase of nascent recovery in 2021, ANL made the most of it and was able to attain a 30.5 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 of 14.45 percent in 2021 despite 29.5 percent rise in gross profit. Another factor which affected the gross margin of the company was the stability in the value of Pak Rupee against the greenback which resulted in lesser translation gains. Distribution expense inched up by 10.5 percent in 2021 on account of higher freight and commission. Administrative expense also rose by 10.9 percent during the year as a result of higher utility charges and elevated payroll expense as ANL’s workforce expanded to include 6889 employees in 2021. Other expenses took a massive jump of 526 percent in 2021 due to increase in provisioning done against trade receivables, WPPF and impairment loss on investments. ANL registered 40.3 percent escalation in its operating profit in 2021 with OP margin slightly rising up to 7.33 percent. Finance cost buttressed the bottomline as it slid by 29 percent in 2021 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 highest ever bottomline seen by the company. ANL posted net profit of Rs.7559.40 million with EPS of Rs.15.38 and NP margin of 34.25 percent in 2021.
In 2022, the company attained the highest topline 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. Gross profit rebounded by 46 percent year-on-year in 2022, however, GP margin dropped to 13.79 percent. High freight charges and commission also exacerbated the distribution expense which surged by 81.4 percent in 2022. Administrative expense also soared by 20.8 percent in 2022 as a result of higher payroll expense as number of employees increased to 7110 in 2022. Higher travelling, conveyance and entertainment also contributed in inflating the administrative expense in 2022. ANL operating profit rose by 30 percent in 2022, however its OP margin slid to 6.25 percent. Financial restructuring has greatly reduced the debt burden and hence the finance cost of the company shrank by 15.9 percent in 2022. However, lower gain on the restructuring loan in 2022 when compared to 2021 considerably affected the bottomline. This coupled with the amortization of notional income resulted in 90.8 percent year-on-year erosion in ANL’s net profit in 2022 which clocked in at Rs.693.05 million with EPS of Rs.1.41 and NP margin of 2.05 percent.
ANL’s topline dropped by 6.5 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. During the year the company faced myriad challenges such as high raw material prices, energy tariff, devastating floods which resulted in lower crop yields. Its export sales dipped by 8 percent in 2023 while local sales grew by 14 percent. However, depreciation in the value of local currency helped company attain a better GP margin of 16.11 in 2023 with gross profit having grown by 9.2 percent. ANL registered 24.9 percent dip in its distribution expense in 2023 which was due to significantly lesser commission and freight expense incurred during the year. Administrative expense surged by 15 percent in 2023 on account of higher payroll expense, travelling & conveyance, repair & maintenance, fuel and power as well as fuel & power charges coupled with depreciation. Other income amplified by 353.4 percent in 2023 mainly on the back of higher profit on saving deposits. This greatly helped ANL’s operating profit to grow by 47.3 percent in 2023 with OP margin climbing up to 9.84 percent. 6.6 percent lower finance cost was the result of higher discount rate. ANL’s net profit grew by 112.2 percent in 2023 with EPS of Rs.2.99 and NP margin of 4.66
Recent Performance (1QFY24)
With a marginal 9.5 percent year-on-year uptick in its topline, dwindling bottomline and constricted margins, 1QFY24 doesn’t seem favorable for ANL. High prices of raw materials, energy tariff as well as stability in the value of Pak Rupee resulted in 4.8 percent thinner gross profit reported by the company during the period with GP margin of 13.3 percent, down from 15.3 percent during 1QFY23. Operating expenses slid due to lesser operational activities. Other income continued to buttress the operational performance of the company as it attained 147 percent year-on-year rise which supposedly is the consequence of higher return on deposits. Operating profit grew by 2.3 percent during 1QFY24; however, OP margin plunged to 7.57 percent from 8.10 percent during the same period last year. Finance cost surged by 5.7 percent in 1QFY24 on account of higher discount rate and increased short-term borrowings during the period. Super tax also proved to be a bane for ANL’s bottomline which slid by 31.4 percent in 1QFY24 to clock in at Rs.219.85 million with EPS of Rs.0.45 versus EPS of Rs.0.65 during 1QFY23. NP margin fell from 4.01 percent in 1QFY23 to 2.52 percent in 1QFY24.
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 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 indigenous inflation, discount rate and stable local currency against the greenback are constantly squeezing company’s margins.
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