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International Knitwear Limited (PSX: INKL) was incorporated in Pakistan as a public limited company in 1990. The principal activity of the company is manufacturing knitted and woven apparel products besides exporting garments.

Pattern of Shareholding

As of June 30, 2023, INKL has a total of 9.675 million shares outstanding which are held by 1262 shareholders. Local general public has the majority stake of 51.91 percent in the company followed by directors, CEO, their spouse and minor children holding around 35.28 percent shares. Modarabas & Mutual funds account for 10.77 percent of INKL shares while insurance companies hold 1.64 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

Except for a plunge in 2021 and 2023, INKL’s topline has been riding an upward trajectory over the period under consideration. Conversely, its bottomline kept shrinking until 2021 where the company recorded net loss. INKL’s bottomline recovered from net loss in 2022 and remained constant in 2023. The company’s margins considerably eroded in 2019. In 2020, gross and operating margins rebounded while net margins continued to slide down. All the margins depicted a fall in 2021 followed by recovery in the subsequent years. The detailed performance review of the period under consideration is given below.

In 2019, INKL’s topline grew by 14.72 percent year-on-year. This was on the back of increase of volume, prices and depreciation of Pak Rupee. The company achieved capacity utilization of 75.54 percent in 2019 as both local and export orders increased. Cost of sales grew on the back of inflation, hike in commodity prices, elevated fuel and energy prices as well as Pak Rupee depreciation. This resulted in 45.41 percent decline in gross profit with GP margin falling 15 percent in 2018 to 7.1 percent in 2019. Operating expenses surged by 28 percent year-on-year in 2019 on account of higher payroll expense, conveyance charges as well as depreciation.

During the year, the company hired additional resources which took its workforce from 127 employees in 2018 to 191 employees in 2019. INKL recorded other income of Rs.11.13 million in 2019 due to exchange gain; gain on translation of foreign currency debtors as well as hefty dividend income earned during the year. Other expense slid by 14.94 percent in 2019 due to lower profit related provisioning made during the year.

Operating profit plummeted by 15.63 percent in 2019 with OP margin slipping from 6 percent in 2018 to 4.4 percent in 2019. INKL was able to cut down its finance cost by 17.54 percent in 2019 despite higher discount rate. Net profit declined by 23.63 percent year-on-year in 2019 to clock in at Rs.10.24 million with EPS of Rs.1.06 versus EPS of Rs.1.39 in the previous year. NP margin slumped from 3.4 percent in 2018 to 2.3 percent in 2019.

In 2020, INKL registered 19.14 percent year-on-year rise in its net sales due to robust performance in the first three quarters of 2020 before the outbreak of COVID-19. However, lockdown imposed during the 4th quarter of the year resulted in idle capacities, supply chain impediments and cancellation of orders across the industry. As a result, INKL achieved capacity utilization of 70.05 percent in 2020. Due to improved volume and prices during the most part of the year, as well as cost control measures put in place by the management, INKL registered 59.74 percent year-on-year rise in its gross profit with GP margin picking up to 9.5 percent in 2020. Operating expense fell by 1.46 percent in 2020 as workforce was streamlined to bring it down to 152 employees which resulted in lower payroll expense. Due to restriction on travelling, conveyance charges also dropped during the year. Other income declined by 80.41 percent in 2020 due to no exchange gain and gain on translation of foreign currency debtors recorded during the year. Dividend income also ticked down in 2020. Conversely, other expenses mounted by 14.36 percent in 2020 due to higher profit related provisioning made during the year.

The company was able to strengthen its operating profit by 51.29 percent over last year with OP margin scaling up to 5.6 percent in 2020. Finance cost magnified by 156.24 percent in 2020 due to higher discount rate for most part of the year, elevated exchange loss as well as increased borrowings. This coupled with higher effective tax rate due to prior year taxation drove INKL’s net profit down by 24.45 percent in 2020 to clock in at Rs.7.73 million with EPS of Rs.0.8 and NP margin of 1.4 percent.

INKL recorded 9.2 percent year-on-year plunge in its net sales in 2021. Slowdown of global economy due to COVID-19 as well as imposition of lockdowns time and again during the year dented its sales volume. The company’s capacity utilization fell to 57.75 percent in 2021. Hike in global cotton and yarn prices as well as revision of gas tariff and non-availability of gas during winter months drove up INKL’s cost of sales. This resulted in 21.30 percent year-on-year fall in gross profit with GP margin sinking to 8.3 percent. Operating expense inched up by 3.44 percent in 2021 due to slightly increased salaries although workforce size remained almost intact during the year. Other income surged by 181.24 percent in 2021 on account of higher dividend income, grant income and gain on sale of investments. INKL also recorded exchange gain of Rs.0.488 million during the year. Other expense tumbled by 68.76 percent in 2021 due to lower profit related provisioning done in 2021. Operating profit contracted by 19.53 percent in 2021 with OP margin dropping to 5 percent. Finance cost enlarged by 32.72 percent in 2021 despite monetary easing due to higher mark-up on MTF salaries & wages (COVID-19) and other mark-up incurred during the year. INKL recorded net loss of Rs.0.05 million in 2021 with loss per share of Rs.0.01.

INKL posted staggering 37.32 percent year-on-year escalation in its net sales in 2022. This was on the back of revival in both local and export order coupled with improved prices and Pak Rupee depreciation which made export sales more worthwhile. Due to increased demand, the company was able to employ its capacity efficiently with capacity utilization clocking in at 70.43 percent in 2022. Gross profit spiraled by 48 percent in 2022 due to better absorption of fixed overheads, upward price revision, elevated volumes and currency depreciation. 11.18 percent increase in operating expense in 2022 was primarily the effect of higher payroll expense as the number of employees increased to 181 in 2022. Other income multiplied by 56.83 percent in 2022 higher exchange gain, dividend income, gain on disposal of property, plant and equipment as well as reversal of provision on ECL. Higher profit related provisioning drove up other expense by 423.47 percent in 2022. Operating profit strengthened by 73 percent year-on-year in 2022 with OP margin climbing up to 6.3 percent. Finance cost dropped by 18.38 percent in 2022 due to lower other markup and mark-up incurred on export refinance facilities. INKL was able to pull its bottomline from net loss recorded in the previous year. INKL’s net profit stood at Rs.22.08 million in 2022 with EPS of Rs.2.08 and NP margin of 3.3 percent.

The political and economic instability prevailing in the country, high cost of doing business coupled with global recession took its toll on the net sales of the company which dwindled by 8.77 percent in 2023. INKL’s capacity utilization drastically dropped to 46.53 percent in 2023 in line with reduced demand. Nevertheless, gross profit spiraled by 35 percent year-on-year in 2023 with GP margin flying up to 13.2 percent. This was due to higher margins on exports, cost control measures and the company’s ability to pass on the impact of high cost to its consumers.

High cost was the result of sky-rocketed inflation, shift to expensive imported cotton due to damage of local cotton produce owing to devastating floods, Pak Rupee depreciation as well as upward revision in gas and power tariff. 36 percent high operating expense incurred in 2023 was the consequence of higher payroll expense although the number of employees was streamlined to 121 in 2023. Higher fee and subscription charges, depreciation as well as motor vehicle & conveyance charges also played their role in inflating the operating expense in 2023. Other income thinned down by 27.9 percent in 2023 mainly on account of exchange loss and loss and loss on disposal of investment. Higher provisioning for WWF and WPPF drove other expense up by 34.5 percent in 2023. INKL was able to record 18.96 percent enhancement in its operating profit with OP margin reaching its optimum high value of 8.2 percent in 2023. Finance charges continued to slide during the year due to significantly lower outstanding loans in 2023. Higher taxation due to the effect of prior year pushed down net profit by 0.06 percent in 2023 to clock in at Rs.22.072 million in 2023. However, EPS remained intact at Rs.2.28 in 2023. NP margin boasted its highest level of 3.6 percent in 2023.

Recent Performance (1HFY24)

The demand of INKL’s products which began to erode in 2023 continued in 2024 with 2.67 percent year-on-year slide in its net sales in 1HFY24. While 1QFY24 posted 7.34 percent growth in net sales due to Pak Rupee depreciation and slightly higher volumes, 14.32 percent weaker net sales in 2QFY24 counterbalanced its effect. Cost control measures, revised sales mix and Pak Rupee depreciation resulted in 20.5 percent stronger gross profit recorded by INKL in 1HFY24 with GP margin rising up from 13.5 percent in 1HFY23 to 16.7 percent in 1HFY24. 16.73 percent higher operating expense appears to be the outcome of inflationary pressure as well as elevated fuel prices. INKL recorded net other loss of Rs.3.21 million in 1HFY24 versus net other income of Rs.4.88 million during 1HFY23 supposedly due to exchange loss. Despite all the odds, INKL was able to record 13.13 percent growth in its operating profit for 1HFY24 with OP margin rising up from 10.5 percent in 1HFY23 to 12.2 percent in 1HFY24. Increased discount rate drove finance cost up by 83.62 percent in 1HFY24. This resulted in 16 percent thinner bottomline recorded by INKL in 1HFY24 to the tune of Rs.23.54 million with EPS of Rs.2.43 versus EPS of Rs.2.9 during the same period last year. NP margin lowered from 6.7 percent in 1HFY23 to 5.8 percent in 1HFY24.

Future Outlook

INKL is under severe pressure due to high inflation, elevated gas and energy prices, sky-rocketed level of discount rate and political uncertainty in the home market which is further aggravated due to global recession and demand decline from its export market. Exploring new export destinations to reinforce its volumetric sales amid low demand in the home market can save the day for INKL.

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