Pakistan's largest spinning mill, Gadoon Textile Mills Limited is another success story of the prolific Yunus Brothers Group, which is the largest export house and cement manufacturer in Pakistan. Established in 1988, Gadoon was initially set up to provide an alternative source of income to the locals of the Swabi District, who cultivated poppy and opium on their lands. With nearly Rs 4 billion in market capitalisation today, the firm ranks among the top players in the textile sector, next to Dawood Lawrencepur, Artistic Denim, and Gul Ahmed.
The company operates strictly in the spinning sector, manufacturing and processing all types of cotton and man-made fibers. It is the second in the world and the first in Pakistan to introduce compact core spun yarn. Its clientele include some of the biggest names in the textile industry of Pakistan and abroad. At present, the company has 9 production mills with more than 245,000 installed spindles and a captive power plant of 47kw. It is without a doubt at the forefront of the textile spinning sector.
Prior Performance Gadoon Textile Mills' sales growth has been adequate, exactly doubling from FY10 to FY14. However, the company's profitability has seen much fluctuation over this period. The reason is that Gadoon operates strictly in the spinning segment, and as such its performance is entirely contingent on yarn prices. Unlike other companies which are more vertically integrated along the value chain and market cloth, bedwear, and garments, Gadoon operates at the more basic end of the value chain.
For instance, the firm's profitability peaked to an all-time high in FY11, with gross and net margins of 18 and 14 percent, respectively. This was the year when global cotton prices peaked and the yarn market became extremely bullish, fetching higher prices.
However, a look at the FY14 results reveals the reverse happening; cotton prices slumped globally, and yarn with it. Gadoon reported an all-time low of 3 percent net margins in FY14. Other factors such as a weaker Chinese currency, availability of subsidised Indian yarn in the international market, and rapid appreciation of the rupee also hit the profitability of the company and rendered it uncompetitive. These factors still persist and are an ailment to the whole of Pakistan's textile sector.
An analysis of the turnover shows that the company's exports and local sales are more or less on the same level. But the difference between international and domestic yarn prices isn't too great. Hence, this division doesn't do much to hedge the company, as either market fetches the same price.
Recent Performance For the nine months ended FY15, Gadoon's financials were nothing short of disastrous due to the low yarn prices and high cost of doing business. The top line declined by 7 percent year-on-year, whereas costs were cut by a mere one percent. This caused a 50 percent fall in gross profits.
There is barely anything left at the bottom line; net profit declined by almost 100 percent year-on-year to a paltry Rs 10 million on over Rs 14 billion in sales. Thus, the net margins came in at zero, as the company managed to do a little better than breakeven for the quarter. This was despite significant reductions in distribution and other expenses.
Due to a change in sales mix and the addition of new production facility at its Karachi Project, Gadoon's production was higher over the prior year. In terms of volume, sales actually improved by 3 percent year-on-year. Unfortunately, the low yarn prices killed profitability. Moreover, the strong rupee and cheaply available Indian yarn hurt competitiveness.
However, there was some relief in the form of lower fuel prices that have been observed since the start of FY15. As of FY14, fuel and power accounted for nearly 12 percent of Gadoon's cost of sales. So, the lower fuel costs played an instrumental role in mitigating losses and keeping the numbers in the positive.
Outlook The outlook for the textile industry of Pakistan as always is bleak, with no change in the prevailing conditions on the horizon. The government has done little to quell the concerns of the textile industry which is on the brink of collapse owing to high cost of doing business and lack of competitiveness. If anything, new tax reforms such as increased sales tax and WHT on non-filers are making matters worse.
For Gadoon Textile Mills, there is no choice but to weather the storm. In the short term, however, there are some plus points; the company's merger process with Fazal Textile Mills Limited is in the final stages, which will further strengthen its market position and enhance its operational efficiencies. Moreover, the company would have established a Waste Heat Recovery unit in the most recent quarter, which will further reduce fuel and power costs.
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GADOON TEXTILE MILLS LIMITED
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Rs (Million) 9MFY15 9MFY14 YoY
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Net Sales 14,320 15,359 -7%
Cost of Sales 13,426 13,566 -1%
Gross Profit 894 1,793 -50%
GP Margin 6% 12% down
600 bps
Distribution Cost 211 237 -11%
Administrative Expenses 136 89 53%
Other Expenses 11 179 -94%
Other Income 10 21 -52%
Finance Cost 534 553 -3%
Profit Before Taxation 134 839 -84%
Taxation 125 114 10%
Profit After Tax 10 725 -99%
NP Margin 0% 5% down
500 bps
EPS 0.42 30.95 -99%
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Source: company accounts
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