Established thirty years ago with 14,000 spindles, Gadoon now has over 300,000 spindles and a modern environmental friendly plant which utilises waste recovery and also has captive power generation. The company's core business activity involves fiber spinning and knitting sector.
Textile sector dynamics
The exchange rate is in free fall and even though the majority of textile exports had long been arguing for devaluation in the currency, not many of them expected the rupee to fall to such levels. While exports might increase, the accompanied increase in the cost of raw materials will likely keep the profitability of textile companies in check. In addition, the hike in the interest rate also means a rise in the finance cost for leveraged textile companies, which will further dent the bottom line in the coming year. However, the government has fulfilled the demand for reduction in utility prices which might alleviate some of the inflationary effects for exporters. There is also the recently revised FTA with China which has been touted to be much better than the last one and might see increased exports from Pakistan to China.
Shareholding pattern and stock performance
GADT's shareholding pattern is highly concentrated with the Yunus Brother Group holding almost 70 percent of the total outstanding shares. This is followed by the general public which holds 21 percent while banks, DFIs and insurance companies cumulatively have 8 percent ownership of Gadoon Textile Mills Limited.
Historical performance.
Spinning is the main bread and butter for Gadoon Textile Mills, which means things, have not fared well for the company over the past few years. The trend of declining profitability and slow-down in the firm's revenues could be attributed mainly to the fall in exports for the companies which have mirrored the overall trend of yarn exports of the country. GADT's exports dipped from 48 percent in FY13 to almost 32 percent in FY17.
One of GADT's major export destinations is China, which means that a weaker Yuan coupled with an overvalued rupee has not helped over the years. However, the company managed to make some progress in boosting exports in FY18 when exports contributed 42 percent to the overall top line. Another highlight was the increase in finance cost for the company which came about due to the management's decision to convert foreign denominated loans to domestic currency borrowing.
On a more recent note, the 9MFY19 period has been a mixed bag for the company. Even though GADT's domestic sales recorded a healthy increase of 30 percent as compared to the same period last year, its exports fell by 24 percent. The company attributes this to the trade war between US and China which resulted in lower demand from Chinese companies for value added production. GADT believes that the competition has also been tough in international markets and the more than anticipated hike in the interest rate as well as the abrupt devaluation has not helped textile companies either.
The company's finance cost has doubled during the 9MFY19 period due to the balancing, modernisation and replacement investment. The government also decided against extending the export rebate for the spinning segment for this year. In the same period last year, GATM's export rebates amounted to Rs116 million almost which have been absent this year. Overall, the company's PAT fell by almost 19 percent.
Future outlook
GATM is looking to implement cost minimization efforts to combat the inflationary trends in the economy. Its BMR activities will help in this regard coupled with procurement of raw material at economical rates. The availability of raw cotton has also been a big bane for spinning firms as the local cotton crop continues to disappoint year after year. As noted in its most recent quarterly report, the general economic slowdown has not only affected core operations for the company but also dampened returns from other strategic investments. This means a fall in other income is likely going forward as well. The other external threat is the trade war between the US and China which does not seem to be cooling down anytime soon especially with the recent additional tariffs imposed by the Americans.
The company has obtained an extension from shareholders regarding investment approval for renewable projects Tricom Solar Power (Private) Limited, Tricom Wind Power (Private) Limited and Yunus Wind Power Limited and will be looking to complete the investment within the approved time. This is another diversification effort to spread the investment portfolio into a larger footprint by the company renewable energy.
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Gadoon Textile Mills Limited
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Rs (mn) 9MFY19 9MFY18 Chng YoY
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Sales 22,251 19,988 11%
Exports 5,301 6,968 -24%
Local 16,950 13,020 30%
Gross profit 1,702 1,360 25%
Distribution cost 278 289 -4%
Admin expenses 206 166 24%
Finance cost 775 396 96%
Other income 372 489 -24%
PBT 770 883 -13%
PAT 566 687 -18%
EPS (Rs) 20.19 24.5 -18%
Gross margin 7.65% 6.80% up by 85 bps
Net margin 2.54% 3.44% down by 89 bps
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Pattern of Shareholding (as on June 2018)
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Categories of Shareholders Share
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Directors, CEOs and their spouse(s) and minor children 0.07%
Associated Companies, and related parties 69.57%
of which
Y.B Holdings (Private) Limited 69.57%
Banks, development finance institutions, 8.00%
insurance, non-banking finance companies etc.
Mutual Funds 0.96%
Public 21.38%
Foreign companies 0.18%
Total 100%
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Source: Company accounts