June 23, 2021 (MLN): The textile sector of Pakistan is one of the major sources of foreign exchange earnings. Despite facing challenging times during the strict lockdown amid the Covid-19 pandemic, the sector utilized its maximum potential to fulfill the domestic and international demand.
On the back of favorable macros particularly the government’s prudent policies, textile exports of Pakistan have soared by 18% YoY. Companies have invested a significant amount in capacity enhancements on the back of subsidized financing facilities in the form of TERF and LTFF. This is evident by the rise in textile machinery imports in FY21, which have increased by 17% YoY.
According to the report by Insight Securities, Gul Ahmed Textile Mills (GATM)- the major textile exporter with 65% of export sales, has largely benefitted from the policies, as evident by the company’s profitability.
In order to remain ahead of the competitive curve, GATM has been continuously modernizing and upgrading its spinning and weaving segment, under which the company has made CAPEX of around Rs5.7bn in FY20. The company is constantly investing in PPE which grew at a 7-year CAGR of 23%.
The research further indicated that given the eagerness to perform better, total sales of GATM would cross the bar of Rs100bn by the end of FY23 which was hardly near to the Rs30bn back in 2017.
On the export front, the company is enjoying more revenue from the export front rather than local sales since 2017 which is expected to cross Rs60bn by the end of FY23. It is pertinent to mention that the increasing trend of e-commerce and online shopping during the pandemic has also led to improved sales.
During 9MFY21, IDEAS alone has shown impressive performance where retail sales of GATM have increased by 15% YoY with a 5-year CAGR of 10%.
The report also pointed out that management has decided to carve out IDEAS as a separate entity and will have IPO in the coming months. It is expected that the IPO transaction to be executed by the end of 2QFY22 after necessary regulatory approvals. The proceeds of the IPO would be utilized to improve the local & international retail footprint, distribution network, and e-commerce segment.
The retail segment contributes 36% to GATM’s topline. The gross margin of the segment stood at 25% in FY20, whereas the overall company’s gross margin was recorded at 16%. The current book value of the segment stands at Rs7.5bn (Rs14.5/sh).
On the exchange front, PKR devaluation is considered one of the significant factors to boost exports. During 9MFY21, PKR appreciated by 9% against the US dollar which has been affecting the net earnings of major textile players of Pakistan. However, it has depreciated by more than 3% since then and has constantly been on the decline, research by Insight Securities highlighted.
As per the report, it is expected that the current account deficit (CAD) to reach $7-8bn next year (vs. surplus of $0.8bn in 10MFY21) on account of higher oil & machinery imports under the TERF and LTFF schemes. Therefore, PKR to reach 165-170 against US$ in FY22.
Under this scenario, GATM is likely to be the major beneficiary of the currency devaluation as 60% of the company’s topline is driven by exports.
The report also underlined the dilemma of cotton prices which may hit the margins of the value-added segment as cotton prices in the country have soared to Rs12,300/40kg, whereas domestic production is at a multi-year low, clocked in at 5.6mn bales as compared to the target of 11mn bales. The cultivation area has reduced by 20% which means that the total production would continue to be below the required levels.
GATM has procured cotton till Dec’21 and will be unaffected by the current rising trend of prices. However, if the prices sustain at current levels, it will negatively impact the estimates.
On the debt front, GATM is one of the most leveraged players in the industry with the ratio of 57.3%. However, most of the debt comprises subsidized markup facilities such as TERF and LTFF, due to which its finance costs have stayed in the range of 5% and are expected to hover in the same range, the report added.
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