Big jump in other income leads to earnings beat

Gul Ahmed Textile Mills (GATM) reported consolidated 2QFY21 NPAT of PKR1.2bn (EPS: PKR2.78), compared to a NPAT of PKR640mn (EPS: PKR1.49) SPLY and a NPAT of PKR697mn (EPS: PKR1.63) last quarter. This took 1HFY21 NPAT to PKR1.9bn (EPS: PKR4.41), up 91% in SPLY. The 2Q result came in higher than our expected NPAT of PKR817mn (EPS: PKR1.91), where deviations stemmed from higher-than-expected other income, partly offset by higher Opex.

2QFY21 result highlights

Revenue jumped by 32% yoy to PKR22bn (broadly in line with our expectation of PKR21.6bn), led by higher exports sales in the Home Textile segment, local retail sales (Ideas) and an overall improvement in the spinning segment, in our view. Sequentially, however, there is a 10% qoq increase in revenue, from PKR16.5bn last quarter. Recall that Pakistan’s overall textile exports rose 15% qoq during 2Q.

Gross margins fell c.2ppt yoy to 19%, (in line with our expectation of 19%). This may be due to still-moderate margins in the retail segment, in our view, which may be due to the extensive discounts, in order to attract consumers to Ideas outlets amid restrictions in timings of commercial operating activities. With further easing of lockdowns hereon and overall improvement in the economy, we expect retail margins to gradually rise above 25% (as seen historically).

Distribution and Admin expenses rose by a sharp 23% yoy (and 42% qoq). This may be due to higher freight costs, as international fuel prices increased and due to the global shipping issues (shortage of containers), in our view. Other income clocked in at PKR664mn, which may be due to some one-off item. We await the availability of accounts for clarity.

Finance costs increased by a mere 3% yoy to PKR568mn from PKR551mn (in line with expectations), potentially due to an increase in short-term borrowings amid higher sales and rise in long term borrowings for BMR, in our view. Effective tax rate clocked in at 25% compared to 17% last year. This may be due to the an increase in local sales, in our view. 

The strong growth in revenues notwithstanding, given higher other income led to the earnings beat could mean that the bottomline is not entirely recurring, in our view. We await further details on clarity on this and SGA expenses. However, we still like GATM as a pure-play textile stock, where we look to revisit our estimates on account of a sustained growth in revenues. The material disclosure on the carving out of the retail segment (Ideas), is likely to unlock further value for GATM as Ideas’ IPO looks more likely. 

Courtesy –  Intermarket Securities Limited.