Analyst briefing holds by Gul Ahmed Textile Mills Ltd

Gul Ahmed Textile Mills Ltd (GATM) posted 3QFY21 consolidated NPAT of PKR1.7bn (EPS: PKR4.00), compared with a net loss of PKR453mn last year (LPS: PKR1.06). This took 9MFY21 NPAT to PKR3.6bn (EPS: PKR8.41). Gross Margins rose c.3ppt qoq from c.19% to c.22%, due to significant improvement in Spinning margins, which are likely to remain healthy as the present demand-supply situation in the yarn market is likely to persist.

Key Takeaways and Outlook:

GATM reported net sales of PKR22bn, up a staggering 52% yoy (distorted by Covid-19). However, on a 9M basis, revenues grew by 40% yoy to PKR65bn amid massive rerouting of orders from China and supply-chain issues faced by regional competitors.

GATM believes that the present momentum in revenues is sustainable – expected to maintain a CAGR of 15% over the next three years – while crossing the PKR100bn mark (doubling to PKR160bn by FY26, as per GATM’s plans below). GATM expects unit price increases in exports in the near-term – due to supply bottlenecks in India and other regional countries.

The unique technology in the Spinning segment has enabled GATM to achieve one of the highest GMs and sustained revenue growth among listed companies. With regards to the declining margins in Processing segment, the Management attributed high yarn prices coupled with the sharp PKR/US$ appreciation. However, due to the recent rise in international raw material costs, price hikes are on the cards – 4-5% hikes per quarter are likely to lift GMs further in the coming quarters.

The company has focused heavily on BMR projects in both the Home Textiles and Spinning segments. The capacity enhancement of the Home Textile segment (by 30%) is likely to commence operations by 1QFY22. Multiple expansions in the Spinning segment are likely to come online during FY22-23 (first phase 30% expansion, 20% in phase II).

GSP Plus Status resolution passed by the EU Parliament: The GATM management believes that the government will work closely with the EU member countries in order to resolve the ongoing issues. Presently, the Home Textile segment faces stiff competition from Bangladesh in the EU market; but Bangladesh is already operating at full capacity utilization, hence GATM management does not see significant issues if the status is revoked. In the Apparel segment, however, Pakistan is likely to lose more from the revocation.

GATM is expanding in Healthcare & Hygiene segment (new plant), amid rapidly rising demand. The company believes that exports from this segment can touch US$100mn in six years – also fetching high GMs (niche products).

The management seemed content about the imminent completion of the carve-out of Ideas (expected by November 2021 to March 2022). GATM believes that the technology division of Ideas (e-commerce) is likely to grow revenues exponentially in the near term. Online sales are presently c.20% of overall retail sales.

Key risks over the medium term are: (i) escalation of Covid-19 pandemic, (ii) revocation of GSP+ status, (iii) energy non-availability, and (iv) local cotton supply and Agriculture policy.

With the strong order flows and cotton inventory until the first week of November 2021, we believe GATM is well positioned to grow even further (already surpassing other listed composites in terms of revenues). The carving out of Ideas will unlock greater value for the scrip, as Ideas is likely to fetch premium valuations.

We reiterate our Buy stance on GATM with a June 2022 TP of PKR75/sh.

Courtesy – Intermarket Securities Limited.

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