Topline Securities recently hosted a Corporate Briefing Session (CBS) of Gul Ahmed Textile Mills (GATM), wherein the management discussed the company’s recent financial results and prospects.
The company has borrowed FE loans effectively at the right times, keeping finance costs below 4% of sales. The company stays profitable by focusing on cash flows from operations, reducing the need for borrowing to grow. Instead, it plans to fund growth from its earnings and will continue with this approach. Management expects interest rates to drop, but not by much, aiming for 18-19% by Dec-2024 and 16% by Jun-2025.
Increase in tax in budget FY25: Management believes that Pakistan’s tax structure is the highest among the export regions the company competes with. Companies are facing higher costs for energy, interest, and now taxes. There is little support for growth, so the company will have to fund it independently. Management foresees a bleak outlook for many companies as they won’t be able to switch to expensive renewable energy options due to the high CAPEX required.
GATM’s wind energy project requires an investment of US$120mn. If there is a focus on completely renewable energy, it will leave little to no room for the company to grow its core operations.
Currently, GATM meets its entire energy requirement through internal generation, with a power requirement of approximately 42 MW and an average power cost of Rs35 per KW. The 100 MW wind power project is expected to be commissioned in 2027.
Minimum Salary Impact: According to management, the impact of the minimum salary increase is in line with the inflationary factor. Last year, Pakistan experienced 20-25% inflation, while trading partners had only 2-3% inflation. Consequently, the devaluation should have been 18-20%, but this did not occur. This situation has restricted the company from raising prices for buyers, as Europe and North America are still experiencing high interest rates.
Increase in Sales Tax on Retailers: Management believes the government should re-look the policy of broadening the tax base.
Export revenue is expected to be US$360mn in FY24, with an expectation of US$360-380mn for FY25. The company plans to filter partners and choose those where value addition is maximized to mitigate higher energy costs. The company does not expect Pakistan’s textile exports to grow in FY25, and this might even decline, following recent budgetary measures and policies.
The European Union (EU) is the largest export market, with Germany being the top country. Regional sales from Europe rose by 29%, reaching Rs49bn in 3QFY24 compared to Rs38bn in 3QFY23.
Courtesy – Topline Pakistan Research