Gadoon Textile Mills Limited

Business and Industry Introduction

Gadoon Textile Mills Limited (GTML) was founded in 1988 and has since grown to become one of Pakistan’s largest spinning units. It manufactures and processes all types of cotton and manmade fibres in state-of-the-art plants in Karachi and Gadoon Amazai, KPK province. Gadoon’s primarily work in Pakistan’s textile industry, specifically the fibre spinning sector and operates in the industry’s B2B sector. Some of the biggest names in Pakistan’s and the world’s textile industries are among its clients. Gadoon is a quality and innovation pioneer in Pakistan’s textile manufacturing sector. As a result of its growth and expansion strategy, GTML’s merger with Fazal Textile Mills Limited further strengthened its market position. With an installed capacity of 342,420 spindles and an efficient organizational structure, it is able to operate independent production units supported by a captive power plant with a capacity of 56 megawatts.

The textile industry is the largest manufacturing industry in Pakistan. Pakistan is the 8th largest exporter of textile commodities in Asia. Textile sector contributes 8.5% to the GDP of Pakistan. In recent years, Pakistan has faced competition from regional players including Bangladesh, India and Vietnam. In the past decade, Pakistan’s share in global textile market decreased to 1.7 percent from 2.2 percent. According to the economic survey of Pakistan2008–09 the Pakistan textile industry contributes more than 60% to the country total exports, which amounts to around 5.2 billion US dollars. According to the 2012 Economic Survey of Pakistan, issued by the finance ministry, the textile industry itself constituted about 4% of the total size of the economy.

Capital Structure of the Firm

Capital structure of a company tells how it finances its long-term projects with equity versus loan. The long-term debt to equity ratio of Gadoon has been consistently on a rise since 2018 which means that Gadoon started relying heavily on debt rather than equity to finance their long-term projects. Thus, the capital structure of the company is somewhere between medium to high-risk capital structure.

Ø Free Cash Flows

FCFF is a measure of a company’s profitability after all expenses and reinvestments have been deducted. It is one of many financial health benchmarks used to compare and analyse a company’s financial health. The Free Cash Flows for the Firm are the cash flows available to all the stakeholders, stockholders, and creditors, of a company after all its expenses and investments have been paid. It is the single most important item to be considered while making investment decisions. If the Free Cash Flows of a firm are increasing every year that investment is worth making. The FCFFs of Gadoon have largely shown a horizontal trend i.e., the cash position of the company has not improved over the course of 5 years. In fact, there was a sharp dip in the FY 2020 when the FCFFs of the firm went negative. The reason is the spread of COVID-19 throughout the world that shook the economies of the world to their cores. However, since the world has now learnt to fight COVID and the textile sector of Pakistan is back to its full swing, the forecasted FCFFs of the company are expected to see a continuous growth pattern. This is a positive sign. The Free Cash Flows of the firm are expected to be 1,247,623k by the FY 2023.

Ø Cost of Equity

Cost of equity was calculated through the CAPM model which came out to be 13.80%. This means that the expected return for the stock of Berger paints is 13.80%. The CAPM model is affected by the prevailing risk-free rates in the market which averaged out to be 9%. The current market return was expected to be 6%. The beta was found to be 0.80 which means that for every unit change in the market the company moves 80% in the same direction. This means that in the state of boom the company provides 80% of what the market provides.

Ratio Analysis

Ø Gross Profit Margin

The gross profit margin ratio represents the percentage of sales revenue retained by a company after all direct costs associated with running the business have been deducted. It is one of five calculations that are used to determine profitability. Return on shareholders’ equity, net profit margin ratio, return on common equity, and return on total asset are the others. A higher gross profit margin indicates that the company has more cash available to pay for indirect and other costs such as interest and one-time expenses. As a result, it is an important ratio for assisting business owners and financial professionals in assessing a company’s financial health. The gross profit of the company has been fluctuating around the value of 8% in the past and the future projections take it to around 10.5%. The gross profit margin ratio is commonly used to compare businesses in the same industry or to track a company’s performance over time. The Gross Margin of Gadoon is quite low in comparison to the industrial average which fluctuated around 14% in the same time period. Overall, both Gadoon’s as well as the Industrial average have decreased over the course of 5 years. The main reason can be attributed to the fact that the prices of raw materials increased over the years.

Ø Profit before Tax

The pretax profit margin is a popular metric for comparing the profitability of businesses in the same industry. The pretax profit margin is a financial accounting tool used to assess a company’s operational efficiency. It is a ratio that tells us what percentage of sales have turned into profits, or how many cents of profit the company has generated for every dollar of sales before taxes. From 2016 to 2019 the financial performance of the company improved, and the Pretax Profit Margin of the company increased from -0.43% in FY2016 to 5.34% in FY2019. The FY2020 again saw a decline however, now since the firm has recovered from the COVID-19, the future is promising. The ratio is expected to be 5.48% in FY2021, 8.68% in FY2022 and then 9.91% in FY2023.

Ø Net Profit after Tax

A financial performance ratio calculated by dividing net income by net sales is known as an after-tax profit margin. The after-tax profit margin of a company is important because it demonstrates how well the company controls its costs. A high after-tax profit margin generally indicates that a company runs efficiently, providing more value to shareholders in the form of profits. The trend of the Net Profit margin was almost the same as that of pretax profit margin. There was a sharp dip in FY2020, however, both the industry as well as Gadoon expect a rise in the future years.

Ø Return on Equity

Return on equity shows how much a company generates on the money invested by investors. A good rule of thumb is to target a return on equity that is equal to or just above the industrial average. The graph tells the opposite story. The industrial average ROE is higher by almost 3% points that of Gadoon in all of the FYs. However, in the coming years Gadoon follows the same trend as the industrial average and the gap is narrowed down until, in the FY 2020, both the ratios are almost the same. When a company has a low ROE, it means that the company has not used the capital invested by shareholders efficiently. It reflects that the company is not in a position to provide investors with substantial returns. Analysts feel if a company’s ROE is less than 12–14 per cent, it is not satisfactory. Gadoon is expected to generate ROE around 15–17% every year in the future. Among the competitors, Gul Ahmed and Feroze1888 showed the highest returns in comparison with their investor’s money.

Ø Return on Assets

Return on assets (ROA) measures a company’s profitability in relation to its total assets. ROA informs a manager, investor, or analyst about how effective a company’s management is at generating earnings from its assets. ROA is expressed as a percentage, the greater the ROA, the better. When comparing similar companies or a company’s previous performance, ROA is best used. In contrast to other similar metrics such as return on equity, ROA considers a company’s debt (ROE).

The ROA of Gadoon followed a curve from FY 2016 to 2020. It was -1.42% in FY2016 and 0.15% in FY 2020. In between the ratio rose to 4.03% in FY2017 and then an all-time high of 5.12% in FY2018. However, the industry performed a lot better. There was a significant gap between the ROAs of Gadoon and Industrial Average in FYs 2016 and 2020. The reason being high ROA of Feroze1888. By comparing Gadoon’s ROA to industry peers, we see that Gadoon generated lesser profits per dollar of assets than the overall industry.

Ø Asset turnover

The asset turnover ratio compares the value of a company’s sales or revenues to its assets. The asset turnover ratio can be used to determine how efficiently a company uses its assets to generate revenue. The greater a company’s asset turnover ratio, the more efficient it is at generating revenue from its assets. In contrast, a low asset turnover ratio indicates that a company is not efficiently using its assets to generate sales.

Long-term debt to equity Ratio (%)

The long-term debt to equity ratio is a method for determining how much leverage a company has taken on. To calculate the ratio, divide an entity’s long-term debt by the total amount of its common and preferred stock.

When the ratio is relatively high, it indicates that a company is more likely to fail because it may not be able to pay the interest on its debt if its cash flows decline. This is more of a problem when interest rates are rising, when a company’s cash flows are volatile, or when an entity has only a small amount of cash on hand to pay down its debts. This ratio talks about the Capital structure of a company that how it finances its long-term projects with equity versus loan. The long-term debt to equity ratio of Gadoon has been consistently on a rise since 2018 which means that Gadoon started relying heavily on debt rather than equity to finance their long-term projects. Thus, the capital structure of the company is somewhere between medium to high-risk capital structure.

Ø Current Ratio

Current ratio which is the current asset ratio to current liability explains a company’s financial positions about their ability to pay off its current liabilities considering their liquid assets that it has at hand. Companies need to maintain a current ratio greater than 1, so that they have a margin of safety if the company has an emergency, and it needs urgent funds to handle the situation. The higher the ratio, the stronger company’s short-term financial situation is.

The current ratio of Gadoon has increased over the years slightly from 0.80 in 2016 to 1.03 in the FY 2020. There isn’t a big increase, but ratio has crossed the figure of 1, which is a good figure. The industrial average stood at 1.84 in the FY2016 and has been declining continuously. In FY 2020 it stood at 1.29; significantly higher than Gadoon’s 1.03. So, looking at the industrial average we can say that Gadoon did not perform well in terms of current ratio.

Industry

Ø Industry and the Competitors

This industry (Textiles) has been an integral part of Pakistan’s economy for decades, it was initially organized in 1957. It was one of the first sectors that actually became industrialized in the country. Initially, because of it being labour intensive but not requiring too much skilled labour, it proved to be the easiest to set up.

At the moment Pakistan stands at the 8th position in global textile export. It contributes eight and a half percent of the economy yet employs 45% of the labour force (and 38% of total manufacturing workers). Recently however, many companies are working to provide value addition as well as the production of textiles. This has not been the case for a while. Initially the brunt of the cotton produced was sent abroad for value addition. There has been a lot of diversifications in recent years.

Gadoon and its competitors (Feroze1888, Gul Ahmed, Nishat and Sapphire) are working on brand recognition and making efforts for their clothing (one stop clothing shopping) to replace the more traditional style of buying cloth separately and having it made into dresses through independent tailors.

Sapphire was founded in 2014 and is currently in the development stage, this compared to the high value-added products of Gadoon. Gul Ahmed is similar in stature to Gadoon when it comes to their history, both have been established for a while and are similarly developed when it comes to the textiles industry, however Gul Ahmed has cornered the market with multiple brands too. They are better performing out of the whole lot. Feroze1888 was found in 1970s and is a much older and more established name than Sapphire who are in a much more nascent phase of their development.

The Pakistani textile industry has been on a decline since some time now. The downturn in cotton and textile production due to water shortage, power shortage and the recent upsurge in locust attacks consuming standing cotton crops are the major issues that the government is failing constantly to pay heed to. The lack of skilled labour has been a large barrier for this industry because it is vital in order for them to be value addition in the products sold. Even though the government has stepped in to provide a draw back in local levies and taxes while also providing a special energy package for the textile industry, but the outcomes have not been promising. Recently the govt. has announced its new Textile Policy 2021–25 which aims to increase the Pakistani textile exports to $25 bn by 2025. Let’s hope for the best.