Pearl Securities Limited – Textile in Focus

Karachi, December 29, 2014 (PPI-OT): Artistic Denim Mills Limited

Synopsis

In this report Pearl Securities Limited would likes to highlight Artistic Denim Mills Limited (ADMM) for solid sales prospects to foreign markets. The firm’s Top-Line is improving consistently despite overall slow textile exports. ADMM focused segments of ‘readymade garments’ and ‘non-cotton yarn’ are picking up pace with exports up by 11% YoY and 9% YoY in 5mFY15. The Company produces denim jeans and yarn which are exported to the US and EU.

Despite improving sales, core operations have been burdened by rising input costs, most notably in Fuel and Power. In 1Q FY15, gross margins declined by 749bps YoY and denied positive impact of 32% YoY revenue growth. However, recent GoP decision to cut power rates by 2.97/unit and declining cotton prices will ease this burden in coming terms. However, cotton prices have started going up which might offset the positive impact in coming quarters.

Export data for the ongoing quarter shows strong growth in the focused segments, indicating solid sales by the firm in the ongoing quarter. Additionally, power rate reduction and cotton price decline are of further benefit to the company. ADMM has been proactive in securing a greater client base in the EU by participating in textile shows.

Strong exports of readymade garments

It is important to note, slow industry textile export growth is due to significant drop in ‘cotton yarn’ and ‘cotton cloth’ exports which make up the bulk of industry exports. On the other hand, exports of nearly all other segments has been improving, including ADMM focused ‘readymade garments’ and ‘other than cotton yarn’ segments. The readymade garments and ‘other than cotton yarn’ segments have grown by 11% YoY and 9% YoY respectively in 5mFY15.

In the first two months (Oct’14 and Nov’14) of the ongoing quarter, exports of these segments have accelerated significantly. The ‘readymade garment’ segment shows outstanding growth of 24% YoY while the ‘other than cotton yarn’ shows growth of 28% YoY during 2mo 2Q FY15.

Garment capacity upgraded, Top-Line improves by 32% YoY…

Noting prospective gains under the GSP scheme of trade, ADMM has upgraded garment manufacturing capacity by 28% YoY by the end of FY14. Capacity now stands at 2.31mn pieces against previous 1.8mn pieces of garment products. Additionally, ADMM has been rigorously focusing on expanding client base in the EU by participating in four textile shows across Europe during CY14. With better production and promotion of their product, the firm has able to improve sales by 32% YoY in 1Q FY15 to reach PKR 2.29bn against PKR 1.74bn in the same period last year.

Top-Line expansion to be maintained

Export figures show improving activity in the company’s focused segments. Most recently, ADMM promoted their product in the ‘Munich Fabrich Start’ in Sep’14 and the ‘Kingpinps Show’ (Amsterdam) in Oct’14 which along with production capacity improvements stand to enhance revenue moving forward.

Depressed margins downgrade benefit of solid revenue…

Core expenses have grown substantially by 43% YoY in the face of 32% YoY growth in revenue resulting in strong deterioration of gross margins. Rising expenses are due to increased power tariffs, utilities and labour. Gross margins have declined by 749bps YoY, at 18% in 1Q FY15 against previous 24.5% (YoY). Due to declining gross margins, gross profit has declined by 3% YoY to reach PKR 414mn.

Improvement in sight

Moving forward, GoP has reduced power tariffs by PKR 2.97/unit, (effective from Jan’14) while cotton prices have declined significantly. These factors will help the company control core expenses and improve gross margins. Cotton prices have declined by 27% in YTD FY15 and are maintained at lower levels of during ongoing 2Q FY15 with the latest reported price of PKR 4,800/bale against PKR 6,600/bale at the start of FY15.

1Q FY15 Summary – Margin decline forces negative PAT growth

Benefit of solid Top-Line was negated by rising core expenses. Additional stress to earnings was provided by rising OPEX. Finance cost decline provided some relief to bottom-line. Overall net income is recorded at PKR 282mn (EPS: PKR 3.34), showing a decline of 11% YoY against PAT of PKR 324mn (EPS: PKR 3.86).

Net sales have improved by 32% YoY, at PKR 2.29bn.

COGS have increased by 43% YoY to reach PKR 1.88bn.

Gross margins decline by 749bps YoY, at 18%.

Gross profits decline by 3% YoY to reach PKR 414mn.

OPEX has escalated by 99% YoY with a cost of PKR 99mn.

Finance costs decline by 8% YoY, at PKR 33mn.

Operation details

Artistic Denim is a vertically integrated textile company that is engaged in the production and sale of rope dyed denim fabric, yarn and value added textile products. The firm is listed at the KSE with its registered head office in Karachi. The manufacturing facility is located in Korangi Industrial Area of Karachi, with spinning capacity of 22.1mn lbs of yarn, weaving capacity of 23.97mn meters of fabric and 2.31mn pieces of garment production.

Company Outlook

ADMM’s sales prospects appear strong due to growing production and marketing efforts in EU. Negative aspect to operations are the rising core expenses, however, burden is expected to be softened by power tariff reduction since Jan’14 and overall decline in cotton prices. ADMM has currently emerged to a glowing position and has a moderate potential (15%) to chase its Target Value of PKR135 with the P/Ex ratio 9.8x (FY15E). Buy

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