Equity Analysis /
Pakistan

Gul Ahmed Textile Mills Ltd: Corporate Briefing Takeaways

  • In the Corporate Briefing held today, GATM’s management painted a cloudy outlook for Pakistan’s exports in FY23

  • High inflationary environment in Pakistan is likely to GMs in check; revised EFS rates to elevate finance costs

  • GATM is relatively well positioned to post decent earnings in FY23. We have a Buy stance with a June 2023 TP of PKR61/sh

Intermarket Securities
30 June 2022

GATM held its Corporate Briefing Session today to discuss the recent performance and the future outlook. During FY22TD, GATM posted a sharp 72% yoy rise in 9MFY22 earnings to PKR6.2bn (EPS: PKR10.01). Despite the imposition of super-tax, GATM is likely to post an all-time high EPS of PKR12.02 in FY22, in our view; however, demand outlook remains cloudy. 

Key takeaways

Demand Outlook:        

  • With the surge in inflation in US, UK and EU, Pakistan’s exports are expected to witness a decline of 10-15% in FY23 (as per management). Decline in purchasing power of consumers in these regions and inventory build-up with global retailers is likely to result in significant slowdown in near-term export sales between July-November 2022.

  • Company’s exports in FY22 are likely to touch US$300mn (all-time high) largely owing to (i) capacity enhancements in all segments and (ii) favorable increase in realized prices (US$/unit). As for the order book, 1QFY23 seems promising as the company has filled orders. For FY23, the management expects dollarized revenues to remain flat, due to diversified customer base and launch of new product lines (Medical Textiles and Air-spun yarn).  

  • On the local side, the management also foresees an overall decline in Retail segment sales. However, due to the strong brand presence, GATM is likely to be relatively shielded than peers.

Cost Outlook:

  • High inflationary environment in Pakistan is likely to GMs in check, during FY23. The expected rise in fuel costs (yet to be announced by the government), will elevate cost pressures further. GATM has recently started consuming FO and Diesel in its power mix owing to shortage of gas. In order to mitigate the elevated fuel costs, company plans on installing 20MW solar power plant in FY23 under a capital expenditure outlay of PKR3bn. 

  • With regards to cotton procurement, GATM’s presently has inventory until September 2022 at an average cost of PKR18,500/maund. The management believes that new procurement from July next month, will be at favorable rates. This, coupled with improved Spinning efficiencies will give GATM a relatively competitive edge in the market.   

  • Other cost pressures include (i) increase in minimum wage to PKR25,000/month (management estimates PKR200mn/month impact) and (ii) revision in EFS rates will further elevate finance costs (revised LTFF rates will be applicable for new projects).

Other updates:

  • GATM has partnered with the WWF for production of Organic Cotton in Baluchistan, which will take 2 years to come into fruition (improvement in ESG).  

  • In light of the current macroeconomic situation, the management has decided to further delay the planned Ideas IPO, for at least one year.

  • With the extensive capacity enhancements and planned product launches in FY23, we believe GATM is relatively well positioned to post decent earnings relative to other listed peers. We thus reiterate our Buy stance with a June 2023 TP of PKR61/sh.