Gul Ahmed Textile Mills : TRANSMISSION OF QUARTERLY ACCOUNTS FOR THE QUARTER ENDED 31-12-2022

Textile Mills Limited

Half Yearly Report

Condensed Interim Financial Information

For the Half Year Ended December 31, 2022

Directors' Review Report to the Shareholders

The Directors of your Company are pleased to present their review of the affairs of the Company for the half year ended December 31st, 2022.

Global Economy

The global economy has faced significant challenges. Very low growth and high inflation across countries and products. The world has been faced with energy and food shortages that have been pushing costs to some og the highest levels ever witnessed. Interest rates have been increased to curb inflation resulting in heightened financial vulnerabilities etc. Due to higher interest rates worldwide, the fiscal capacity has significantly decreased, and worries over debt sustainability have increased in several countries as global financial conditions have made it harder to manage the mounting debt loads that have accrued rapidly in recent years, mainly during the pandemic.

Largely due to the war in Ukraine, inflationary pressures had intensified, which have pushed up energy and food commodity prices. The higher price of energy has helped trigger increasing prices across a broad basket of goods and services specially in Europe and USA. These factors as well as rising finance cost had not only reduced the disposal income in the hand of final consumers but also forced the Retailers to reduce level of inventories by changing supply chain practices and cut down on non essential purchases.

Pakistan's Economy

In addition to the Global economic challenges, Pakistan's economy got further impacted by political

uncertainties,

delayed economic decision making, inconsistent policies, and indecision on

implementation of economic measure under International Monetary Fund's (IMF) program led to a greater impact of Pakistans economic situation. These factors have pushed lot of pressuce and all key indciators are not in right direction.

Pakistan Manufacturing and Export Sector

Large-scale manufacturing (LSM) declined by 3.51 per cent year-on-year (YoY). According to an economist "Facing a balance of payments challenge, the authorities have taken a number of measures to slow down the economy. These included tightening of monetary policy as well as administrative measures to curtail imports. These measures coupled with challenges of floods, energy shortfalls and a slowing global economy have resulted in contraction of the LSM output".

Pakistan's exports have declined to $14.26 billion by 5.73 per cent in the first half July-Dec. 22 as compared with $15.13 billion in the corresponding months of the last fiscal year. At a time of increased focus on giving boost to Pakistan's exports to earn more foreign exchange, the performance of textile sector has remained unimpressive in international markets. Lower demand in world market and import restrictions in Pakistan are blamed for slack performance of textile industry, which has around 50% share in Pakistan's exports every year. The sector is also facing challenges including the shortage of cotton in the country, as it produced five million bales while the demand of the industry is around 14 million bales. To meet the demand of the industry, around 9 million bales of cotton are required, which also needs foreign exchange to import the input. Resultantly since October 2022, the textile exports have been at a nosedive. The exports declined 15 percent in Oct'22, then in Nov'22 by 18 percent and, Dec'22 by 16 percent. Textile exports decreased by 16.5% year-on-year to $1.35 billion in December 2022.

During period under review, exports mainly declined in cotton yarn, yarn other than cotton yarn, and bedwear which is 37%, 20%, and 14% YoY, respectively. In December 2022 alone, the major decline is witnessed in yarn other than the cotton yarn segment which decreased by 31.15% MoM, to $3.25mn, tents, canvas & tarpaulin by 27.09% MoM to $10.32mn, and knitwear by 11.63% MoM to $353.67mn. Similarly, the towels segment also depicted a decline of 11.29% MoM to $82.19mn. On yearly basis, cotton yarn, yarn other than cotton yarn, art, silk & synthetic textile, tents, canvas & tarpaulin, and knitwear decreased by 49.92%, 37.44%, 26.06%, 26.04%, and 19.54% YoY respectively.

Operational and Financial Performance

Major challenges faced by the Company during the period under review included increase in borrowing cost both concessional (3% to 12%) and conventional, higher working capital requirement due to increase in raw material prices, reduced availability of concessionary financing, increase in minimum wages, higher cotton prices besides longer procurement time, reduced yarn demand due to reduction in export orders etc.

Despite all the challenges the export volume of the company had been higher than corresponding period of last year, however, volume of local sales of yarn reduced by the Company as a strategic measure and internal consumption was enhanced by reducing the external purchase of yarn. There had been lot of pressure on prices in view of sales contracts already entered into as well as the value of PKR being managed Vs US Dollar. These further impacted the bottom line which contracted by almost 38% when compared with previous quarter of the current year and 42% when compared with corresponding period of last year.

Key performance numbers are presented below:

	Units	Half Year ended	Half Year ended
	December 31, 2022	December 31, 2021
Export sales	Rs. in millions	45,492	32,028
Local sales	Rs. in millions	5,516	14,897
Total net sales	Rs. in millions	51,008	46,925
Gross profit	Rs. in millions	6,520	7,852
Profit before tax	Rs. in millions	2,717	4,178
Profit after tax	Rs. in millions	1,627	3,356
Earnings per share (EPS)	Rupees	2.64	5.44
Debt to equity ratio	Times	64:36	64:36
Current ratio	Times	1.11	1.15
Break-up-value per share	Rupees	61.23	58.59

Gross Profit Margin	%	12.78	16.73
Profit before tax Margin	%	5.33	8.90
Profit after tax Margin	%	3.19	7.15

The company has been operating at a lower capacity in its export divisons since October 2022. The apparent reduction in local sales is on account of lower sale of yarn in market by reducing the corresponding purchases. The pressure on prices, higher cost of raw material, gas shortages forced the comany to generate power from very costly fuels such as Diesel and HFO. The increase in cost and inflation, coupled with lower capity utilization in exports reduced the gross margin by 3.79 %. Administrative and Selling costs were effectively monitored and has marginally gone up when compared with corresponding period of last year. The financial cost however increased by 57.39% (Rs. 671 million) both on account of enhanced rate as well as increased financing requirements. Both the reduced gross margin and additional finance cost has dented by bottom line and profit before tax reduced by 3.58%.

Fortunately, the management visualizing difficult times ahead, reviewed and finetuned the procurement and treasury policies to anticipated risks. If the same was not done, we would have faced more reduction in profit or even incurring loss during October to December 2022, either being unable to fulfill the orders on time or facing working capital crunch.

Future Outlook

According to IMF, the economic growth proved surprisingly resilient in the third quarter of last year, and global financial conditions have improved as inflation pressures started to abate. This, and a weakening of the US dollar from its November high, provided some relief from emerging and developing economies. Accordingly, IMF has slightly increased their 2022 and 2023 growth forecasts. Global growth is expected to slow from 3.4 percent in 2022, to 2.9 percent in 2023, then rebound to 3.1 percent in 2024. Nine out of ten advanced economies will see growth decelerate this year. US growth will slow to 1.4 percent in 2023, as federal interest rate heights work their way through the economy. Euro-area conditions are more challenging. Despite signs of resilience to the energy crisis, a mild winter, and generous fiscal support, with tightening monetary policy, and negative terms of trade shock, due to the increase in the price of supported energy, IMF expect growth to bottom out at 0.7 percent this year in the region. Emerging market and developing economies have already bottomed out as a group, with growth expected to rise modestly to 4 percent, and 4.2 percent, this year and next.

Similarly, the Asian Development Bank (ADB) has reduced regional growth forecast from 4.9% to 4.3% during 2023. Whereas growth forecast for South Asia has been reduced from 6.5% to 6.3% mainly on account of slowdown in Bangladesh and flooding in Pakistan.

On domestic front, Pakistan, as per the World Bank is expected to grow at the rate of 2% in 2023 followed by 3.2% growth in 2024. With depleting foreign reserves and tough conditions attached to the IMF program, Pakistan is expected to face multiple challenges in days to come. Inflation, Import Appetite, Energy availability, political stability and consistency in economic policies will remain integral areas for Pakistan going forward.