Textile sector of Pakistan depicted strong earnings growth of 23 percent in the first half of FY09 as compared to the corresponding period last year. The composite sector, which accounts for approximately 67 percent of the entire textile sector market capitalisation, posted remarkable earnings growth of 61 percent.
Moreover, weaving sector came back into profits whereas the spinning sector plunged into losses when compared to the corresponding period last year. In the analysis, 24 companies were taken from the composite sector - six weaving companies and 31 spinning units representing 92 percent, 95 percent and 80 percent market capitalisation of their respective sectors.
Amid rise in export-based revenue due to depreciating rupee (21 percent in the first half of FY09), net sales of the textile sector jumped by 22 percent to Rs 127 billion. This resulted in improved margins, which rose by 377bps despite high cotton prices (up 21 percent) during the period, Atif Zafar, an analyst at JS Global Capital said.
However, a 100 percent increase in financial cost to Rs 12.4 billion brought down earnings to Rs 3.4 billion, still up 23 percent on year-on-year basis. Financial cost rose on the back of higher borrowing rates as 6-month Kibor during the period averaged 14.59 percent up 458bps, Atif added.
The composite sectors impressive earnings growth of 61 percent was largely driven by improving gross margins, which increased by 451bps. Due to its export orientation, depreciating rupee boosted the rupee-based revenue of the sector, which increased by 26 percent to Rs 84 billion. Its impact on the bottomline was however impaired by 105 percent increase in finance cost to Rs 8.5 billion.
Weaving sector, which was in losses in the first half of FY08, recovered to post earnings of Rs 52 million. The sector was benefited the most from jump in gross margins, which rose by 538bps. Financial cost of Rs 485 million, up 43 percent from last year, however diluted the earnings of the weaving sector.
In the first half of FY09, spinning sector plunged into losses of Rs 783 million as against profits of Rs 343 million in the corresponding period last year. Though gross margins rose by 152bps, 102 percent rise in financial cost dragged the earnings of the spinning sector into the red zone, he said.
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