Pakistan's textile industry posted an earning growth of 26 percent in 1HFY14 (July-December 2013). This was due to improved demand and stable yarn margins. Further boost to profits was provided by depreciating Pak rupee (PKR fell 7 percent vs USD in 1HFY14) and the declining finance cost, according to research document of Topline Securities.
The Topline said that profits of our sample listed textile firms increased by 26 percent to reach Rs 17.5bn while gross profits posted a growth of 14 percent to Rs 39bn in 1HFY14. The bottom-line grew by more than gross profits mainly on account of decrease in financial charges, according to the research document.
"Our analysis is based on listed textile firms (78 companies) which includes all textile units having a minimum Rs 250mn market capitalisation at KSE. However, for the sake of comparability, we have omitted Azgard Nine and Amtex Limited due to their volatile bottomline. Though the sample covers 60 percent of textile sector market cap, it is very small compared to total Pakistan textile industry. So the actual profit growth of the textile industry would be much more than Rs 3.6bn. The same was also reflected at the local bourse as shares of our sample listed textile firms gained 53 percent vs benchmark KSE-100 index return of 20 percent in 1HFY14."
Sales up 7 percent led by exports: Favouring fortunes resulted in improved overall textile output in 1HFY14 which can be gauged from 6.8 percent uptick in sales of our sample companies to Rs 283bn. This can also be observed from 7.8 percent growth in the country's textile exports in the said period to US $6.9bn. In terms of PKR, overall textile exports went up 19 percent YoY to Rs 730bn.
Strong cotton yarn, grey cloth and bed wear demand from China and neighbouring countries has contributed to higher units sales while margins increased due to stable cotton prices and around 7 percent Pak rupee depreciation against US dollar. In 1HFY14, local cotton prices remained in the range of Rs 6,806-7,771 per 40-kg compared to Rs 5,573-6,645 in 1HFY13, depicting less volatility this time.
2QFY14 was not good: Textile sector performed well in 1QFY14 but then profits decline slightly by 0.3 percent QoQ in 2QFY14 due massive surge in fuel and power cost and lesser textile exports in second quarter of current fiscal year. The exports of textile products decreased by 5 percent QoQ to US $3.4bn compared to US $3.6bn in 1QFY14. The major decline can be seen in cotton yarn followed by bed wear which decreased by 18 percent QoQ and 12 percent QoQ, respectively. However, rupee depreciated by almost 4%QoQ which provided some support to falling profits.
Outlook for 2HFY14: Pak rupee appreciation, relatively less orders from China, dumping of Indian yarn in the country, any disruption in the gas supply to textile sector and materialisation of proposed 2 percent -17 percent tax on exports of textile products may exert pressure on profits of textile sector going forward. However, recently awarded GSP Plus status from the EU and resultant surge in local demand will likely ease-off this pressure to some extent.