Nishat firms reap cotton price dividend

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KARACHI – The second half of the financial year bodes well for both Nishat Mills Limited (NML) and Nishat Chunian Limited (NCL) as cotton prices are likely to grow robustly in the local and international market. According to the Cotlook A Index and Karachi Cotton Association, cotton prices are currently hovering around $2.28 per pound and Rs 12,500 per maund, respectively.
Timely investment in cotton during the buying period (September-December) for both companies has allowed average procurement prices to settle in the range of Rs 8,500-9,000 per maund. Thus, they are likely to benefit from the unprecedented prices in 2HFY11. On the flipside gas and electricity outages, leading to increased usage of furnace oil and diesel, still remains a key concern for the textile sector.
According to the PCGA, cumulative cotton arrivals as of April 1, 2011 stood at 11.6 million bales, down 8.5 percent annually, predominantly due to crop loss in the unprecedented summer floods. However, in the case of Financial Year 2012 (FY12), the government has set a target of 15.0 million bales, increasing the area under cultivation to 1.0 million acres from 700,000 acres last year.
Farmers, too prefer to sow more cotton in the coming fiscal year due to high cotton prices which are up 88 percent and 167 percent since July 1, 2010 locally and internationally, respectively. Internationally, USDA also released preliminary estimates for FY12, according to which the world harvest is likely to go up by 10.6 percent annually to 127.5 million bales (4.7 percent higher than the previous all-time record of 121.8 million bales in FY07).
The data also indicates that global consumption will rise by three percent annually in FY12 to 120 million bales suggesting an increase in cotton stocks for the first time in the last six years. As a result, it is foreseen that cotton prices will shift their trajectory and ease off both domestically and globally owing to an improved supply outlook, said Rabia Tariq at JS.
He said that this is further reinforced by a recent Bloomberg survey which anticipates international cotton prices to tumble to $1.0 per pound by 31 Dec 2011. Furthermore, the Cotlook ‘A’ Index is hovering around $2.28 per pound currently, while the Cotllook Forward ‘A” Index is $1.59 per pound (a spread of $0.69 per pound) further reinforcing the belief.
If this is the likely scenario, it is expected that the usage of additional working capital lines, utilised due to the boom in cotton prices, will decrease resulting in lower finance costs post FY11, she added. This is evident from NML and NCL’s 1HFY11 short-term borrowings increasing by 87 percent and 59 percent annually, respectively.
As a result, finance costs were ramped up by 29 percent and 25 percent, respectively on yearly basis. Restricted power and gas supply were major concern for the textile industry in 1HFY11 and will continue to remain a factor during the latter half of the finnacial year as well.
Thus forcing textile companies to rely on increased usage of expensive furnace oil and diesel; lessening profitability and remaining a key concern looking ahead as well.