Textile maintains positive trend

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The textile industry of Pakistan continued its robust performance in 9MFY11, registering profit growth of 122 percent year-on-year. All three sectors such as composite, spinning and weaving witnessed prominent earnings performance. Net revenue bolstered by 47 percent annually to Rs 333 billion in the ninth month of FY11 in particular led by higher product prices in exports and sales in the local markets. According to the data released by the FBS, Pakistan’s textile exports for the nine month period (July-March) were up 30 percent annually at $9.9 billion. However, gross margins dropped by 31 bps to 15.9 percent due to higher input prices for the downstream value added segment that could not be fully passed on to the customers.
Furthermore, increased usage of diesel and furnace oil during frequent gas and power outages dragged down margins. Nonetheless, other incomes played a supporting role as it ascended by 35 percent annually to Rs 4.0 billion, primarily on the back of improved profits from associate companies. As a result, earnings grew by 122 percent annually to 21 billion in 9MFY11. Albeit, the composite sector’s topline amplified by 40 percent annually to Rs 203 billion, gross margins dropped by 104bps in annual terms to 15.9 percent.
This was led by an unprecedented rise in raw material prices that outpaced the increase in selling prices during the period; a perpetual woe for the value added sector. Other incomes, on the other hand, rose to Rs 2.9 billion (up 33 percent since last year) with supporting earnings growing by 83 percent in the same timeframe to Rs 10 billion. The spinning sector contributed 52 percent to the overall sector’s profitability as it recorded a PAT of 11 billion, up an impressive 172 percent annually.
The topline grew by 59 percent on a year-on-year basis to Rs 116 billion with gross margins improving by 103bps since last year to 16.5 percent, largely led by a continuous rise in cotton and yarn prices during the period. Cotton prices locally went up 89 percent (KCA) and 160 percent internationally (Cotlook ‘A’ Index) during 9MFY11. a significant rise of 72 percent since last year in other incomes also contributed to the bottomline growth.
Weaving sector’s net sales augmented by 52 percent to Rs 14 billion on the back of higher prices and improved volumes. The sharp rise in cotton yarn and polyester prices along with frequent gas and electricity outages added to the cost of production of weavers. However, effective price pass through helped the sector report margins of 11.2 percent, up 29 bps. Furthermore, operating profits nevertheless settled at Rs 1.0 billion, up 96 percent since last year.
As a result, the sector reported profit after tax of Rs 489 million, also up 153 percent. NML and NCL posted better than expected the result in FY11. However, we believe the slide in yarn prices during the ongoing fourth quarter is likely to pose challenges for both the companies, considering their average cotton procurement rate is Rs 8,500 to 9,000 per maund, said Rabia Tariq at JS. Nevertheless, dividend income from their respective arms and NML’s strong investment portfolio will provide cushioning to the bottomline, she added.