The textile industry has faced windfall gains in FY11, due to the high cotton prices that led to a turnaround in their margins, as per the analysts. Textile is the largest industry in Pakistan and has the highest listed companies (207 out of 638 firms listed at KSE); even though in terms of share trading their representation is hardly five per cent. “After compiling the full year results of these listed textile companies, we found out that the sector is trading at a trailing PE of 2x (excluding loss making firms), 71 per cent discount to market PE of 7x,” said, Mohammed Millwala of Top line Securities. He said that, “Our sample is based on 147 companies that have announced their full year results representing 97 per cent of market capitalisation.” Interestingly, the analyst said that, there were 33 firms (35 per cent of profitable companies) that were even trading below their earnings i.e. PE of less than 1x. Moreover, 32 per cent companies were trading at PE between 1-3x while 12 per cent are trading in the range of 3-7x. “In spite of abnormal profits made by textile firms, the market participants seem aloof as the sector has underperformed the broader index by 19 per cent in 2011YTD,” Millwala said. Adding this was important, because investors’ doubts regarding future earnings, lack of faith in management of the family controlled textile set ups and most importantly higher profits were not adequately shared with minority shareholders.
He said that the concern in the minds of investors was whether the same earnings would be witnessed next year? “We know that improvement in earnings mainly attributable to rise in cotton prices owing to a difference in demand supply of the crop.”
However, the analyst said, with global cotton crop production expected to surpass the consumption after 7 years, it was expected that cotton prices would fall gradually.
Thus, it would create a concern for millers to realise inventory losses on cotton inventories available with them.
Furthermore, as yarn prices had moved in tandem with the change in its raw form, the margins of spinning segment were expected to remain under pressure in FY12. “Inventory losses combined with higher input costs would drive down the abnormal margins witnessed by textile mills in FY11, resulting in a steep decline in earnings as compared to last year,” he said.
The analyst claimed that majority of textile sector was dominated by family business structure as opposed to formal corporate structure and the investors were staying wary of investing in such business as the management of the company was being selected on basis of kinship rather than capabilities.
“This result is the lack of faith in company’s management and investors do not trust the company with their money.” The analyst said that the shareholders expect return from a stock in two ways, namely the dividend and capital gain. “In last few years, it is generally seen that most of the textile companies remained shy in distributing payouts,” he said.