KARACHI, March 4, 2021: Pakistan’s textile sector profits posted an increase of 32 percent YoY in the first half of this fiscal year (1HFY21) supported by higher sales and lower finance cost supported earnings.
Topline securities has presented profitability analysis of listed textile composite sector of Pakistan, based on a sample of 21 companies; representing 82 percent of the sector’s market capitalization.
We have filtered out companies based on a minimum market capitalization criteria of Rs1.0bn.
According to analysis the textile sector’s profitability has shown a significant increase of 32 percent YoY in 1HFY21 primarily due to (1) increase in textile exports, (2) improvement in Other Income and (3) decline in Finance Cost.
Overall revenues have increased by 12 percent YoY in 1HFY21 as textile exports during 1HFY21 increased by 8 percent YoY in USD terms and 13 percent YoY in PKR terms.
While the (1) backlog of orders from 2HFY20 and (2) diversion of orders from other regional countries like India and Bangladesh amidst COVID-19 lockdown/restriction has helped support exports, the uptick in general pricing due to commodity super cycle has also played an important part.
The increase in pricing and depreciation of PKR/USD by 4.6 percent YoY helped mitigate the impact of rising cotton prices, as gross margins remained largely unchanged at 16 percent. However, gross profits increased by 9 percent YoY.
The local cotton prices have increased by 7 percent YoY to average Rs9,154/mound during 1HFY21 mainly due to 34 percent YoY decline in cotton production.
Other Income of sample companies increased by 22 percent YoY mainly due to (1) remeasurement gain booked on Gas Infrastructure Development Cess (GIDC) as per the IFRS and (2) exchange gain recorded on net foreign asset exposure.
Finance Costs also declined 14 percent YoY during 1HFY21, mainly attributable to lower interest rates as SBP reduced Policy Rate by a cumulative 625bps to 7.0 percent.
In 2QFY21, profitability of our sample companies, picked up further momentum, growing by 32 percent YoY and 28 percent QoQ.
The uptick in 2QFY21 profits were largely fueled by better pricing as commodity super-cycle kicked in (Cotlook A Index: +20 percent QoQ). Sales increased by 10 percent YoY and 6 percent QoQ, while gross margins also improved by 1.6ppts QoQ.
Other Income also played an important part in the improvement of profitability of textile companies, as it increased by 24 percent YoY and 55 percent QoQ.
It largely included remeasurement gain booked on Gas Infrastructure Development Cess (GIDC) as per the IFRS – which is unlikely to be recurring going forward.
Analysts at Topline believed that textile sector profits are likely to be supported by better pricing in the near-term, however announcement of Textile Policy (with subsidized energy rates) will be important for sustainability of profits given the recent increase in energy prices.
