January 21, 2022 (MLN): After strong earnings growth last year, Pakistan’s textile sector is set to gain further momentum in revenue and margins in the second quarter of the current fiscal year on the back of PKR depreciation against the USD and an improvement in export demand amid continuous rerouting of orders from China and other competing countries ahead of Winter/Spring season in the West.
The textile sector is likely to grow by a staggering 2.3 times YoY and 10% QoQ to post a cumulative 2QFY22 net profits of Rs10 billion, partly due to a sharp 25% YoY increase in combined revenues of Rs96bn.
According to a preview report by Intermarket Securities, the sequential increase in Spinning segment margins is likely to be sustained in 2Q, on the back of elevated global and local cotton prices (up 35% since 3QFY21), implying healthy profitability as seen in the previous three quarters.
Since February 2021, yarn prices have risen around 40% to Rs270/lb due to the rise in global cotton prices (translated into robust profitability as producers had procured cotton at lower than market rates).
Further, in Value-added segments, rising export prices and sharp PKR/USD depreciation during the quarter will boost gross margins from already healthy levels in 1Q, the report noted.
Among the textile universe of the report, it is expected that Nishat Mills Limited (NML) would outperform the sector in terms of growth in core textile profits in 2QFY22, as it is likely to post net earnings of Rs10.7 compared to EPS of Rs2.35 in the corresponding period last year. This expected earnings growth emanates from robust profitability in both spinning and value-added segments. Sequential increases in cotton prices will sustain the present growth in both revenues and margins, due to cotton inventory procured at low rates and the ability to sell yarn at rates similar to other spinners which procure cotton at the going market rates.
This is followed by both Nishat Chunian Limited (NCL) and Kohinoor Textile Mills Limited (KTML) as their earnings per share (EPS) are likely to jump more than 2- folds each to Rs8.72 and Rs3.86, respectively during 2QFY22.
As per the projections put forward in the report, Interloop Limited (ILP) is likely to report EPS of Rs3.18 for 2QFY22, as opposed to EPS of Rs1.69 in the corresponding period last year.
Gul Ahmed Textile Mills Limited (GATM), too, is likely to post an EPS of Rs2.5 for 2QFY22 when compared to the previous year's EPS of Rs1.93.
Despite the impressive growth in both exports and profit margins whereby the latter has significantly surpassed pre-pandemic levels, the report stated that the sector failed to outperform the market during 2QFY22.
Going ahead, stable policymaking and incentives are crucial for the long-term competitiveness of the sector, without which neither exports nor investments can sustain the present momentum, Abdul Ghani Mianoor of IMS said.
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