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Pakistan Textile: COVID-19 pull textile profits down by 62% YoY in FY20; Outlook looks promising

• We present profitability analysis of listed Pakistan Textile sector based on a sample of 16 companies – representing 92% of the sector’s market capitalization. We have filtered out these listed companies based on a minimum Market Capitalization criteria of Rs1bn.
• Textile sector’s profits plunged by 62% YoY in FY20, where the decline in the year’s profits were accentuated by dismal 4QFY20 performance due to COVID-19 outbreak.
• During the year, textile exports dropped by 6% YoY (+9% YoY in PKR terms) to US$12.5bn where the decline was largely attributable to lower quantity exported. In 8MFY20 (pre COVID-19), textile exports were up 8% YoY. The last four months witnessed a drop of 29% YoY due to either postponement or cancellation of orders amidst COVID-19. Exports accounted for 71% of the total sales of our sample companies in FY20 (65% in FY19).
• Local revenues were affected more by COVID-19 (down 21% YoY in FY20) with closure of retail shops during the lockdown period.
• As a result, overall revenues declined by 3% YoY in FY20, saved by an average 16% YoY PKR depreciation vis-à-vis USD. 
• Gross Margins too came under pressure, declining by 2.2ppts YoY to 14.5% in FY20 from 16.7% last year. This was largely due to (1) weak economies of scale due to COVID-19, (2) higher cotton prices as local production declined further and (3) higher energy costs.  
• To highlight, cotton prices jumped by 5% YoY to Rs8,984/mound during 2QFY20 (main cotton procurement period) on news of cotton shortage.
• Other income of our sample also declined by 60% YoY during FY20 mainly due to lower dividend income from investments in power companies (affected by circular debt).
• In 4QFY20, our sample companies dived into losses, where the deterioration in the bottom-line was due to low volumetric sales amid global pandemic.
• Sales declined by 38% YoY and 37% QoQ in 4QFY20 with both export and local sales declining.
• Overall gross margins in 4QFY20 were down by 7.8ppts YoY  and 5.3ppt QoQ to 9.0%. 
• We believe Pakistan Textile exports are likely to depict a strong recovery given Pakistan’s far superior improvement in COVID-19 cases compared to its peers.
• The prior orders, which were cancelled or postponed, have largely returned as global economies are opening up.
• Moreover, purchasers are also shifting towards Pakistan from countries like India and Bangladesh, where COVID-19 is still restricting economic activities.

Key risks for the sector are (1) rise in cotton prices due to shortage of cotton crop and (2) second wave of COVID-19.