EUR 13.06 For Business Accounts Only

Pakistan Textile: Sector Profitability flat during 2QFY18

• During 2QFY18, our textile sector sample (having market cap of at least Rs1bn, representing 87% of total market cap) witnessed rise of 10% YoY to Rs148bn in its revenue mainly on the back of 1) export package announced by Govt. of Pakistan and 2) currency devaluation of 5% in Dec 2017.
• Fall in PKR/USD value coupled with export package provided some respite to the industry GP margins with augmentation of 1ppts to 15% during 2QFY18 vs. 14% in 1QFY18 and 2QFY17 each. However, a narrow down analysis says, cost curtailments, and higher spinning segment sales amid better yarn prices were key reasons for few companies to advance their margins.
• Moreover, profitability of the textile sector remained stagnant at Rs7bn during 2QFY18, despite of the growth in revenues and gross margins. The pressure on profitability was attributed to increase in finance cost of the sample by ~29% YoY.
• Relative to KSE100 index, textile sector performance remained subdued  by 13% (KSE100 return -2% FYTD vs. 15% of textile) despite the export relief package given by the Govt. Underperformance of textile sector could be attributed to 1) liquidity crunch arising out of delayed receipts of rebates amount, 2) higher cost of production (mainly energy prices) compared to regional peers and 3) lower cotton production in last few years.
• Future Outlook: Textile manufactures in their budget proposal to government have requested to decrease cost of doing business primarily through decrease in electricity tariff in line with regional players. Similarly, manufactures have also proposed for 1) timely release pending refunds, 2) continuation of draw back duties and 3) reduction/elimination of custom duties on import of synthetic yarn and Polyester stable fiber (PSF).
• Key Risks may stem from 1) unavailability of raw material, 2) volatility in commodity prices & 3) further rise in power/electricity charges.