Earnings Report /
Pakistan

1QFY23 Result Previews - Moderating gross margins to offset sharp revenue growth

  • We expect the IMS Textile Universe to post combined core net profits of PKR9.4bn in 1QFY23, flat compared to SPLY

  • ILP and GATM are expected to lead our Textile cluster, attributed to robust revenue growth in the Value-added segments

  • We continue to remain Overweight, with a preference for ILP and GATM

Intermarket Securities
17 October 2022
  • We expect the IMS Textile Universe to post combined core net profits of PKR9.4bn in 1QFY23, flat compared to SPLY, largely owing to moderating cotton inventory gains and elevated borrowing costs, offsetting the 34% YoY combined revenue growth.   

  • Once again, ILP and GATM are expected to lead our Textile cluster, largely attributed to robust revenue growth in the Value-added segments, continued exchange gains and operational efficiencies.   

  • Sequentially, the significant improvement in core earnings of NML, NCL and KTML should boost overall profits by 9% QoQ, owing to lower taxation. We continue to prefer ILP and GATM as our top picks in the sector.   

Extravagant inventory gains of yesteryear to recede in 1Q

We expect our Textiles Universe to post combined core net profits of c.PKR9.4bn in the Sep’22 quarter, flat YoY (+9% QoQ), largely attributed to i) dwindling cotton inventory gains (continued contraction in Spinning segment margins), ii) elevated finance costs due to rollover of short term borrowings at higher rates and iii) imposition of supertax (albeit lower than the previous quarter’s supertax rate of 10%). The above mentioned factors should offset the cumulative industry revenue growth in 1Q (+34% YoY), on the back of PKR weakness. Sequentially, Spinning segment margins should continue to normalize, in our view, as both global and local cotton prices retracted by an average c.20% QoQ. Also, on a sequential basis, the Value-added segment may depict a divergent trend, with a likely slowdown in Home Textile exports for NCL, KTML and NML, whereas, GATM and ILP are likely to witness a slight improvement, in our view.

ILP and GATM to lead growth in core profits

We continue to believe that both ILP and GATM will outperform the sector in terms of overall profitability, owing to robust revenue growth (YoY basis and flat sequentially), attributed to the Value-added segments (Hosiery and Denim segments in case of ILP; Home Textiles for GATM). However, margins for both ILP and GATM, as well as the sector are likely to moderate in the presence of lower cotton inventory gains (mainly Spinning division). We expect cotton inventory costs to increase in 1Q to levels near current cotton prices, reducing the cost advantage previously held against the smaller Spinners. Thus, gross margins for the sector are likely to remain significantly lower compared to 1QFY22 and slightly lower than the previous quarter. Also, borrowing rates of short term borrowings are likely to be repriced upwards amid contract rollovers to higher rates, in our view. On the flipside, the sharp PKR slippage is likely to further fuel profits due to strong exchange gains, in our view. Sequentially, some respite is likely to be witnessed in the form of lower supertax charges for the overall sector.

Maintain ILP and GATM as our top picks

Despite the strong earnings beats in the FY22 (specifically in 4QFY22) owing to impressive revenue and profit growth for both ILP and GATM, both companies underperformed the broad market index by 4.2ppt in 1QFY23. Also, going forward, headwinds in the form of i) global inflationary pressure and recession fears, ii) local macroeconomic slowdown, and iii) volatility in utility tariffs, financing rates and cotton prices, may continue to hamper price appreciation of the sector.  However, with the sector having corrected sharply, we continue to remain Overweight. We prefer ILP due to i) extensive expansion in new product lines and existing products, ii) strong revenue growth, and iii) resilience of hosiery sales in global slowdowns. We also like GATM for expansion into high margin segments (Healthcare and Hygiene) and Spinning segment efficiencies.