Earnings Report /
Pakistan

Pakistan Textiles: 2QFY21 preview – Earnings to reflect export growth

  • We estimate the IMS Textile Universe to post NPAT of PKR3.4bn amid sharp rise in value-added exports in 2QFY21

  • ILP is expected to outperform both GATM and NML, while NML’s earnings may fall yoy due to lower dividend income

  • We are Overweight on the sector, with Buy ratings on ILP (TP PKR80/sh), NML (TP of PKR132/sh) and GATM (TP PKR50/sh)

Intermarket Securities
21 January 2021

For 2QFY21 results, we expect our Textile Universe to post combined NPAT of PKR3.4bn, compared to a NPAT of PKR2.3bn in SPLY. The expected rise in profitability is inspired majorly from the sharp 18% yoy jump in Pakistan’s value-added textile exports during the period.  

ILP is expected to outperform both GATM and NML on a yoy basis, largely due to the strong growth in knitwear exports, up 23% yoy, alongwith similar increase in unit prices. NML, on the other hand, is expected to drag overall sector profitability due to the decline in its other income (largely because of SBP’s dividend moratorium on MCB).

The Textile stocks have rallied c.50% in the past 3mths. Despite the rally, we are Overweight on the sector with a Buy rating on all three stocks under coverage, where we expect the momentum in exports to continue in 2H amid strong order flows.

Sequential improvement in topline to drive profitability

Interloop (ILP) is expected to post a 2QFY21 NPAT of PKR1.9bn (EPS: PKR2.21), against a NPAT of PKR742mn (EPS: PKR0.85) in SPLY. We expect sales to increase by c.50% yoy on the back of higher hosiery, apparel and denim sales (Pakistan’s total Knitwear exports rose 23% yoy in 2Q). We, therefore, expect an improvement in gross margins by c.4ppt yoy to 26.7%, where the margins will be checked by the drag from Denim segment, which may still not be profitable. The Apparels segment, however, is likely to remain profitable, with a softer 6% yoy rise in Pakistan’s readymade garment exports. We also expect ILP to announce an interim dividend of PKR1.0/sh.            

We expect Gul Ahmed Textile Mills (GATM) to post a NPAT of PKR817mn (EPS: PKR1.91) for 2QFY21, compared to NPAT of PKR640mn (EPS: PKR1.49) in the same period last year. The sequential improvement in profitability emanates from the overall improvement in both exports (mainly Home textiles) and local sales, albeit slightly less so for the latter due to restrictions on operating timings for the retail sector, in our view. Despite the expected 29% yoy increase in revenues, we expect gross margins 2ppt yoy lower at 18.7%, due to lower Retail segment margins of 24.6%, against 28.6% SPLY.

Despite the strong growth in exports, we expect Nishat Mills (NML) to post a 2QFY21 NPAT of PKR638mn (EPS: PKR1.81), down 34% yoy from PKR968mn. The decline in other income, by 74% yoy (largely due to MCB’s dividend cuts amid the SBP’s moratorium on banks’ payout), will overshadow the growth in core textile earnings, which we expect to grow by c.80% yoy to PKR478mn (Core EPS: PKR1.36). With NML operating near full capacity and overall rise in US$ based unit prices, GMs are likely to improve by c.1.0ppt to 12.0%.

Textiles to remain in the limelight  

According to channel checks, the demand for exports is likely to remain strong, as the sector has orders booked for the next 3-6 months. These order flows are likely to be sustained following the global vaccine rollout, thanks partly to government incentive and global trends favoring Pakistani exporters. The upcoming Textile Policy (which is likely to be approved by the ECC soon), can cement long-term competitiveness of the sector, while improving margins further in the upcoming quarters. We thus reiterate our Overweight stance on the sector with a Buy rating on all three stocks under coverage.