Earnings Report /
Pakistan

Pakistan Textiles: Core-profits are intact, but FY23 to be challenging

  • We estimate the IMS Textile Universe to post core NPAT of PKR7.9bn, down 8% YoY, largely due to one-off supertax

  • ILP and GATM are likely to lead the sector, owing to elevated robust Spinning segment margin and Hosiery margin for ILP

  • We are Overweight on the sector, and prefer ILP (TP of PKR109/sh) and GATM (TP of PKR61/sh) as our top picks

Intermarket Securities
31 August 2022
  • We expect our Textile Universe to post combined core net profits of PKR7.9bn in 4QFY22, down 8% YoY largely owing to one-off supertax and increased borrowing costs, which are likely to offset strong revenue growth and exchange gains.  

  • In terms of core profits, both ILP and GATM are expected to lead our Textile cluster, largely attributed to strong Spinning and Value-added margins (latter especially in case of ILP). 

  • Despite record exports in 4Q, the Textile sector significantly underperformed the market by 7.5ppt. We continue to remain Overweight on the sector, with a preference for ILP and GATM. 

Divergent trend in earnings owing to supertax

We expect our Textiles Universe to post combined core net profits of c.PKR7.9bn in 4QFY22, down 8% YoY, largely due to imposition of one-off high supertax, and elevated finance costs owing to increase in borrowing rates. Cumulative industry revenue is likely to witness a sharp growth in 4Q (+26% YoY), on the back of record exports to the tune of c.USD1.7bn. On a sequential basis, Spinning segment margins are likely to remain healthy, as both global and local cotton prices remain at elevated levels (up c.40% since 4QFY21), implying sustained profitability as seen throughout FY22. With regards to the Value-added segments, the sharp PKR devaluation and YoY rise in export prices will improve margins, due to repricing of export contracts amid elevated global input costs, in our view. We believe the sustained rise in Value-added exports, largely Knitwear and Home Textiles, are attributed to continuous rerouting of orders from China.

ILP and GATM to lead growth in core profits

We expect both ILP and GATM to outperform the sector in terms of growth in core textile profits, owing to robust profitability in both the Spinning and Value-added segments (Hosiery segment in case of ILP, coupled with reduction in losses of the Denim segment). Overall margins are likely to be sustained due to elevated cotton prices as cotton inventory had been procured at lower than market rates, allowing the large Textile players to sell yarn at rates similar to those of smaller Spinners (high rates due to expensive cotton procurement). Thus, gross margins for the sector are likely to remain strong in 4Q. In addition, the sharp PKR slippage is likely to further fuel profits due to strong exchange gains, in our view. Also, according to channel checks, further price adjustments occurred during 4Q, owing to elevated input costs such as cotton and utilities (adjustments occurred from mid-3Q on various contracts). DLTL disbursements following FY23 Budget announcement will improve the working capital requirement for the sector, potentially cushioning the burgeoning finance costs, which are likely to balloon owing to the multiple interest rate hikes from Apr’22. 

Maintain ILP and GATM as our top picks

Despite the strong exports data, earnings beat owing to impressive revenue and profit growth throughout the year and PKR slippage, the Textile sector underperformed the broad market index by c.7.5ppt in 4Q and by 13ppt from Mar’22 to date. This is due to headwinds in the form of i) global inflationary pressure and recession fear, ii) local macroeconomic slowdown, and iii) volatility in utility tariffs, financing rates and cotton prices owing to the recent floods. However, with the sector having corrected sharply, we continue to remain Overweight on the sector, preferring ILP (TP of PKR109/sh) 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 (TP of PKR61/sh) for expansion into high margin segments (Healthcare and Hygiene) and Spinning segment efficiencies.