Earnings Report /
Pakistan

Pakistan Textiles: Spinning margins to sustain strong yoy profitability

  • We estimate the IMS Textile Universe to post core NPAT of PKR10.8bn, up a strong c.65% yoy amid strong Textile Exports

  • KTML and ILP are likely to lead the sector on the back of robust profits in both Spinning and Value-added segments

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

Abdul Ghani Mianoor
Intermarket Securities
19 April 2022
  • For 3QFY22 results, we expect our Textile Universe to post combined core net profits of PKR10.8bn, up a strong c.65% yoy on revenue and margin growth, amid a sharp c.25% yoy rise in exports and c.10% PKR devaluation.

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

  • We are Overweight on the sector with a Buy rating on all stocks under coverage, where we expect strong momentum in profitability to continue for the remainder of FY22 due to healthy order flows, recent PKR depreciation and handsome margins.

Profits expected to surge in 3Q results

We expect our Textiles Universe to post combined core net profits of c.PKR10.8bn in 3QFY22, up a strong c.65% yoy and c.10% qoq, partly due to a sharp c.50% yoy growth in cumulative revenues to c.PKR110bn. On a sequential basis, Spinning segment margins are likely to remain robust in 3Q as both global and local cotton prices remain at elevated levels (up c.55% yoy since 3QFY21), implying sustained healthy profitability as seen in the previous three quarters. Yarn prices have also risen similarly translating into robust profitability as producers have procured cotton at lower than market rates. With regards to the Value-added segments, the sharp PKR devaluation and rise in export prices at the start of the quarter will sequentially improve margins from a low base, in our view. We believe the sustained rise in value-added exports is attributed to continuous rerouting of orders from China and other competing countries ahead of the Summer season in the West. Also, resumption of normal economic activities and growth in retail sales in the West will further improve Value-added exports, in our view.

 KTML and ILP to lead growth in core profits…

We expect both KTML and ILP to outperform the sector in terms of growth in core textile profits in 3QFY22, amid healthy profitability in the Spinning segments and Value-added segments (Hosiery segment in case of ILP). Overall margins are likely to be sustained due to elevated cotton prices as cotton inventory had been procured at lower than market rates. This will allow the large Textile players to sell yarn at rates similar to those of smaller Spinners (high rates due to costlier cotton procurement). Thus, gross margins for the sector are likely to remain strong in 3Q, whereas the sharp c.10% yoy PKR depreciation is likely to further fuel profits, in our view. According to channel checks, price adjustments had occurred during the quarter and further positive price adjustments cannot be ruled out in the coming quarter. Also, with regards to ILP the sharp qoq growth in earnings is attributed to the re-addition of DLTL drawbacks following approval of the Textile Policy (DLTL provisions had been reversed in the previous quarter).

…maintain ILP and GATM as our top picks

In light of the strong exports data and earnings beat amid impressive revenue and profit growth, the Textile sector outperformed the broad market index by c.1ppt in 3Q (excluding KTML). The decline in KTML is likely to have been related to the negative sentiment which had been surrounding the Cement sector. Therefore, given the conducive exports backdrop and no immediate threat of a revocation of GSP+ status, we shift our liking towards the Value-added segment, from the Spinning segment. We prefer both ILP (TP of PKR109/sh) and GATM (TP of PKR61/sh) as our top picks. Risk of a global slowdown in light of the presently high global inflation, poses a key threat to our liking for the sector. Also, the change in EFS rate will negatively impact future earnings.