The textile sector posted 40 percent rise in profitability in the first quarter of fiscal year 2013-14 (Q1 FY14) due to improved demand and better yarn margins.

The textile people said on Tuesday further boost to the profits was provided by depreciating rupee and cheaper financing rates.

Profits of the sector’s listed textile firms increased by 40 percent on yearly basis to Rs 9.1 billion in the Q1 FY14.

The same was also reflected at the local bourse as shares of listed textile firms have shown price performance of 12 percent versus Karachi Stock Exchange 100-share index’s return of just 2.2 percent in Q1 FY14.

In the textile sector, Nishat Mills (NML) had a target price of Rs 111 per share, which most brokers advised to ‘buy’.

Favouring fortunes resulted in improved overall textile output in Q1 FY14, which could be gauged from 9.3 percent yearly growth in textile exports to $3.6 billion. In terms of rupee, overall textile exports went up 19 percent on yearly basis to Rs 368 billion. The same is reflected from listed textile companies’ profits, which increased by Rs 2.6 billion (40 percent on yearly basis) to Rs 9.1 billion in Q1 FY14 as compared to Rs 6.5 billion in the same period last year.

The experts said this analysis was based on selected textile firms (61 companies) including spinners, weavers and composites.

The sector includes all textile units having a minimum Rs 250 million market capitalisation at KSE. However for the sake of comparability, they have omitted Azgard Nine and Amtex Limited due to their abnormal and volatile bottomline. Though the sample covers 85 percent of textile sector market cap, it was very small as compared to total Pakistan textile industry. So the actual profit growth of the textile industry would be much more than Rs 9.1 billion.

They believe upward trajectory of profits was mainly attributed to higher volumetric sales and improved margins. Strong cotton yarn and grey cloth demand from China and neighbouring countries has contributed to higher units sales while margins increased due to stable cotton prices and around 6.0 percent rupee depreciation against the dollar.

In Q1 FY14, local cotton prices remained in the range of Rs 6,752 to Rs 7,770 per 40 kilogrammes as compared to Rs 5,573 to Rs 6,645 in Q1 FY13, depicting less volatility this time.

Textile sector performed well in Q1 FY14 versus Q4 FY13 as shown by Pakistan textile exports, which increased by 3.6 percent on quarterly basis to $3.58 billion versus $3.45 billion in Q4 FY13. Export volumes of yarn, bed wear and towels rose by 39 percent, 32 percent and 13 percent, respectively.

This coupled with rupee depreciation against dollar in Q1 FY14 boded positive impact on the profitability of sector.
Rupee depreciation, continuation of China cotton policy and relatively better energy situation in the country will keep on supporting the textile sector in making profits.

Expected Generalised System of Preferences plus status from European Union Parliament will further augment positive effects especially for composite units.

On the other hand, potential revision of China cotton policy, recent increase in energy prices and higher inflation forecast for FY14 are expected to impact sector’s profitability, going forward.