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Pakistan’s textile sector set to report robust profits

As financial results reporting season gains momentum, investors in textile sector are looking to splendid growth in profitability, which would probably match the financial year 2013 performance. Profitability of textile (sample firms) scaled four-fold to Rs22.8 billion in three-quarters of financial year 2013 (9MFY13) as against Rs4.4billion in the same period last year.

“Last fiscal year, FY-’13, was one of the better years for Pakistan textile sector in terms of sales and profits which was also reflected in more than 100per cent price performance of our sample listed textile firms with market capitalization of over Rs25 million,” says ZeeshanAfzalof Topline Securities.

Though shortage of power remained the perennial problem, especially in winter, the textile companies’ jump in profits by 400per cent was mainly attributed to stable cotton prices and strong regional demand.

Moreover, continuous depreciation of rupee against the dollar and cheaper financing also contributed to hefty earnings growth. In FY-’13, Pakistan exported $13bn worth textile products, up by 5.9per cent in dollar terms but represented improvement by 14.7per cent in local currency due to the drop in value of the rupee.

The growth in exports was attributed mainly to imposition of cotton floor price in China that encouraged Chinese textile manufacturers to import more yarn and grey cloth instead of converting yarn into costly local cotton.As a result, Pakistan’s yarn and grey cloth exports increased by 24per cent and 10per cent to $2.2billion and $2.7billion, respectively, in FY-’13. The latest results of textile sector are expected to show continuous growth in export for FY-’14 on the back of sustained textile demand from China and substantial depreciation in local currency.

However, analysts caution that much would depend upon international cotton prices, though major volatility was unlikely to be seen in local cotton prices in FY-’14. The encouragement was based on estimates of Cotton Crop Assessment Committee (CCAC) which estimated Pakistan’s cotton production at 13.25million bales in FY-’14, slightly higher over the 13.0 million bales produced by the country in FY-’13.

Exports and profits of the sector could also improve due to expected Generalised System of Preferences (GSP Plus) status from EU, as lower import duties would provide Pakistan a competitive edge in international markets. “Further operating environment of the textile sector may see further improvement in low interest rate scenario,” analysts said, the caveat, however, being the all-important improvement in energy situation.