Profits to continue rising but non-textile triggers awaited
- For 1QFY22 results, we expect our Textile Universe to post combined core net profits of PKR9.2bn, nearly tripling yoy, due to improvements in both revenues and margins, amid a sharp c.30% yoy rise in exports.
- NCL is expected to lead our Textile cluster, in terms of core profitability (c.5x yoy growth), largely attributed to strong Spinning margins, while we see ILP’s earnings growth to be relatively softer at c.40% yoy (lowest growth).
- We are Overweight on the sector with a Buy rating on all stocks under coverage, where we expect the momentum in profitability to continue on the back of strong order flows and continuous PKR weakness.
Continued earnings growth amid expanding Spinning margins…
We expect our Textiles Universe to post combined core net profits of PKR9.2bn for 1QFY22, up a staggering c.3x yoy and 7% qoq, posting a sharp c.25% yoy growth in combined revenues to PKR86bn, amid c.30% yoy rise in exports to US$4.5bn. The sequential increase in Spinning segment margins, amid surge in both global and local cotton prices, will further lead to higher profitability, as seen in the previous two quarters, in our view. We highlight that Spinning segment margins were at a record high in 4QFY21, averaging 26% (ex-GATM); and we expect the upward trend to have sustained in 1QFY22 (up c.20ppt yoy). According to channel checks, yarn prices have risen by at least 20% since February 2021 to PKR225/lb, due to the continuous increase in global cotton prices, which has recently touched US¢120 from US¢71 last year. Otherwise, the uptick in value-added exports is attributed to the rerouting of orders from China, as well as from other competing countries such as Vietnam due to strict Covid lockdown measures there – ahead of the Winter demand in the West, in our view.
…where NCL will lead in growth, while ILP will lag
We expect NCL to outperform the sector in terms of headline profitability growth in 1QFY22, followed by NML, largely due to the continued rise in both direct and indirect exports. The rise in both local and global cotton prices is likely to further improve margins for the Spinning segment (c.27% in 4QFY21 for NCL). Recall that NCL witnessed significant increase in export sales in FY21 (up c.30%). Despite the sequential decline in margins for the value-added segments amid rising input costs, overall margins will still improve because of improved unit prices (average 7% yoy) – complemented by the c.6% qoq PKR depreciation. Looking ahead, recent PKR depreciation will lift revenues in coming quarters and improve Pakistan’s competitiveness against regional countries. According to channel checks, the demand for exports will remain strong until the end of FY22, where the strength is corroborated by various capacity expansions in existing and new product lines, across the sector (reportedly close to US$5bn).
Non-textile triggers will lead to price discovery
Despite the impressive growth in both exports and profit margins (significantly surpassing pre-pandemic levels), both NCL and KTML did not outperform the market during 1QFY22, despite sharp earnings beat throughout the previous year, while underperforming the value-added scrips by 2ppt. We highlight that selling pressure in Cement stocks has also negatively impacted both KTML and NML (holding in MLCF and DGKC, respectively), unjustly disregarding the strong growth in the core earnings of both companies in FY21 (up a staggering c.150% yoy on average). Therefore, further rise in cement prices is a key catalyst for NML and KTML, while the pending Ideas IPO and resolution of NCPL payment from the government are triggers for GATM and NCPL, respectively. We therefore reiterate our Overweight stance on the sector with Buy ratings on all stocks under coverage.
Courtesy – Intermarket Securities