KARACHI, Feb 14: Contrary to market expectations, textile companies have managed to produce favourable financial results for the first quarter of 2004 (Oct-December 2003).

Analysts attributed the better-than-expected profit or lower losses from the textile companies to reasons ranging from 'savvy manoeuvring to plain luck'.

Under the 'code of corporate governance', which now is a part of listing regulations of the stock exchanges, companies are required to announce annual results within four (previously six) months of the close of the year and quarterly figures by the end of the month following. Textile mills close the year in September, and were, therefore required to furnish figures by the end of January.

With a depressing yarn market and skyrocketing cotton prices, the financial year 2004 had started out with bad tidings for the industry. Asjad Yahya, textile sector analyst at stock brokerage firm, KASB Securities, observes that savings on financial charges and additional income, particularly the dividend income, would be the key drivers of results for the current year.

"While textile companies have little influence over dividend income, and thus are lucky that the companies they have invested in have performed well, the ability to drive down financial charges to significantly lower levels reflects well on the management," says the analyst, adding that the increase in gross margins in such tough conditions, as demonstrated by Nishat Mills and Kohinoor Textile Mills - two of the largest units in the sector - had little to do with luck. The 1QFY04 gross margin at Nishat Mills stood at 13.33 per cent, representing improvement from 13.21 per cent for the corresponding period the previous year and 13.26 per cent for 4QFY03. Likewise gross margin at Kohinoor Textile rose to 17.51 per cent for the quarter under review, from 1Q last year's 14.34 per cent and 4QFY03 gross margin of 12.6 per cent.

Khalid Iqbal Siddiqui, analyst at InvestCap tracks 30 textile companies - 15 textile spinning mills; five weaving and 10 composite units - which together account for 50 per cent of market capitalization of listed textile companies. He observed in respect of accounting year 2003, that it was marked by higher input prices. Revenue showed growth of around nine per cent but gross margin for the sector had declined to 12.6 per cent, from 14.6 per cent. But since the operating margins slipped to eight per cent, from 9.8 per cent and financial charges showed a huge 27 per cent cut, the bottom line showed nominal increase of three per cent.

In respect of textile spinning mills, Mr Khalid stated that the sector was faced with 14 per cent higher average cotton prices during the year 2003; sales grew by 12 per cent and in absolute terms gross profit for the 15 spinning companies decreased by four per cent to Rs2.6 billion, from Rs2.7 billion. However a 14-per cent reduction in financial charges enabled companies to show improved bottom line by nine per cent.

Earnings of the weaving sector declined in absolute terms, though sales rose by a marginal 1.5 per cent. Operating margin for the weaving sector decreased to 5.7 per cent from 8.1 per cent. Net profit of the sector dropped by 39 per cent.

Aggregate income of the textile composite sector amounted to Rs3 billion for the FY03, representing 12.4 per cent increase from Rs2.7 billion, year-on-year basis. Faisal Shaji, analyst at Capital One Equities noted that during FY03, 24 companies paid cash dividend out of total 40 listed units on the composite sector; last year 22 companies had declared a cash payout. During the year, profit margins of the sector came under severe pressure due to the troublesome Middle East and US-Iraq war. There was a gradual slowdown in major US and EU markets where demand for finished fabrics and textile made-ups remained sluggish. Moreover prices of essential raw material such as cotton lint and polyester stable fibre increased sharply giving tough time to the mill owners. Even so, the six-month average market capitalization of composite sector swung up by 53pc to Rs23 billion, from Rs15bn during the same period last year, which the analyst thought was a demonstration of an enormous trading activity.

"We believe that the future of the (composite) sector would remain exposed to risk, especially in the backdrop of the imposition of 13.1 per cent anti-dumping duty on bedlinen by the EU and enhanced cost of raw material such as cotton for yarn production, which would continue to put pressure on the earnings," Capital One Equities said in its report on the sector, adding that another emerging challenge was the advent of WTO regime in 2005 and the consequent looming threat of excessive supplies of Chinese textile products in the US and other markets that could have negative repercussions on Pakistan's exports.