March 15, 2007	Thursday	Safar 25, 1428

KARACHI, March 14: Pakistan’s textile sector posted 10 per cent plunge in profitability for the first half of the current year (July-Dec 2006). Tycoons blamed higher cost of inputs, rising interest rates and fierce competition in the export market as key factors to have led to the fall.

Textile sector contributes approximately 60 per cent to the total exports of the country; adds 8.5 per cent share in the GDP and employs 38 per cent of the total manufacturing labour force,” lamented a weaving mill owner, adding: “Even so the industry receives step-motherly treatment from the government.” But the government was really giving the sector a “step-motherly” treatment. Those in the business thought so, though detractors believed that the industry had been greatly pampered with one after the other packages.

In addition to the various incentives already being enjoyed by the sector, textile millers have been asking for more, which include reduction in gas tariffs, no increase in electricity tariffs, continuation of R&D subsidy and abolition of various levies, taxes and surcharges. The industry is of the view that such a situation would help country’s products compete in the international markets with those of China and India, which have been dominating international markets due to their huge capacities and economies.

Those who turn down the industry’s case argue that the textile mills had been slow to diversify. The staple export product was yarn, with value-addition taking the back seat. Someone even remarked that the country exports cotton and imports shirts! But it really is the wearer who knows where the shoe pinches and textile producers have been pleading their case on all forums.

But after that slight digress, back to the cold world of financial figures. The textile sector is in the depth of trouble for some time now as the sector’s earnings had recorded 14 per cent decrease in the first quarter of fiscal year 2007, which was believed to be disturbing as $5 billion worth of investment had been made in the sector in the last five years.

For all of the fiscal year 2006, the sector had witnessed 29 per cent decline in net profit, which stood at Rs5.3 billion compared with Rs7.5 billion the year before.

Although net sale of the textile industry had reflected growth of 10 per cent; the benefit did not travel down to the bottom line, due mainly to rising interest expenses, as financing cost soared by 83 per cent in fiscal year 2006.

Based on a sample analysis of 10 companies from the textile composite sector, 16 from spinning and six from weaving, which represented 78, 44 and 87 per cent of their respective sectors’ market capitalisation, analysts at JS Global Capital figure out the 10 per cent decrease in profits for first half of fiscal year 2007 to Rs2.3 billion, from Rs2.5 billion earned in the previous comparable period.

The earnings were lower in spite of net sales growth of 11 per cent, which analysts said, was witnessed due to squeezed margins, amid higher input and energy costs.

“During the period under review, overall margins dropped by 100 bps to 14 per cent and financing costs increased by eight per cent,” analysts at JS Global stated.

Sector-wise results are as follows: The most active of the listed textile sectors, the composite sector saw a decline of three per cent in profitability to Rs1.8 billion against Rs1.9 billion in first half of fiscal year 2006. Net sales increased marginally by four per cent which was mainly attributable to poor exports by the sector. While a trickle down impact of the overall sector margins and higher financing cost was also seen to have impacted the composite sector.

In line with the depressed profits in the composite sector, earnings in the textile spinning sector for first half of fiscal year 2007 receded by 13 per cent. Net sales of the segment were up by 17 per cent, whereas gross profit margins shrank by 122bps to stand at 13 per cent from 14 per cent in first half of fiscal year 2006, main reasons being the higher cotton prices during the year. While financing cost of the sector was up by 19 per cent.

And finally the textile weaving sector, which was termed the ‘worst performer’, taking a hit from higher financing costs which also nullified the 27 per cent growth in net sales. Although, earnings before interest and tax (EBIT) of the sector were up by 15 per cent to Rs536 million, a massive surge of 40 per cent in financing cost pushed the sector deeper into losses of Rs109 million from Rs10 million in the first half of the previous fiscal year.