Illustration by Abro

A week before, over 30 textile stocks had hit their upper circuit in trading, according to a market report. By November 27, according to the JS Global note for investors, the textile sector had outperformed the market by 28 per cent during the current fiscal with spinning companies leading the sector's rally.

Analysts say it is first time in many years that the textile stocks have been in the ‘forefront of the market's march’ toward a new record high. "Historically, the textile sector doesn't participate so actively in the rise of the stock market. But the soaring profitability of many listed companies in the recent months has changed the situation this time and brought the sector in the forefront of the rally, sustaining the surge of the bulls in the recent weeks," says Lahore-based financial and stock analyst Shahid Zia.

The data supports this contention. The share of Suraj Textiles, for example, was trading on August 6 at Rs39. By the close of the session on November 27 it was trading at Rs64. Over the same time period, the value of Nishat Mills increased by Rs20 per share, Reliance Weaving by Rs16.90, Fazal Cloth by Rs34.45, Banero by Rs66.95, Faisal Spinning by Rs44.37, Nishat Chunian by Rs18.29, Shams Textile by Rs31.20 and Crescent Textile by Rs9.

The increase in share prices was supported by their earnings over a sustained period. Nishat Chunian, for instance, has turned its pre- tax loss of Rs45 million in the first quarter of fiscal 2011/12 to September into profit before tax to over Rs420 million during the corresponding period this year.

Several factors are believed to have triggered the investors' renewed interest in the textile scrips, pushing their prices to new highs. "A strong demand for Pakistan's cotton yarn and fabric from China, lower domestic cotton prices and improved energy supplies to textile factories in the recent month are the major factors fuelling investors' interest in textile stocks," says Ayub Ansari, senior investment analyst at the AKD Securities.

Textile exports rose by almost 4.3 per cent to $4.39 billion during the first four months of the current financial year to October on the back of a 37 per cent spike in the export of cotton yarn to $702 million, eight per cent of cotton cloth to $892 million and 15 per cent of woven garments to $604 million. "With cotton price rising to $1.10 a pound in China compared to $0.80 a pound (which is about10 per cent lower than last year) in Pakistan and other factors, yarn exports have picked up rapidly. Yarn prices also remain high, making it feasible for textile producers to use expensive furnace oil in place of cheap gas to generate electricity for running their factories," argues Ansari.

The profitability of the producers of basic textile has considerably increased in the recent months. Besides healthy growth in exports, (almost nine per cent depreciation in the value of the rupee against the dollar, and four per cent cut in the interest rate to 10 per cent since August 2011, bringing down their debt servicing costs), have also improved profitability of the basic textile producers. The implementation of EU trade discounts has spawned hopes of improvement in exports of value-added products and profitability of the sector.

The performance of a chunk of the listed textile companies seems to be at odds with the frequent complaints of growing energy shortages affecting their production, especially in Punjab. But it is not.

"Only the large spinning units or composite units are performing because they can afford their own generation on furnace oil or diesel when gas is not available for captive power. An average sized spinning mill with 25,000 spindles still cannot afford expensive oil-based captive generation," says an official of the All Pakistan Textile Mills Association (Aptma).

He says the textile sector has been making money for some years because of increase in prices of its exports. While textile export in terms of dollars has gone up, it has come down in terms of quantity (leaving aside yarn or another couple of items), he adds. Textiles, which constitute over 27 per cent of weighted average of the large scale manufacturing, has shown negative growth of 0.39 per cent during the first quarter of the current fiscal on a year-on-year basis mainly because of energy shortages in Punjab.

Anjum Nisar, a manufacturer of chemicals, artificial leather and fine cotton yarn, agrees. He says the current business climate - growing energy gap and high credit costs, etc - doesn't favour smaller producers. "If the textile industry has to be competitive, it will have to create economies of scales and integrated units in order to cut its production costs."

Aptma chairman Ahsan Bashir, however, is happy with the performance of basic textiles sector. “The financial results of the companies show that we are ready to face global competition,” he says. "With China getting out of yarn and fabric production, Pakistan has a big opportunity coming its way. We do not need subsidies or concessions. Just give us sustained supply of gas and electricity to fully utilise our capacities and affordable credit to invest in new projects and upgradation of technology. If we don't step up, India will take away this opportunity from us as it is supporting expansion in a big way by way of providing cheap credit and 20 per cent equity to the investors," he warns.

Gohar Ejaz, a leading yarn exporter and business leader, says that, helped by improving economic fundamentals - fall in price inflation, reduction in interest rates, slightly improved energy supplies, low cotton rates, etc -, the textile industry, particularly the basic textiles, has done quite well in the last nine months or so. But, he says, a lot needs to be done to fully realise the country's economic potential and grab the new opportunity being offered by changing global textile scenario.

"With China opting out of basic textiles, we must move quickly to fill the void. India has already started working on it. As a start we should revive the sick units to fully use the installed production capacity and then formulate a policy to support fresh investment to create economies of scale and setting up of composite textile units to improve efficiency and overcome energy crisis. For this, the government needs to bring down cost of borrowing as well as ensure that the banks make a certain percentage of their funds available to the corporate sector for supporting large, capital intensive projects," contends Gohar.