KARACHI, March 11: Based on the 1HFY06 results released recently, analysts have commented on oil and gas exploration and production companies as showing growth, while the textile sector painting a bleak picture.
“The textile sector of Pakistan, although has been performing well in terms of export growth, but when it comes to profitability, the story is not as rosy,” writes Suleman Amir Ali, analyst at Invest Cap.
Overall, the profitability of the textile sector showed a decline of 37pc year-on-year. Spinning and composite sectors showed a substantial decline in profitability, while the weaving sector, although improved a bit, was still not able to show profits. Net sales of the overall textile sector grew by a healthy 10 per cent, but the growth could not translate into higher profits due to depressed gross margins and higher financial charges, the analyst said.
He observed that despite making considerable investments in the past couple of years, the spinning sector had not been able to show the proportionate increase in its profitability. That was evident from a 12 per cent decline in profits, year-on-year during 1H06. Although both sales and gross margins improved during the period, they could not translate into higher net earnings due to a significant rise in financial charges, which increased by over 50 per cent, year-on-year.
The weaving sector was the only sector that showed some improvement in its earnings. During the period, the sector was able to significantly reduce its losses on the back of healthy sales growth and a considerable improvement in gross margins, which increased to 10 per cent from eight per cent last year. However, a 112 per cent year-on-year jump in financial charges did not allow the sector to enter the profitable territory.
The largest of the three textile sectors — textile composite — also showed a decline in profitability during the period. “Although some of the decline in net profitability is due to one time gain booked by Nishat Mills on the sale of MCB shares, earnings would still have been down by around 20pc, had the impact not been taken,” says the analyst. Declines in gross margin and higher financial charges are the two main causes for profit erosion. Gross margin dropped to 14 per cent during the period as against 16pc last year, owing mainly to average performance by two major companies on the sector: Nishat Chunian and Kohinoor Textile Mills. Going forward, the analyst expects the textile composite sector to perform better, as new capacities come on line which would improve both gross margin and sales.
OIL AND GAS E&P COMPANIES: Three listed exploration and production (E&P) companies — OGDCL, PPL and POL — collectively produce 74 per cent of oil and 50 per cent of gas in the country. A report by analyst Faraz Farooq at JS Capital Markets stated that during the first six months of FY06 (July-Dec 2005), the listed E&P sector posted a net income of Rs29 billion versus that of Rs21.7 billion during the similar period last year. That represented a significant growth of 34pc in the bottom line.
“Amongst the three E&P companies, OGDCL occupies the major share in profit, that is, 70pc, followed by PPL 20pc and POL 10pc in 1H06,” says the analyst. He observes that growth in earnings primarily ensued from higher levels of oil prices on international front coupled with a volume increase in oil and gas production. Moreover, with their holding of huge cash balances of around Rs50 billion as of Dec 2005, higher income in the wake of rising deposit rates also supported the bottom line.
Net sales of the E&P sector during 1HFY06 were recorded at Rs64.2billion, higher by 34pc over sales at Rs48.0 billion during the same period last year. The analyst reasoned that it mainly arrived from the duel impact of increased oil and gas production and higher prices of those products. With over 36pc contribution to the overall net sales of the E&P sector, combined oil production of E&P companies was up by sevenpc to Rs48,000 barrels per day. Besides, higher international prices played a role in this regard. Saudi Light oil prices averaged $55.1 barrel in 1HFY06, up by 50 per cent from the same period last year.
Gas was stated to have remained the major contributor to the top line growth in 1H06 having around 57 per cent share in net sales. Going forward, the analyst at JS Capital Markets expected combined profitability of the listed E&P sector to grow at a decent combined annual growth rate of 19pc in the next three years (FY06 to 08). “This is based on our conservative oil price assumption of $54, $49 and $44 per barrel of Saudi Light for FY06; FY07 and FY08, respectively, the analyst said, adding: “In FY’06 alone, we expect a growth of 45 to 50pc in the bottom line of the sector, making FY06 another exceptional year when it comes to profitability.”