KARACHI, Sept 20: Earnings of textile composite sector are likely to post appreciable improvement in the financial year 2005 (FY05), but for the year that is to close on Sept 30, the market is making some gloomy forecasts.
"Textile sector performance, especially of the middle link of the textile chain, is likely to improve in FY05 on the back of decline in raw material prices, increase in market access under non-quota regime, extension in GSP regime for another year and expansions coming online to gain from non-quota regime," says Mohsin Ahsan, sector analyst at Global Securities Limited.
The analyst, nonetheless, suggests that the segment would face stiff competition especially from India and China. Large textile players with exposure to diversified markets and capacity to expand easily will gain the most.
Pakistani textile companies would have an edge over other regional players (excluding India and China) due to large local production of cotton. However, government needs to concentrate on increasing the size of crop to meet rising local demand.
Analyst notes that cotton prices have come down 24pc on month-on-month basis and 4pc on year-on-year basis. "Strong cotton crop locally as well as in China and lower demand in US, due to closure of textile mills, are likely to result in further reduction in cotton prices in the coming months," Mohsin expects, and points out that yarn and other intermediate commodity prices were also coming down though margins were expected to remain favourable.
The value added segment was expected to face intense competition from India and China, which would negatively affect their margins though profits may still show growth due to increase in overall size of the market. Big textile companies with diversified portfolio of markets and ability to expand easily and quickly will gain in the coming years, says the Global Securities' analyst.
Naveed Ahmed, who follows the textile sector for Elixir Securities, admits that earnings of the textile sector would decline during 4QFY04 on the back of 14pc drop in yarn prices.
Despite a 43pc year-on-year decline in cotton prices during the current calendar year, profit margins of textile companies were squeezing due to falling yarn prices, which had dropped by 14pc.
"Cotton procurement season for the textile sector usually starts by the end of September and continues till November. As the sector holds cotton from previous season, at 16pc higher cost, falling yarn prices are affecting the profit margins of the industry," says the analyst, but adds that with the beginning of new procurement season, profit margins of the industry should stabilize where the cotton price is trading at Rs2400 per maund as compared to over Rs3000 per maund last year.
According to the International Cotton Advisory Committee (ICAC), global cotton production is expected to increase by 5.3pc over FY04-06 due to expected bumper crop in China and India.
This coupled with initial reports of a good crop in Pakistan during FY05 was likely to result in increased world cotton production. "We expect lower cotton prices in the international market, as well as the domestic market where, in our opinion, local prices would remain within the range of Rs2400-2700 per maund over FY04-06," reported Elixir Securities.
Going forward, textile composite sector would benefit on account of lowering of international cotton prices. It is expected that over the next two years China and India would witness bumper cotton crops where the production is likely to increase by 5.3pc as against a 1.3pc in global cotton demand. This would cause local cotton prices to slide by 16pc to about Rs2400-2700 per maund.
According to estimates, the drop in cotton prices would improve gross margins by around 75 basis points. Furthermore, the declining raw material cost would also help domestic textile industry to be more competitive in the international market especially after WTO regime.
Analyst at Global observed that the textile machinery imports had increased at 30pc pa in last 5-years to $0.6bn in FY04. During first two months of FY05 (July-Aug), growth was more modest at 1pc, though growth was likely to pick up pace in the coming months as had been the trend. Tariff and other trade related incentives, given as part of FY05 budget, and creation of garment cities were likely to push up machinery imports in FY05.
Market watchers observe that during the last six months the rupee had depreciated 2.3pc against dollar and 1.8pc against euro. As the two regions account for almost 60pc of Pakistan's textile exports, companies in general have benefited from the rupee depreciation, but added that the continuous rise in interest rates would affect profits. With 60pc of textile companies' debt having less than one year tenor, profits would be negatively affected if interest rates continue to rise.