JS Securities Limited - Morning Briefing.

Karachi -- May 09, 2019 (PPI-OT)

Bleak global demand could dampen growth in ST, despite healthy 3QFY19

We review the textile composite sector's performance during the 3QFY19, where our sample size comprises Nishat Mills (NML), Nishat Chunian (NCL), Gul Ahmed (GATM) and Kohinoor Textile (KTML).

Earnings increased by 16% YoY, whereas core textile earnings rose by 33% YoY, despite a 67% YoY jump in finance costs.

To note, the higher finance costs during the quarter are mainly due to higher short-term borrowings (other than interest rate hikes).

Going forward, we expect core earnings from textile operations for the sector to remain upwards sticky, given lack of capacity additions and low demand in the global market.

Textile sector's earnings grew 16% YoY in 3QFY19 We review the textile composite sector's performance during the 3QFY19, where our sample size comprises four of the largest textile companies, namely Nishat Mills (NML), Nishat Chunian (NCL), Gul Ahmed (GATM) and Kohinoor Textile (KTML). During the quarter, cumulative earnings for these companies declined by 56% QoQ to Rs2.4bn. This was largely attributable to a sharp dip in Other Income (down 82% QoQ), which was not unexpected, given that a significant chunk of dividend income is recorded during December and June quarters.

On the other hand, pre-tax profits of core textile operations declined by only 14% QoQ in comparison, which was mainly on account of 20% QoQ increase in finance costs and 2% QoQ/3% QoQ lower sales/higher distribution expenses during the quarter. Compared to last year, net earnings increased by 16% YoY, whereas core textile earnings rose by 33% YoY, despite a 67% YoY jump in finance costs. The improvement in earnings was largely attributable to (1) 19% YoY increase in sales, and (2) 125bps YoY rise in gross margins.

Limited by the fact that these companies do not disclose region-wise sales in their quarterly statements, we suspect that the increase in sales was mostly due to higher demand...