High financial charges, costs: profit of Pakistan’s listed textile sector plunges 24% in FY23

High cost of financing and rising input costs took their toll on Pakistan’s listed textile sector, which saw its profitability plunge 24% in fiscal year 2023, said brokerage house Topline Securities in a report on Monday.

“Profitability Pakistan textile sector’s (listed companies) declined by 24% year-on-year to Rs72.6 billion in FY23 primarily due to increase in finance cost, high cotton and energy costs and global slowdown,” said the brokerage house.

Topline assessed the profitability of 22 listed textile companies, representing 81% of the total textile sector’s market capitalisation. The brokerage house also filtered out companies based on a minimum market capitalisation criteria of Rs1 billion.

The sales of listed textile firms rose 15% YoY to Rs1,150 billion in FY23, while in dollar terms it declined by 17% YoY mainly due to a decline in textile exports.

“In FY23, Pakistan recorded textile exports of $16.5 billion down by 15% YoY (+18% YoY PKR terms) primarily led by global slowdown and recession in Europe,” the report highlighted.

Meanwhile, gross margins of sample companies fell from 19% in FY22 to 17% in FY23 led by high energy and cotton prices as both costs make a large part of the cost of textile companies, it noted.

Topline said the government, in its bid to secure the International Monetary Fund (IMF) programme, discontinued concessionary energy tariffs for the textile sector, an IMF condition, with effective from March 01, 2023, which led to increased cost of production.

Moreover, local cotton prices have also increased by 9% YoY to an average of Rs19,070/mound during FY23. “The increase in cotton prices is due to bad weather conditions which led to heavy rainfall and flooding that destroyed cotton crops last year,” it said.

Topline said that the other income of its sample companies increased by 47% YoY on account of exchange gains and rise in interest income. “Finance costs also jumped 109% YoY during FY23, mainly attributable to higher interest rates and higher borrowings of the sector,” it said.

Topline expects an increase in textile exports albeit lower than the government estimate of $25 billion for FY24.

“Furthermore, cotton production is expected to rise as the favorable weather conditions have resulted in a better cotton crop in Pakistan. However, elevated energy costs and shortage of gas will continue to remain a challenge to the textile industry,” said Topline Securities.