Pearl Securities Limited – Textiles in focus

Karachi, January 13, 2015 (PPI-OT): Synopsis

Ambitious capacity enhancement and improving operating environment brings Kohinoor Textile Mills Limited (KTML) to the limelight. Moving forward, operations are expected to be complimented by certain factors, such as 1) Improving exports 2) Suppressed cotton prices 3) Reduced power tariffs, 4) Lower DR. In light of these aspects, KTML has expanded their weaving operations by installing an additional 48 High Speed Air Jet Looms.

Resilient performance is seen in 1Q FY15 as Pearl Securities Limited sees exports of value added textiles improving. NPAT for the term is recorded at PKR 207mn (EPS: PKR 0.88), up by 10% YoY against net income of PKR 189mn (EPS: PKR 0.77).

Strong scrip appreciation of 71% in YTD FY15

The scrip has appreciated significantly by 71% in YTD FY15 on account of improved profitability, better exports of value added textiles and favourable macro factors such as reduced DR and power tariffs. Additionally, strong appreciation of subsidiary company, MLCF, where KTML hold majority stake, in addition to strong portfolio investments, is also a strong factor behind scrip growth. The KTML stock has reached PKR 40.79 by the 12th of Jan’14, up by 71% against rate of PKR 23.88 at the start of the fiscal year.

Improving exports in KTML focused segments

KTML focused segments, such as ‘Bed wear’, ‘Made-up Articles’ and ‘other textile materials’ show growth of 1% YoY, 4% YoY and 13% YoY, respectively, during 5mFY15. During Nov’14, exports in respective segments have grown by 9% YoY, 15% YoY and 24% YoY. While overall textile exports remain moderately suppressed due to declining exports of cotton yarn and cotton cloth, value added segments have been improving. KTML’s weaving and stitching segments have been performing well. During 1Q FY15, the firm’s Top-Line has improved by 8% YoY.

Weaving capacity increased by 23%

With various uses in value added textiles, demand of grey fabric is expected to grow along with growth exports. In Pearl Securities Limited’s opinion, the ‘other textile materials’ segments, classified in the export data, also shows export of fabric. Exports of this segment have been growing consistently.

Based on these aspects, KTML has expanded their weaving capacity by 23% by installing 48 High Speed Air Jet Looms. This takes total installed looms to 255 and upgrades fabric weaving capacity to 90,335 sq meters against previous 72,568 sq meters.

The total cost of the new weaving shed was PKR 550mn and was financed by a debt to equity ratio of 58:42. The project has been completed and currently operational. Start-up date of the new shed was 7th Jan’14.

Low cotton prices and reduced power tariff to counter gas rate hike

Local cotton prices have dropped significantly by 26% during YTD FY15 with the majority (22%) during 1H FY15. With lower prices at the start of 2Q, Pearl Securities Limited expects the firm to have lowered their raw material costs significantly in 2Q FY15. Prices are sustained at lower levels; Pearl Securities Limited sees a further 5% decline in prices between Oct’14 and 11th Jan’15.

Additionally, ‘Fuel and Power’ costs are expected to be controlled as NEPRA has recently lowered power tariffs by PKR 2.97/unit, effective for 1st Jan’14. On the other hand, gas tariffs have been increased significantly by 53% for industrial users to reach PKR 750/mmbtu against previous rate of PKR 488/mmbtu. Pearl Securities Limited expects the firm will be able to absorb the gas rate hike on account of lower cotton and power rates to keep gross margins stable with also chance of improvement.

DR cut to control mark-up charges

A strong benefit to leveraged companies was the Discount rate reduction of 50bps to reach 9.5% in Nov’14. Moving forward, with a controlled inflation outlook, there is a strong likelihood that DR may be reduced further by 50bps in the upcoming monetary policy. This stands to benefit KTML as short term borrowings stand at PKR 4.58bn while long-term financing increased by 4.31x QoQ to reach PKR 371mn by the end of Sep’14.

1Q FY15 Summary – Sustained growth, PAT up by 10% YoY

Despite pressure in the spinning segment, overall operations remained steady on account of better exports of value added items. Top-Line has improved backed by stable margins. OPEX growth is in line with Top-Line expansion while solid support is provided by other income.

Net sales are recorded at PKR 3.9bn, up by 8% YoY.

Gross margin is seen at 15.3%, slightly lower by 35bps YoY.

Gross profits have improved by 5% YoY, at PKR 597mn.

OPEX has increased by 14% YoY, at PKR 230mn.

Other income is recorded at PKR 44mn, up by 144% YoY.

Finance costs are up by 5% YoY, at PKR 143mn.

Operation details

Kohinoor Textile Mills is a composite textile manufacturing company primarily engaged in manufacturing of yarn and cloth, processing and stitching the cloth and trade of textile products. The company is listed at all stock exchanges of Pakistan with its registered office located in Lahore. The firm has 86k spindles, 255 looms and a processing unit in Rawalpindi.

Company Outlook

With enhanced weaving capabilities, the firm is headed in the right direction to take advantage of trade links to the west. Low cotton prices, reduced power tariffs and DR are also strong positives to operations. Increased gas rates can put some burden on core costs, however, Pearl Securities Limited believes positive factors will be able to absorb this impact. Improving exports of value added textiles shows better utilization of GSP than earlier in the year. These positives applied by the management appear to be a step in the right direction in equipping the company for export expansion as GSP+ status for trade with EU has been gaining momentum. Currently, the scrip is trading at a discount of 18% to its target price (June 15) of PKR48/share.

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