Updated on
Summary Textile industry has faced windfall gains in the outgoing year (FY11) due higher cotton prices.
Textile is largest industry in Pakistan and has the highest listed companies (207 textile out of 638 firms listed at KSE) though in terms of share trading their representation is hardly 5%.Compiling the full year results of these listed textile companies, we found out that the sector is trading at a trailing PE of 2x (excluding loss making firms), 71% discount to market PE of 7x. Our sample is based on 147 companies that have announced their full year results representing 97% of market capitalization. Interestingly, there are 33 firms (35% of profitable companies) that are even trading below their earnings i.e. PE of less than 1x. Moreover, 32% companies are trading at PE between 1-3x while 12% are trading in the range of 3-7x.Inspite of abnormal profits made by textile firms, market participants seem aloof as the sector has under-performed the broader index by 19% in 2011YTD. This is because investors doubt regarding future earnings, lack of faith in management of these family controlled textile set ups and most importantly higher profits are not adequately shared with minority shareholders.Furthermore, as yarn prices have moved in tandem with the change in its raw form, the margins of spinning segment are expected to remain under pressure in FY12.Inventory losses combined with higher input costs would drive down the abnormal margins witnessed by textile mills in FY11, resulting in a steep decline in earnings as compared to last year.Majority of textile sector is dominated by family business structure as opposed to formal corporate structure. Investors stay wary of investing in such business as the management of the company is selected on basis of kinship rather than capabilities. This results in lack of faith in company’s management and investors don’t trust the company with their money.Shareholders expect return from a stock in two ways, which is dividend and capital gain. In last few years, it is generally seen that most of the textile companies remained shy in distributing payouts. This could be one of the reasons why the investors remain unexcited about the turnaround story.Last year also when textile firms minted money they refrained from sharing dividends in the same proportion as seen globally where companies pay special and abnormal dividends in good times.
