KARACHI, Nov 26: Textile sector stocks have assumed prominence at the Karachi Stock Exchange where a wave of buying has propelled prices to highs not seen, perhaps in decades.

More than 30 stocks on the sector (composite, spinning, weaving) hit their ‘upper circuit’ in trading last Friday. The ‘upper/lower circuit’ is the maximum of Re1 or 5 per cent of the opening price of a stock, at which the rise or fall of scrip value a single day trading, is capped.

The mechanism allows ‘cooling’ effect lest an over-enthusiastic crowd of buyers or panicky investors spiral the price of a share up or down beyond reasonable limits. But the phenomenon of stocks hitting the ‘top’ is conspicuous by its presence in slow measure for most of the trading days since July.

“Now the bulls are all over the sector, tossing up prices of whichever stock they can lay their horns under,” says a trader.

Savvy investors, however, are looking at the company fundamentals before taking a leap.

As investors charge into the textile stocks head foremost, a back of he envelope calculation of turnover of shares in the sector looks like having crossed a record 2.5 billion since Jan this year. The scale of trading can be judged by the fact that it is higher than the turnover in same period, in the heavy-weight oil and gas sector; automobiles; electricity and insurance (life & non-life), combined.

Yet most analysts believe -- as the fictional detective Sherlock Homes would say: “There is a method in this madness.”

Some of the strong positives that have rejuvenated stock prices in textile sector have been identified as: healthy core business; depreciation of (around 9 per cent) in the value of the rupee against major currencies; stable cotton prices; low inter-corporate debt scenario; approval of the agreement from European Union; and higher dividend income from subsidiaries.

The latest financial figures have triggered investors’ interest. The spinning sector revenue was recorded at Rs54.6 billion for the first quarter financial year 2013 (1QFY13), representing 5 per cent growth, from Rs52.2 billion in the corresponding period of the previous year.

Gross profit for the sector rose by a massive 124 per cent to Rs6.2 billion, from Rs2.8 billion during the quarter. Therefore, gross margin improved to 11.3 per cent in 1QFY13 from 5.3 per cent in the same period last year.

Analyst Abdul Azeem at brokerage InvestCap says: "The main reason for the jump in gross margins is the 10 per cent year-on-year (YoY) lower cotton prices during July-Sept 2012. Moreover, on local front better yarn prices provided a breather to the sector".

On international front, demand of yarn from China, Hong Kong and Taiwan shot up as those countries turned to importing lower value inputs like yarn and grey cloth from Pakistan (and other yarn producing countries) to save on heavier labour costs and instead concentrate on production of finished garments.

Analyst noted that the textile exports were up by 5 per cent to $4.4 billion in July-Oct 2012 due mainly due to giant leap in export of yarn. The local spinning industry managed full capacity utilisation resulting in economies of scale.

At the operating level, the spinning segment’s operating profit recorded impressive growth of 239 per cent YoY to Rs4.5bn in 1QFY13. Financial charges of the sector shrank by 6 per cent YoY to Rs1.7bn in 1QFY13 as compared to Rs1.8bn in the same period last year.

In consequence, the bottom line of the spinning sector converted to a huge profit of Rs1.9bn in 1QFY13 from net loss of Rs1.4bn in the corresponding period last year.

Other textile segments, ready made garments, cotton clothes and towels also grew by 15 per cent YoY, 8 per cent YoY and 7 per cent YoY respectively.

Analyst Bilal Qamar commented: “During 1QFY13, the textile sector witnessed improved profitability on account of better sector dynamics, although power outages continued to restrict the growth. Consequently the textile sector has outperformed the stock market by 7 per cent (upto Nov 15), from July 1 this year”.