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Kohat Textile Q3 FY26: Gross Margin Improves, but Finance Costs Weigh on Earnings

Kohat Textile improved gross margin in Q3 FY26 and strengthened nine-month cash generation, but higher quarterly finance cost and weaker other income pulled PAT lower.

Sep 23, 2026

Verdict

Kohat Textile Mills Limited delivered a mixed third quarter of FY26. The core manufacturing economics improved: gross profit increased despite lower sales, and gross margin expanded by about 2 percentage points. But the benefit did not reach the bottom line. Higher finance cost, a near-disappearance of other income and a larger administrative cost base pulled quarterly profit after tax down 20.9%. The nine-month picture is healthier than the quarter alone: sales, operating profit, pre-tax profit and operating cash flow all improved, while inventories and short-term borrowings declined. The key question for the next result is whether the stronger gross margin can be sustained while financing and below-the-line costs normalize.

Results at a glance

  • Q3 FY26 net sales were Rs1.909 billion, down 2.7% year on year from Rs1.961 billion.
  • Gross profit rose 10.4% to Rs323.7 million, lifting gross margin to 17.0% from 14.9%.
  • Operating profit fell 2.3% to Rs228.1 million because higher administrative expense and much lower other income absorbed the gross-profit improvement.
  • Finance cost rose 15.7% to Rs120.9 million, and quarterly profit after tax fell 20.9% to Rs72.3 million. Net margin slipped to 3.8% from 4.7%.
  • For 9MFY26, sales rose 3.3% to Rs6.313 billion, operating profit rose 9.9% to Rs745.7 million and PAT increased 12.2% to Rs258.1 million. Operating cash flow increased 5.5% to Rs690.7 million.

What improved

The strongest feature of the quarter was gross profitability. Q3 sales declined by Rs52.0 million year on year, but cost of sales fell by a larger Rs82.7 million. That widened gross profit by Rs30.6 million and pushed gross margin to 16.96% from 14.94%. In other words, Kohat Textile earned more gross profit on a slightly smaller revenue base. The company’s directors attribute the broader nine-month improvement to operational efficiency, working-capital management and optimum utilization of manufacturing facilities. Those explanations are directionally consistent with the reported nine-month numbers, although the filing does not provide enough quarter-specific production or pricing data to isolate exactly how much of the Q3 margin gain came from efficiency, raw-material costs, product mix or selling prices.

The nine-month operating picture was also stronger. Sales increased 3.3%, gross profit rose 16.1%, and gross margin expanded to 16.1% from 14.3%. Operating profit increased 9.9% to Rs745.7 million, with operating margin improving to 11.8% from 11.1%. Finance cost for the nine months fell 4.9% to Rs335.1 million, helping profit before taxation and minimum-tax levies rise 25.9% to Rs410.6 million. Liquidity metrics improved as well: the current ratio moved to about 1.08x from 0.99x, net working capital moved to positive Rs286.7 million from negative Rs36.7 million, inventory declined to Rs1.412 billion from Rs1.570 billion, and short-term borrowings fell to Rs2.324 billion from Rs2.605 billion.

What weakened / needs attention

Q3 operating leverage weakened below gross profit. Administrative expense increased 21.8% to Rs62.8 million, distribution cost rose 3.4%, and other income dropped to just Rs1.2 million from Rs27.1 million. As a result, operating profit fell 2.3% even though gross profit rose 10.4%. The operating margin was almost unchanged at about 11.95% versus 11.91% a year earlier. Finance cost then increased to Rs120.9 million from Rs104.5 million, a 15.7% rise, pushing profit before taxation and minimum-tax levies down 17.0%. The closing balance sheet does not show a simple debt build-up that would explain the quarterly increase; the filing does not provide a quarter-specific average borrowing or effective-rate bridge, so attributing the increase to a particular rate, facility or utilization pattern would be speculation.

Tax also reduced the conversion of operating improvement into shareholder earnings. Minimum-tax levies were Rs23.9 million in Q3, broadly in line with the prior year, while deferred tax was Rs11.0 million. For the nine months, current and deferred tax together rose sharply, especially deferred tax, which increased to Rs61.6 million from Rs17.8 million. That is why the 25.9% increase in profit before tax and minimum levies translated into only a 12.2% increase in PAT.

Company and reporting basis

Company Name: Kohat Textile Mills Limited
Ticker: KOHTM
Reporting period: quarter and nine months ended March 31, 2026; unaudited, company-level condensed interim financial statements.
Alpha QoQ Score: 46.85
TTM Performance Score: 82.99
3Y Business Perf Score: 78.11
Sector Leadership Score: 53.0531

The four scores above are AlphaGen model outputs, not company-reported figures. Kohat Textile is principally engaged in the manufacture and sale of yarn. The interim statements were prepared under the financial-reporting standards applicable in Pakistan for interim reporting, including IAS 34, and were authorized for issue by the board on April 30, 2026. Figures in the company report are presented in Pakistani rupees, rounded to the nearest thousand.

Quarterly earnings bridge

The quarter’s earnings bridge is straightforward. Revenue fell 2.7%, yet gross profit rose 10.4%, producing a 2.01-percentage-point expansion in gross margin. The benefit was then diluted by a Rs11.2 million increase in administrative expense and a Rs26.0 million fall in other income. Operating profit ended slightly below the prior-year quarter. A further Rs16.4 million increase in finance cost reduced profit before tax and minimum levies to Rs107.2 million from Rs129.1 million. After minimum-tax levies and deferred tax, PAT was Rs72.3 million, down from Rs91.4 million. EPS was Rs3.48 versus Rs4.40. The quarter was therefore not a case of deteriorating factory-level profitability; the gross line improved, while the earnings decline came mainly after gross profit.

Nine-month picture: stronger than Q3

For 9MFY26, Kohat Textile generated Rs6.313 billion of sales, up from Rs6.109 billion. Gross profit reached Rs1.014 billion, up 16.1%. Distribution cost was slightly lower, while administrative expense increased 17.5%. Other income fell sharply to Rs8.6 million from Rs54.4 million, yet operating profit still rose 9.9% because the gross-profit improvement was large enough to offset most of the pressure below it. Finance cost fell by Rs17.1 million for the nine-month period, and profit before taxation and minimum levies rose to Rs410.6 million from Rs326.1 million. The contrast between Q3 and 9M matters: nine-month financing cost improved, but Q3 financing cost worsened; nine-month PAT increased, but Q3 PAT declined. The improvement has therefore been uneven rather than a straight-line acceleration.

Cash conversion and working capital

Net cash generated from operations was Rs690.7 million for 9MFY26, up 5.5% from Rs654.7 million. Before working-capital movements, operating cash generation improved to Rs910.4 million from Rs801.7 million. Inventory released Rs157.9 million of cash, a major positive compared with the Rs396.3 million inventory build in the prior-year period. However, working capital was not an outright source of cash: trade receivables absorbed Rs67.7 million, and the reduction in trade and other payables absorbed another Rs187.7 million. Overall working-capital movements used Rs95.9 million of cash, slightly more than the Rs69.2 million use in the comparable period. Management’s working-capital improvement should therefore be read with nuance: inventory discipline and the balance-sheet position improved, but receivable collection and supplier-payment movements still consumed cash.

Capital spending also remained significant. The notes show Rs635.8 million of additions to operating fixed assets during the nine months, of which Rs559.6 million related to plant and machinery. Cash-flow additions to property, plant and equipment were Rs249.1 million. The difference reflects accounting and timing classifications rather than necessarily cash paid in the period. Investment in plant can support efficiency, but it also keeps funding needs relevant, particularly when cash balances remain modest at Rs16.4 million.

Funding and capital structure

During the nine months Kohat Textile obtained Rs345.0 million of long-term financing and repaid Rs149.5 million, while net short-term borrowings declined by Rs281.0 million. At March 31, long-term financing stood at Rs1.055 billion, short-term borrowings at Rs2.324 billion, and the current portion of long-term financing at Rs343.3 million. Total financing across those three lines was about Rs3.72 billion, modestly below the June 2025 level. The State Bank of Pakistan held the policy rate at 10.5% on March 9, 2026, while acknowledging a more uncertain outlook following the Middle East conflict. After the reporting period, the policy rate was raised to 11.5% effective April 28. That post-period increase is not part of Q3, but it raises the importance of funding-cost discipline in the next result cycle.

Sector and peer context

The textile demand backdrop was mixed rather than uniformly strong. Pakistan Bureau of Statistics data show total exports in US-dollar terms fell 8.0% year on year during July–March FY26, while March 2026 cotton-yarn export value increased 8.0% from March 2025. The Finance Division’s FY26 Economic Survey describes textiles as the backbone of exports, accounting for 59.6% of total exports in July–March, while also noting challenging external trade conditions. That combination is consistent with a sector in which end-market demand and pricing vary materially by product and customer.

Peer evidence shows that conversion economics were difficult across spinning. Gadoon Textile Mills, a much larger and more diversified peer, reported Q3 sales growth of about 11.3% but a sharp gross-margin contraction and an 89.5% decline in quarterly PAT. Its management explicitly cited higher energy costs, particularly gas tariffs, limited pricing flexibility and elevated conversion costs. This does not prove the same factors caused Kohat Textile’s quarter; company-specific energy mix, yarn mix and procurement can differ materially. It does show that the wider spinning environment was not easy. Against that backdrop, KOHTM’s gross-margin expansion is a notable company-specific positive, even though its bottom-line conversion weakened.

Recurring versus non-recurring drivers

The improved gross margin, lower inventory, better current ratio and lower nine-month finance cost are operational or balance-sheet developments that can persist if execution continues. Finance cost itself is recurring but variable because it depends on borrowing levels, facility mix and market rates; its Q3 increase is material, but the filing does not disclose enough to call it a permanent deterioration. Other income is less reliable: it fell from Rs27.1 million to Rs1.2 million in Q3, so neither the prior-year contribution nor the current-quarter near-absence should be extrapolated mechanically. Minimum-tax levies and deferred tax are also important because they can materially change the conversion of pre-tax profit into PAT.

What changed versus the recent pattern

The most important change is the divergence between gross economics and final earnings. Across the nine months, the company expanded gross and operating margins and reduced finance cost, producing higher PAT. In Q3 alone, gross margin strengthened further, but administrative expense, other income and finance cost moved against the company, causing PAT to fall. The earnings debate has therefore shifted: factory-level profitability is no longer the only issue. The quality and durability of below-gross-profit conversion now matter just as much.

Key risks

  • Financing risk: quarterly finance cost rose despite lower period-end short-term borrowings, and the post-period policy-rate increase raises the hurdle for further improvement.
  • Cash-conversion risk: receivables increased and working-capital movements remained a cash use even as inventory declined.
  • Sector cost risk: peers continue to report pressure from energy and conversion costs; KOHTM’s better gross margin needs to prove durable.
  • Demand, pricing and tax risk: the company does not disclose enough quarter-specific volume and price data to separate demand, pricing and mix effects, while deferred tax and minimum-tax levies can materially reduce the translation of operating improvement into PAT.

What to monitor next

  • Whether gross margin can stay near the Q3 17% level or higher without sacrificing sales growth.
  • The next quarter’s finance cost and whether it returns toward the favorable nine-month trend.
  • Trade receivables and operating cash flow, particularly whether improved inventory discipline translates into stronger net working-capital cash generation.
  • Utilization and product-mix commentary, since management says facilities operated at optimum capacity but does not provide quarter-specific volume data.
  • The earnings effect of the higher policy-rate environment after March and whether lower short-term borrowing offsets it.
  • Any update on plant-and-machinery additions and whether management links them to measurable productivity or energy-efficiency gains.

Sources

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