Download Report

Pakistan Textiles Decline in non‐value dragging overall exports
Personal Goods Sector Performance 1M 3M 12M Absolute % ‐18%
‐4%
‐14%
‐8%
14%
‐22%
Relative to KSE % Relative Chart KSE100 vs Personal Goods
Apr‐15
May‐15
Mar‐15
Jan‐15
Feb‐15
Dec‐14
Oct‐14
Nov‐14
Jul‐14
Aug‐14
Jun‐14
May‐14
Sep‐14
Personal Goods (Textile) KSE100 Index
30%
25%
20%
15%
10%
5%
0%
‐5%
‐10%
‐15%
Tuesday, May 26, 2015
Textile exports continued their downtrend in the month of Apr’15 as 10MFY15 exports declined by 1.4%YoY to clock in at USD11.3bn from USD11.5bn in similar period last year. While on MOM basis, the total exports reported a growth of 4.6% to USD1.1bn from USD1.03bn clocked in the last month. Going forward, we expect the country’s total textile exports to remain flattish at ~USD14bn during the outgoing FY15. While on the budgetary front, the recommended hike on duty of textile exports (from 2%‐5%) bodes negative for the sector and will likely hamper the competitiveness of Pakistani exports in the international market. The recently approved Gas Infrastructure Development CESS Ordinance, 2015 (with few amendments) is likely to have mixed impact on the bottom‐line of the companies in BMA textile universe (GATM the most affected). We highlight NML as our top pick from textile sector with a TP of PKR149/sh, offering 45% returns on last closing. Export of non value added textiles dragging overall textile exports down: Textile exports continued their dismal run in the month of Apr’15 as 10MFY15 exports declined by 1.4%YoY to clock around USD11.3bn from USD11.5bn in similar period last year. In this regard, non‐value added items raw cotton, yarn and cloth posted declines between 7%YoY‐25%YoY in 10MFY15. On the other hand, the value added items such as Knitwear, bed‐wear and readymade garments have posted a growth of 8%YoY‐10%YoY over the same period. The dismal trend in exports can be attributed to i) tepid Chinese demand for Pakistani yarn, ii) rapid depreciation of EUR against PKR in FY15 and iii) intense competition given to Pakistani exporters from Indian and other regional players. However, EUR has appreciated ~5% since Mar’15 and is something to keep an eye on. Source: KSE, BMA Research While on MOM basis, the total exports reported a growth of 4.6% to clock around USD1.1bn from USD1.0bn in the preceding month. The MoM uptick in exports can be primarily attributed to 5%‐15% growth in the exports of value added segment. GIDC likely to have a mixed impact: We see limited negative impact on the profitability of NML and NCL on the back of the recent development pertaining to GIDC as they have already provided for the cost of GIDC. However, the cash‐flow pinch will still be felt when the payments are made on the already provided for cost. Our working suggests the annualized impact on the bottom‐line of NML and NCL stands at PKR0.16/sh and PKR0.03/sh, respectively in form of lower other income. GATM, on the other hand, has not been recording GIDC expense since it reversed it in FY14. As per the latest reports, the company has to record PKR882mn under the GIDC account. On a per share basis, this is likely going to have a one‐time impact of PKR3.85/sh on GATM’s bottom line. Potential increase in finance cost due to higher borrowings amid cash shortfall (post payment of overdue cess) will further erode PKR0.27/sh from earnings Jehanzaib Zafar [email protected] +92 111 262 111 Ext: 2065 Investment Perspective: FY15 has proven to be difficult for textile sector where i) appreciation in PKR, ii) tapering Chinese demand, iii) incessant import of cheap Indian yarn and iv) Eurozone economic turmoil were the key factors. Near sentiments remains weak due to potential hike in export duty in Federal Budget FY16 and government decision to uphold the CESS. With i) high exposure in value added segments and ii) strong portfolio value, we maintain our conviction on NML as our top pick from textile sector with a TP of PKR149/sh, offering 45% returns on last closing. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact: [email protected] or call UAN: 111‐262‐111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy or sell the securities mentioned.
1