Foundation Research Equities

PAKISTAN
24 March 2014

Pakistan Textiles
GSP plus: Yet to reflect in exports
Event
As per PBS data, textile exports for 8MFY14 stood at US$9,155mn, up 8.28%
on YoY basis. Exports for February-14 stood at US$1,131mn (up 3.09% MoM). Against markets expectations the numbers reflect insignificant increase in exports post GSP plus attainment. 8MFY14 numbers show three major trends (1) double digit growth in Bed wear segment, (2) value/volumetric decline in exports of yarn and (3) 12% US$ based unit price increase in cotton cloth segment.

Sighting these trends and the recent PKR appreciation (5.6% since Jan-14),
Textile Exports
(USD mn) 8MFY14 8MFY13 YoY -5% 8% 8% 21% 9% 11% 8% Yarn 1,377 1,456 Cloth 1,879 1,732 Knitwear 1,481 1,366 Bedwear 1,409 1,166 RMGs 1,260 1,154 Others 1,750 1,581 Total 9,156 8,456 Source: PBS, Foundation Research, March 2014

we point out serious concerns for spinners. We anticipate that recent PKR appreciation would dilute the US$ based price increase in the weaving segment and expect slight dent in margins for weavers and value added players going forward. We foresee depressed earnings for NML and estimate PKR devaluation alone to result in ve 0.5-0.6/sh impact on 2HFY14 earnings.

Impact
Value added exports growth led by strong volumes: In 8MFY14 the
Knitwear/Bedwear/Readymade garments (RMGs) segment showed YoY 8/21/9% and 15/20/9% growth in value and volume respectively. As stated in our daily value added items driving exports dated 22nd January 2014, the volumetric growth in value added segment is owed to the shift in orders from China to South Asia, due to the higher production costs in the former.

GSP plus still not reflecting in numbers: Contrary to markets

expectation we have seen a decline in exports of value added items post GSP plus attainment (January-14). Overall the volumetric exports of Knitwear/Bed wear/readymade garments have dropped by 18/4/3% in February-14 (over 1HFY14 average). On the positive side, we have seen a 14/4% increase US$ based unit prices for Knitwear and RMGs in February14 (over 1HFY14); however we cannot conclusively associate this increase to GSP plus attainment.
8MFY14 8MFY13 Yarn Cloth Knitwear Bedwear RMGs 3.00 1.63 17.1 6.9 64.79 2.99 1.45 19.8 6.8 67.63 YoY 0% 12% -14% 2% -4%

Unit price (US$)

Raising red flag for spinners: 8MFY14 exports for cotton yarn stood at
US$1,376mn (down 5.45% YoY). The decline was due to a drop in export volumes (down 43% YoY). According to industry players, expected abolition of current indirect subsidy mechanism in China (i.e. through higher cotton procurement prices) has halted purchases of yarn by Chinese importers, which has resulted in a major decline in foreign sales of Pakistani yarn. Note that margins largely remained intact for spinners in the 1HFY14 due to inventory gains. With stagnant export prices and higher local cotton prices (up 15% YoY) we have a strong conviction that margin erosion would be further evident in the 3QFY14 results.

Source: PBS, Foundation Research, March 2014

Weaving on the watch: In 8MFY14 the total exports for cotton cloth
Analyst
Fahad Irfan 92 21 5612290 fahad.irfan@fs.com.pk Ext 339

stood at US$1,879mn (up 8.47% YoY), contrary to other major textile exports the US$ based unit price for cotton cloth went up by 12% YoY. According to industry players, demand for both fashion and work wear cloth from Europe is the primary reason for higher prices. Note that weavers will also benefit from the stagnant yarns prices (YoY no change).

Recent developments to worry textile players: We believe two

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Textile Sector

March 24, 2014

substantial events may affect the exports based textile industry (1) PKR appreciation of 5.6% since Jan-14 and (2) granting MFN status to India which has relatively cheaper basic textile prices compared to local market.

Outlook
Going forward, we believe that textile exports for FY14 would most likely stay under USD14.5bn mark. We base our
expectation on (1) appreciation of Pak rupee exchange rate (up 5.6% since Jan-14), (2) decline in export volumes despite GSP plus attainment (3) continuation of stagnant yarn demand from China.

With more than 75% exports sales, we believe that Nishat Mills Ltd (NML) would be one of the major losers of PKR
appreciation. We estimate total EPS impact of ve PKR0.5-0.6 on NML earnings for 2HFY14 due to exchange loss. Moreover, the recurring PKR-based margin will also be under pressure due to higher Rupee value.

While NCL is not under our formal coverage, we believe that earnings of Nishat Chunian Limited (NCL) would also
remain under pressure due to poor prospects of spinning business (51% of total sales).
Fig 1: Textile segment wise volumetric exports 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0
Jul-12 Sep-12 Jan-13 Mar-13 Jul-13 Sep-13 Jan-14 Nov-12 May-13 Nov-13

Fig 2: Textile segment wise exports US$ (000) 300,000 250,000 200,000 150,000 100,000 50,000
Jul-12 Jan-13 Jul-13 Jan-14 Sep-12 Nov-12 Mar-13 Sep-13 Nov-13 May-13

Yarn

Cloth

Knitwear

Bedwear

RMGs

Yarn

Cloth

Knitwear

Bedwear

RMGs

Source: PBS, Foundation Research, March 2014

Source: PBS, Foundation Research, March 2014

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