AKD Quotidian about — Textile Export Numbers Speak Well for NML!

Karachi, June 22, 2012 (PPI-OT): As per data released by PBS, textile exports registered at US$1.14bn in May’12.

According to AKD Securities, although exports were flat on MoM basis, a decline of 9.6%YoY (high base effect) was recorded. In this regard, 11MFY12 textile exports came in at US$11.27bn, down by 9.6%YoY as well. Going forward, recent sharp PkR depreciation against US$ (48%MTD) will likely provide some traction to energy deprived textile manufacturers where currencies of regional competitors have either appreciated (CNY; 0.4%MTD) or modestly depreciated (INR; 0.8%MTD and BDT; 0.2%MTD). Recall, INR and BDT have depreciated by 23.9%FY12TD and 10.7%FY12TD, respectively, compared with 9.3%FY12TD deprecation in PkR/US$ parity. Moreover, recovery in intl’t cotton prices (CotlookA at US$0.85/lb), up by 9%MTD from recent low and potential realization of Autonomous Trade Preferences (ATP) and Generalized System of Preferences (GSP) plus, to be awarded by the EU, add to the list of emerging positives for the textile sector. However, increase in GIDC on captive power plants by PkR87/mmbtu and any potential diversion of gas supply (as suggested on various platforms) to power sector pose a risk of a surge in fuel and power expenses of textile manufacturers, thereby, decreasing their competitiveness. Within the domestic textile sector, AKD Securities retains AKD Securities’ liking for vertically integrated NML (FY13 P/E of 5.05x and P/B of 0.41x), providing 45% upside to AKD Securities’ Jun’13 target price of PkR69/share.

Leveled MoM Exports: In terms of volumetric growth, readymade garments segment was notable outperformer (+18.6%MoM) followed by knitwear (+9.2%MoM) while major decline was witnessed in towels exports (-5.3%MoM) and cotton yarn (-5.2%MoM). Average Unit Price (AUP) for cotton cloth and towels increased by 41%MoM and Towels 1.7%MoM while that of cotton yarn slipped by 0.1 %MoM. On YoY basis, export quantity of all major textile segments fell during 11MFY12 with exception of a modest 4.5%YoY increase in cotton yarn. AUP in 11MFY12 improved for all major categories except for cotton yarn (-23.4%YoY), underpinning AKD Securities’ view of relatively lower correlation of finished/semi-finished textile products with cotton price (CotlookA index declined by 33.1%YoY during 11MFY12). Going forward, a major break-through in textile exports in near term is unlikely; however, realization of ATP (applicable from Jan’12 for 2 years) and GSP plus status (applicable from Jan’14) can be a game changer. On the flipside, recommendations, if materialized, to divert gas supply from captive power producers to power sector may result in another cost hike for struggling textile exporters.

Investment Perspective: Numbers bode well for NML as finished (bed wear and readymade garments) and semi-finished (cotton cloth) registered MoM growth in quantity as well as AUP even as concerns emanate from spinning segment. Within the domestic textile sector, AKD Securities’ top pick is NML which has shed 19% from recent peak, amidst sharp decline in cotton prices and general weakness at the KSE-100 Index. Considering the recovery in cotton price (CotlookA index at US$0.85/lb) attributed to downward revision in cotton supply estimates, AKD Securities believes current market price offers an attractive entry point. AKD Securities’ target price of PkR69/share offers upside of 45%.

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