AKD Quotidian about — Textile Exports Jun’12: A weak finish to a lacklustre year!

Karachi, July 23, 2012 (PPI-OT):  Textile exporters could not give a strong finish to the relatively dreary FY12 as Jun’12 textile exports shed by 5.0%MoM to record at US$1.08 billion.

According to AKD Securities, in this regard, FY12 textile exports came in at US$12.4 billion, down by a significant 10.4%YoY. Summing up FY12, lower int’l cotton prices, global economic turmoil, non-preferential access to the EU markets and higher cost of doing business (particularly due to the enduring energy crisis) have combined to dampen textile exports during the review period. Entering FY13, int’l cotton prices are expected to remain on the tower side as record high cotton stock expectations keep a cap on cotton and hence yarn prices. AKD Securities expects lacklustre textile exports to continue in FY13 where delays in delivery order completion (due to persistent energy crisis) may affect future relationships with importers. Moreover, patchy global economic outlook in general and the EU periphery crisis in particular will be the driver of textile exporters’ fortune. Only a limited relief can be expected from the likely realization of EU’s Autonomous Trade Preferences (ATP) package in FY13 as the potential GSP plus status will be effective in FY14, if the prerequisites are fulfilled by GoP. Within domestic textile sector, preferred players are vertically integrated units with focus on value added products whose prices are less affected by movement in int’l cotton prices. In this backdrop, AKD Securities retains AKD Securities’ liking for NML which is trading at an undemanding FY13 P/E multiple 5.6x. Buy!

Recap of FY12: Among major textile export segments, Average Unit Price (AUP) of cotton yarn, directly priced to int’l cotton, dipped 24%YoY as CotlookA Index decreased 32%YoY during FY12. Diametric developments related to cotton cloth segment resulted in a 6%YoY decline in exports where Turkey (one of the major grey fabric importers from Pakistan) imposed import duties on fabric to protect local industry. On the flip side, amendments in the rules of origin by the EU entailed Bangladesh to import cloth from Pakistan. Moreover, all of the value added products secured better AUPs but the export quantity declined due to global turmoil and non-preferential access to the EU market.

FY12 Textile Export Breakup

ExportsQuantityAUPJun’12   
Textile Segment(US$ million)YoYYoYYoYExportsMoM
COTTON YARN1,794.58-18%7%-24%161.49-6%
COTTON CLOTH2,454.70-6%-16%11%210.37-11%
KNITWEAR1,974.23-14%-22%10%180.626%
BED WEAR1,748.33-16%-19%3%149.042%
TOWELS684.18-10%-17%8%65.533%
F.GARMENTS1,634.59-8%-26%24%159.605%

Outlook for FY13: USDA has lowered its global cotton production estimate by 1.5 million bales amidst lower precipitation levels in India and Pakistan where AKD Securities anticipates a further decline in cotton production estimates following the current drought in the US. However, a decline in consumption forecast from earlier 3% to 2% will likely keep a check on int’l cotton prices and hence cotton yarn exports. Value added products will likely miss the much required kickoff as economic crisis in the EU zone is unlikely to end. In this regard, IMF has slashed its CY12 and CY13 global economic growth forecast by 10bps and 20bps to 3.5% and 3.9%, respectively, with inordinate assumption of the EU periphery’s debt crises resolution. Moreover, AKD Securities may see a decline in export orders going forward as enduring energy crises in Pakistan is limiting smaller textile manufacturer’s ability to timely fulfil export orders.

Investment Perspective: NML has recently picked up momentum, up 12% from recent low (as of Jun 13’12) on the back of higher portfolio value where MCB and DGKC have gained 21% and 13%, respectively, implying an uptick of PKR 4/share in the portfolio value (after applying a 50% portfolio discount). The scrip is trading at undemanding FY13 P/E multiple of 5.6x. Cheap multiples, uptick in portfolio value and lower correlation of value added products with cotton prices (despite a 32%YoY decline in CotlookA Index, AUPs of value added products recorded an increase during FY12) calls for bullish stance on the scrip, which is offering a 31% upside from AKD Securities’ Jun’13 target price of PKR 69/share.