Morning Call about Textiles embrace for their ‘Honeymoon’ period – Arif Habib Limited

Karachi, December 13, 2013 (PPI-OT): EU Parliament votes in favour of GSP+ Status

As Arif Habib Limited highlighted in Morning Calls dated (12th and 6th Dec’13), EU Parliament in its historic verdict yesterday has voted in favour (53%) of granting (406 votes out of a total 766) GSP+ status to 10 countries, including Pakistan, till 2017 by which it will be next reviewed further on the basis of 27 conventions; mainly on human rights and environmental issues.

According to Arif Habib Limited, the GSP+ Status to the Textile sector means full tariffs removal on essentially the same product categories in this case 3,500 textile items to 28 EU countries. Arif Habib Limited has forecast USD 1.0-1.5bn incremental inflows in the country through increased textile exports to EU markets.

Though challenges on the macro-level remain on the forefront for the government in ensuring gas supplies, law and order, lack of infrastructure, etc, which Arif Habib Limited believes need to be addressed for the sector to fully make use of the advantages of the GSP+ Status scheme.

Pakistan to compete on a level field with regional players now
Pakistan will now be able to compete on level playing field with other regional players in the region. In particular, Sri Lanka and Bangladesh that previously had been enjoying the benefits of GSP+ Status. To recall, Pakistan did enjoy the GSP+ Status before in Musharraf’s era for a period of three years, while Pakistan was enjoying only the GSP Status, which was only the standard scheme offering specifically substantial tariff reductions meaning partial or entire removal of tariffs on two-third of all product categories.

Value added products the key in improving margins
Arif Habib Limited believes, those textile companies will significantly benefit who will be successful in penetrating the EU markets with their high margin value-added products (home textiles and weaving segments in particular). Due to increased demand of this segment, a likewise surge of by products, yarn in particular, cannot be ruled out.

NCL a major beneficiary
In Arif Habib Limited’s textile universe coverage, Arif Habib Limited strongly recommends NCL which will be able to adequately meet increased demand from EU countries whose capacity expansion of spindles (22,000 of their own expansion, which has already come online and 38,000 of acquired assets of Taj Textile Mills) have come into play at a timely manner. Also, with a 14 MW grid station to come online in this financial quarter, this will reduce NCL’s reliance on power from national grid (tariff hikes have recently negatively impacted sector’s bottom-line).

Currently, an average 14% of NCL’s while 35% of NML’s top line comprised exports to the EU countries. Arif Habib Limited foresees a volumetric growth for both the textile giants from mid-FY14 (Jan’14) onwards.

Recommendation
The sense of optimism on GSP+ Status has prevailed in the market, driving even fundamentally weaker Textile stocks to rally. Under Arif Habib Limited’s coverage companies, Arif Habib Limited recommends ‘Buy’ on NML (FY14E and FY15F EPS PKR 24.9 and PKR 30.8, with FY14E and FY15F PE at 4.8x and 3.9x, respectively) with revised Price Target of PKR 158/share (upside 31%) at current levels.

Arif Habib Limited has ‘Buy’ call on NCL also (FY14E and FY15F EPS PKR 14.1 and PKR 14.5, with FY14E and FY15F PE at 4.0x and 3.9x, respectively), with Arif Habib Limited’s revised Price Target at PKR 80.8/share (43% upside) at current levels. Arif Habib Limited will also be shortly releasing a detailed report on the Textile sector of Pakistan.

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