October 03, 2013

TEXTILE IN FOCUS

Possible GSP status to boost Textiles

SUITE # 204-205, 2nd Floor, Business & Finance
Center, Opp State Bank of Pakistan, I.I.
Chundrigar Road Karachi,
PABX: 9221-32461468-70
Fax: 9221-32473951
www.pearlsecurities.com

Annual Exports (USD mn)

13,805

15,000
12,500

12,336

Synopsis:

13,064

10,221

10,000
7,500
5,000
2,500
0
FY10

FY11

Value: USD m n

FY12

FY12

FY13

FY13

Cotton Yarn

1,810

2,244

%
Change
23.97

Cotton Cloth

2,442

2,691

10.17

Knitw ear

1,983

2,033

2.51

Bed w ear

1,742

1,784

2.4

Readym ade Garm ents

1,616

1,815

12.32

686

776

13.03

591.5

591.8

0.05

Tow els
Made-up Articles (Ex.
Bedw are and tow els)

Jul'13 Exports

Value: USD 000

Raw Cotton
Cotton Yarn
Cotton Cloth
Other Yarn
Knitwear
Bed wear
Towels
Readymade
Art, Silk
Made-up
Other

The sector contributes around 9.5% to the GDP while employing around 15 million
people amounting to about 30% of the countrys workforce. Pakistan holds the distinction
of being the worlds 4th largest producer of cotton. Textile exports have increased by
over 10% in July 2013, due to declining exchange rate since the start of 2013 and
favorable import policy in China.
Superb Performance, complemented by further positives:
The sector has performed remarkably well in FY13, showing annual growth of 6% YoY
with total sales of USD13bn for the year compared to PKR12.3bn in the previous fiscal
year. Overall sector growth is primarily augmented by increase in cotton yarn (24% YoY),
cotton cloth (10% YoY) and readymade garments (12% YoY) respectively. Two Major
factors that further complemented the sectors performance was, 1.) Increase of cotton
prices by 10% in FY13 and 2.) Depreciation in local currency of 8% since Jan13.
Dynamic start to FY14:

Cotton Yarn

July
July
%
FY13
FY14
Change
174,571 201,711 15.55

Cotton Cloth

199,751 232,067

16.18

Knitw ear

201,251 203,234

0.99

Bed w ear

155,804 170,758

9.6

Readym ade Garm ents

157,135 182,711

16.28

61269

65618

7.1

Made-up Articles (Excl. 54574

Bed w ear and tow els)

57745

5.81

Tow els

The recent depreciation of PKR against greenback has put pressure on all aspects of
Pakistans economy; however, the export oriented industries will benefit greatly from the
increasing difference in exchange rate. The textile sector being Pakistans biggest
exporting sector (more than 50% from total exports and contributed USD40.2bn in last
three years) will benefit greatly from this factor and expectations are this along with the
possible GSP plus status of trade with the European Union will put the industry in a
position to grow at an unprecedented capacity. Pakistan has a well matured textile
industry and is currently trading with 20 countries, the quality of products produced are
regarded to be on par with the finest producers in the world.

A great start to the new fiscal year is seen with exports in 1MFY14 showing remarkable
growth 11% YoY and 6.5% on a MoM basis, with total traded value of USD1,210mn.
Increased sales for the month were spearheaded by growth in the cotton yarn, cloth and
readymade garments segments, showing growth of 16% YoY in value terms in each of
the segments. Substantial increases volumes in relatively all segments is seen, the most
prominent being knitwear with volumes increasing by 28% YoY, followed by cotton yarn
with by 13% YoY. Readymade garment was not far behind with an increase of 7% YoY.
We believe the substantial growth in sales during the month is attributed by 1.)
Depreciation in PKR value, 2.) Increased exports of yarn to China due to new import
policy further supported by increase overall cotton prices and 3.) Greater orders due to
workers strike in Bangladeshs textile industry. However, exports have slowed down a
little in August13, when compared with July13 with trading volumes reducing in almost
all sectors besides cotton cloth which managed to grow by 1.6% MoM. On a year over
year basis performance in Aug13 is still showing positive growth of 3% YoY

Research Department
research@pearlsecurities.com
Contact: +9221-32466210 Ext: 116
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TEXTIL IN FOCUS

Possible GSP status to boost Textiles

What in store for FY14:

Exports Monthly (USD mn)
1,167 1,126

1,188

1,137

1,210
1,096

Aug'13

Jul'13

Jun'13

May'13

Apr'13

Mar'13

991

Feb'13

Jan'13

1,058 1,064

Dec'12

1,400
1,200
1,000
800
600
400
200
0

Chinas cotton policy (Positive): China has been going through a harsh time
as domestic cotton prices are high along with increasing labour costs causing
Chinese textile manufacturers to import. This fared well for Pakistans textile
exports of cotton yarn and performance in FY14 is dependent on Chinas
retention of current policy. We expect the policy to be maintained as China is
now looking to invest in Pakistans ginning and spinning segments.
GSP+ status expected (Positive): At current level of trading Pakistan has only
1.5% of the global market share, which gives the industry a limitless possibility
for growth. The approval of the GSP+ status (Generalized Scheme of
Preferences Plus) for trade with the EU, will be a step in the right direction for
Pakistans textile industry. Industrialists are confident in plans to double exports
by next five years, up to USD 26bn.
Depreciating PKR against USD (Positive): The weakening PKR against
greenback is likely to benefit the textile sector as the exchange rate will PKR
has declined by around 8% since the start of 2013 and by around 4% in just the
last two months.
Increased tariffs on gas and power (Negative): Significant increase in power
tariffs for industrial consumers is planned by the GoP, likely to hurt the industrys
earnings. Increase in gas tariffs will also increase production costs of electricity
by captive power plants.

Sector Outlook:
The textile industry has great potential for further growth in both production and export by
virtue of its inherent competitiveness on account of its conventional products. Moving
forward in FY14, we expect the industry to maintain this level of strong performance
particularly due to possible GSP+ status of trade with EU, favorable import policy in
China and depreciating PKR.

Nishat Mills

Nishat Mills Limited: TP @ PKR125 - Buy

FY13A FY14E FY15F

EPS (PKR)

16.63

17.13

18.03

DPS (PKR)

4.00

4.50

5.00

P/E (x)

5.66

5.50

5.22

D/Y (%)

4%

5%

5%

Based on strong cotton market scenario and better than expected exports figures (textile
exports were above 50% of the total exports), we remain positive for elucidating future
due to less chances of Chinas policy on cotton in near future. Coupled with pleasant
growth in portfolio investment owing to expected hefty cash dividend may lead to bottom
line growth constant. Currently, the scrip is trading at from its Target Price of PKR125.
We re-iterate Buy on NML.
Nishat (Chunian) Limited: TP @ PKR69 - Buy

Nishat (Chunian) Limited

FY13E FY14F FY15F
EPS (PKR)

13.5

15.93

16.57

DPS (PKR)

2.00

2.00

2.50

P/E (x)

4.41

3.74

3.59

D/Y (%)

3%

3%

Amid improvement in core earnings due to encouraging yarn exports to Chinese market
and constant dividend income from NCPL we expect, NCL has potential to perform in
decent way as it offers an upside potential with the support of an attractive multiple of
(FY13E) 4.41x with the pregnancy of 14% dividend yield in NCPL at current level. PE of
the scrip is also making NCL as an untapped potential among the peers. Buy

4%

Sources & References: PSL Research, PBS

October 03, 2013

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