AKD Securities Limited Equity Research – Daily Report

Karachi, December 22, 2017 (PPI-OT): Pakistan Textiles: Sector update Nov’17

Sustaining its upward momentum, Pakistan’s total exports during Nov’17 registered an encouraging growth of 12.35%YoY/4.56%MoM to stand at US$1.97bn where both textile (up 7.45%YoY) and food exports (up 22.19%YoY) witnessed an upward trend. A likely impact of increase in final product prices, textile exports maintained its recovering trend in Nov’17, rising 7.45%YoY to reach US$1.12bn. Segment wise, value added-segment once again led the exports growth, up 11.6%YoY to reach US$826mn, while low value-added segment remained under pressure, declining 2.6%YoY to US$264mn. On a cumulative basis, textile exports during 5MFY18 increased 7.6%YoY to reach US$5.51bn largely supported by recovery in final product prices. Going forward, we expect textile exports to grow by 7.5% in FY18, where recent rupee depreciation coupled with approval of 50% unconditional export subsidy are expected to drive exports growth.

Textile exports up 7.5% in Nov’17: Driven by recovery in final product prices coupled with gov’t support, textile exports gained 7.5%YoY to reach US$1.12bn in Nov’17. Category wise, value added segment remained key driver of exports growth, rising 11.6%YoY to US$826mn. In the value-added segment, all the key categories posted double digit growth with knitwear, garment and bed-wear exports growing by 18%YoY, 14.03%YoY and 11.7%YoY, respectively. Failing to maintain recovering trend seen in Oct’17, low value added exports once again declined 2.6%YoY to US$294mn primarily due to strong domestic demand for cotton yarn, leading to 13.7%YoY decline in yarn exports. On a cumulative basis, textile exports during 5MFY18 increased 7.6%YoY to reach US$5.51bn largely supported by recovery in final product prices.

Devaluation may dissuade further incentives: With ~60% share in total exports, textile sector would be the key beneficiary from recent rupee depreciation of ~5%. In this backdrop, we expect textile exports to grow by 7.5%YoY in FY18. However, already benefitting from export subsidy (4-7% on FOB value of exports), industry demands for further incentives (electricity tariff reduction by PkR3.53/sh) has a low likelihood of materializing given lack of fiscal space.

Investment perspective: Our top pick in the sector, NML offers thematic exposure to various sectors with textile/power (likely to gain from rupee devaluation), cement (expected to gain from ongoing infrastructural activity) and Bank (anticipated to recover from expected monetary tightening in CY18). Moreover, developments in NML’s auto venture can unlock price performance going forward (not incorporated currently). At our SOTP based Dec’18 TP of PkR169.1, NML offers 21% upside. Buy!

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