AKD Securities Limited Equity Research – Daily Report

Karachi, June 25, 2018 (PPI-OT): Pakistan Textiles: Sector update May’18

Pakistan’s total exports continue to exhibit remarkable performance, with May’18 exports reaching US$2.14bn, up 32.3%YoY. Once again, both food and textile groups were key outperformers, with respective group exports growing by 44.5%YoY/28.4%YoY. In textile group, both value and low value added exports jumped 28%/29.7%YoY to reach at US$878mn/US$327mn. On a cumulative basis, 11MFY18 textile exports now stand 9.8%YoY higher at US$12.36bn (vs. US$11.23bn in 11MFY17), with value added exports up by 11.3%YoY to US$8.98bn while low value added exports which remained largely sanguine in the first half strongly recovered in second half, with segment exports reaching US$3.35bn (up 6%YoY) in 11MFY18. Looking ahead, we expect textile exports to maintain their upward trend, as sector would continue to benefit from strengthening economic activity in key export markets, flexible exchange rate regime and continued gov’t support in the form of export incentives. However, prolonged delay in payment of exporters’ refunds could undermine utility of export package, thus posing downside risk to export outlook.

Textiles exports – up 28%YoY in May’18: Latest PBS data shows that textile exports grew 28%YoY to reach at US$1.2bn in May’18, where both value and low value added segment registered double digit growth of 28%/29.7%YoY, with respective segment exports of US$878mn and US$327mn. In value added segment, all three major categories including knitwear, bed-wear and garment witnessed export growth of 39%/28%/24%YoY, respectively. Low value exports also rose 29.7%YoY on account of upbeat cotton yarn and cloth demand (cotton yarn/ cloth exports: up 41%/22%YoY).

Rupee depreciation further favors export outlook: Holding substantial ~60% share in total exports, textile sector would be the key beneficiary from rupee depreciation of ~15.7% FYTD, as the recent devaluation exercise should further enhance export competitiveness against regional countries (table II shows regional currencies movements over the last year, where Pakistan now clearly holds a competitive edge). Moreover, PML-N gov’t before completing its tenure approved extension in export incentives – albeit at lower rate (see table III) – for another three years. Enhancing competitiveness, timely materialization of said incentives should address some of the structural issues faced by the domestic industry, leading to higher exports going forward.

Investment perspective: Amongst textiles, we continue to prefer NML on the back of 1) company’s steadfast focus on value addition (margin accretive and yields higher export incentives), 2) strong diversified business portfolio with healthy payouts and 3) further diversification efforts (entry into auto space). NML has corrected 5.6%CYTD, where our SOTP based TP of PkR169.5/share offers 18% upside, Accumulate!

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AKD Securities Limited Equity Research – Daily Report

Karachi, June 25, 2018 (PPI-OT): Pakistan Textiles: Sector update May’18

Pakistan’s total exports continue to exhibit remarkable performance, with May’18 exports reaching US$2.14bn, up 32.3%YoY. Once again, both food and textile groups were key outperformers, with respective group exports growing by 44.5%YoY/28.4%YoY. In textile group, both value and low value added exports jumped 28%/29.7%YoY to reach at US$878mn/US$327mn. On a cumulative basis, 11MFY18 textile exports now stand 9.8%YoY higher at US$12.36bn (vs. US$11.23bn in 11MFY17), with value added exports up by 11.3%YoY to US$8.98bn while low value added exports which remained largely sanguine in the first half strongly recovered in second half, with segment exports reaching US$3.35bn (up 6%YoY) in 11MFY18. Looking ahead, we expect textile exports to maintain their upward trend, as sector would continue to benefit from strengthening economic activity in key export markets, flexible exchange rate regime and continued gov’t support in the form of export incentives. However, prolonged delay in payment of exporters’ refunds could undermine utility of export package, thus posing downside risk to export outlook.

Textiles exports – up 28%YoY in May’18: Latest PBS data shows that textile exports grew 28%YoY to reach at US$1.2bn in May’18, where both value and low value added segment registered double digit growth of 28%/29.7%YoY, with respective segment exports of US$878mn and US$327mn. In value added segment, all three major categories including knitwear, bed-wear and garment witnessed export growth of 39%/28%/24%YoY, respectively. Low value exports also rose 29.7%YoY on account of upbeat cotton yarn and cloth demand (cotton yarn/ cloth exports: up 41%/22%YoY).

Rupee depreciation further favors export outlook: Holding substantial ~60% share in total exports, textile sector would be the key beneficiary from rupee depreciation of ~15.7% FYTD, as the recent devaluation exercise should further enhance export competitiveness against regional countries (table II shows regional currencies movements over the last year, where Pakistan now clearly holds a competitive edge). Moreover, PML-N gov’t before completing its tenure approved extension in export incentives – albeit at lower rate (see table III) – for another three years. Enhancing competitiveness, timely materialization of said incentives should address some of the structural issues faced by the domestic industry, leading to higher exports going forward.

Investment perspective: Amongst textiles, we continue to prefer NML on the back of 1) company’s steadfast focus on value addition (margin accretive and yields higher export incentives), 2) strong diversified business portfolio with healthy payouts and 3) further diversification efforts (entry into auto space). NML has corrected 5.6%CYTD, where our SOTP based TP of PkR169.5/share offers 18% upside, Accumulate!

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