Oct 8, 2015 - a bit hazy, we recommend investors to keep a watchful eye over the developments pertaining to an expected
Pakistan Textiles Implications of declining cotton output
Pakistan Cotton Ginners Association (PCGA) reported a plunge of 26%YoY in seed cotton arrivals, reaching 3.1mn bales in 1QFY16 from 4.1mn bales in 1QFY15. The crop suffered major setback due to heavy rain and floods in Sindh and Punjab, resulting in a production decline of 19%YoY and 33%YoY respectively in the two provinces. Out of this new crop, 0.23mn bales have been purchased by exporters, an increase of 54%YoY while textile sector’s procurement decreased by a significant 33%YoY. This may possibly lead to cotton imports by the value added sector to fulfill its unmet demand, thus hitting the margins. This, together with the incessant dumping of Indian yarn at an import duty of 5%, holds repercussions for the spinning segment dealing in high quality yarn. The production shortfall in confluence with increasing demand has put an upward pressure on the commodity price which has reached an all season high value of PKR5,050/maund (Usc59/lb) in Oct’15, a 9.7%MoM increase. The international cotton prices however, present a conflicting scenario with prices hovering at USc68.5/lb, a decline of 2%MoM due to i) lackluster increase in consumption and ii) a high expected stock to use ratio of 94%. With textile sector’s outlook a bit hazy, we recommend investors to keep a watchful eye over the developments pertaining to an expected textile package before building a position. NML, given its attractive valuation, is our top pick from the sector.
Personal Goods Sector Performance 1M
3M
12M
Absolute %
‐3%
‐6%
‐2%
Relative to KSE %
‐2%
0%
‐13%
Relative Chart KSE100 vs Personal Goods
Personal Goods (Textile)
30%
KSE100 Index 20% 10% 0%
Oct‐15
Sep‐15
Jul‐15
Aug‐15
Jun‐15
Apr‐15
May‐15
Mar‐15
Jan‐15
Feb‐15
Dec‐14
Oct‐14
Nov‐14
‐10%
Source: BMA Research
Wednesday October 08, 2015
Declining production levels: Local cotton production has tumbled by 26%YoY on account of heavy rain and floods in Sindh and Punjab which has resulted in a production decline of 19%YoY and 33%YoY respectively in the two provinces, putting an upward pressure on cotton prices. The increase of 54% in cotton procurement by the exporters and a notable decline of 33% in domestic textile sector’s procurement send alarming signals for the already depressed value added textile exports which may be significantly substituted by non‐value added exports, if the current trend persists. However, the value added segment might be resorted to importing cotton in order to fulfill its unmet demand and shield its exports. Cotton Price at a seasonal high: The production shortfall together with increasing demand from commodity exporters has put an upward pressure on the cotton price which has reached an all season high value of PKR5,050/maund (a 9.7%MoM increase). The international cotton prices however, remained depressed at USc68.5/lb, a decline of 2%MoM on account of i) lackluster increase in consumption of less than 2% from the last season and ii) a higher expected stock to use ratio of 94%, up by 2pps from the USDA’s last month’s forecast. This brings down the differential between local and international price to 14%. Duty proposed on yarn Imports: The incessant dumping of Indian yarn at an import duty of 5% is adding to the misery of the local spinners. Indian yarn is imported at a price of PKR339/kg (inclusive import duty), trading at a discount of 4% from local yarn prices. While this is good news for the value added sector, the spinners are suffering from the brunt of the cheap yarn import. An increase of 5% in the import duty, expected in the upcoming textile package, is likely to provide some respite to the spinners dealing in high quality yarn. However, low procurement by textile sector this season and the expected duty increase, holds repercussions for the value added textile exports, already down in volumetric terms by 5%YoY‐13%YoY in 2MFY16.
Arubah Zia
[email protected] +92 111 262 111 Ext: 2053
Investment Perspective: With textile sector’s outlook a bit hazy, we recommend investors to keep a watchful eye over the developments. NML, with its i) strong portfolio income, ii) new production facilities coming online and iii) core operations almost available for free (Portfolio value @ 30% discount is PKR108/sh while current price is PKR98/sh), remains our preferred play in our textile universe.
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