Oct 12, 2015 - Until further clarity with respect to the textile package, we continue our preference for NML given its d
Pakistan Textiles Expectations of the upcoming textile package Personal Goods Sector Performance 1M
3M
12M
Absolute %
‐3%
‐6%
‐1%
Relative to KSE %
‐5%
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‐13%
Relative Chart KSE100 vs Personal Goods
Personal Goods (Textile)
30%
KSE100 Index 20% 10% 0%
Monday October 12, 2015
The textile sector has attached much of its expectations with the upcoming textile package which is believed to be a ray of hope for the industry in turmoil. Declining exports, lackluster demand, high input costs and amidst all this the shutting down of textile units has raised concerns among the manufacturers and the exporters alike. The All Pakistan Textile Mills Association (APTMA) has put forward textile manufacturers’ demands with the government which include i) an increase in the import duty on Indian yarn to 25% to protect local spinners, ii) release of tax and refund claims held with the government to support the liquidity crunch, iii) removal of GIDC and reduction in gas tariffs comparable to the region, iv) 3% rebate on exports and v) further depreciation of PKR to boost exports. These demands are likely to improve exports and cut down the input cost borne by the textile sector. However, the government has reportedly turned down the exporters’ demand to depreciate PKR, lower gas prices and withdraw GIDC and has in turn offered to provide uninterrupted electricity supply at PKR9/unit to the industry, provided the industry gives up its usage of gas in winters. While there is optimism with respect to the much anticipated textile package, the government’s reluctance to announce one has perturbed the manufacturers. The conundrum of what to expect from the package will only be resolved once the package is out in the open. Until further clarity with respect to the textile package, we continue our preference for NML given its diversification throughout the value chain, with a target price of PKR149/sh offering a total return of 49%. Proposed antidumping duty on Indian Yarn: While India imposes an import duty of 28% on
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
Pakistani yarn, Indian yarn is imported at a duty of only 5% which is adding to the misery of the local spinners dealing in high quality yarn. 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 5pps in the import duty is expected to be announced in the upcoming textile package which is likely to provide some respite to the spinners dealing in high quality yarn. However, this holds repercussions for the value added sector which has already experienced a decline in exports of 5%YoY‐13%YoY in 2MFY16, thus further eroding the margins of value added sector. Gas Tariff cut: Industries in Pakistan operate at the gas tariff of $6.27/MMBtu, highest in
the region (India $4.66/MMBtu, Bangladesh $1.86/MMBtu) thus adds to the cost of doing business. The demand to lower gas tariffs, proposed by APTMA, has been turned down by the government. The government in turn has proposed to provide uninterrupted power supply at PKR9/unit to the industry, provided the industry gives up its usage of gas. While this is good news for the textile units located in north which face a dearth of gas supply, the units in south currently enjoying gas supply at PKR6/unit, will suffer from an increase in their input cost. Also, the Standing Committee on Textile Industry has recommended the FBR to withdraw increase in import duty on coal from 1% to 5%, as this would nullify the textile sector’s positive initiative to use coal as an alternative fuel which is likely to cut down the power cost by PKR3/unit‐PKR4/unit. Refund Claims: The industry suffers from serious liquidity crunch due to pending refunds
Arubah Zia
[email protected] +92 111 262 111 Ext: 2053
held with the government under the heads of sales tax, income tax and DLTL (Drawback of Local Taxes and Levies) amounting to PKR160bn. The textile package is expected to mitigate the liquidity crunch and improve the working capital management of textile firms by releasing the refund claims held with the government. The Standing Committee on
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Textile Industry has recommended that the claims must be released within 90 days once they have been processed. PKR Depreciation: PKR had depreciated by mere 2%YoY in FY15 against USD whereas the
regional currencies INR and CNY have witnessed a depreciation of 7%YoY and 3.5%YoY respectively in FY15. This justifies the exporters’ demand of further depreciation as Pakistani exports are likely to lose their competitive advantage in the international arena if this trend persists. Given a strong external account outlook owing to weak oil prices and continued multilateral flows, we believe further depreciation in PKR/USD seems unlikely in FY16. Investment Perspective: The conundrum of what to expect from the package will only be resolved once the package is out in the open. Until further clarity with respect to the textile package, we continue our preference for NML given its diversification throughout the value chain, with a target price of PKR149/sh offering a total return of 49%.
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