Equity Analysis /
Pakistan

Pakistan Textiles: Attractive valuations offset the headwinds

  • Despite the sharp downward revision in our TPs for the IMS Textile Universe, we remain Overweight on the sector.

  • Global and local macroeconomic uncertainties have led us to further prune our growth assumptions, from our last revision

  • We reiterate our preference towards ILP (TP PKR90/sh), due to the relative resilience of hosiery sales & expansion plans

Intermarket Securities
25 October 2022
  • Despite the sharp downward revision in our target prices for the IMS Textile Universe, by 22% on average, we remain Overweight on the sector. The government’s policy of providing regionally competitive utility prices is vulnerable under the IMF program and global demand fares challenges, but valuations are already knocked down.  

  • Global and local macroeconomic uncertainties have led us to further prune our revenue and earnings growth assumptions for FY23-24f by 1%/12%, respectively, from our last revision. This is led by a sooner-than-expected decline in margins and demand slowdown.    

  • We reiterate our preference towards ILP (TP of PKR90/sh) due to the relative resilience of hosiery sales, even during global downturns, and the company’s extensive expansion plans.     

We retain our Overweight stance…

We have downgraded earnings estimates of our Textile Universe by an average of 10% over FY23-26f. This is a function of i) a potential slowdown in exports, specifically in the ongoing quarter, followed by a slower demand growth trajectory in the West, ii) expected increase in local RLNG and other fuel prices (already incorporated in our estimates, even if regionally competitive gas rates are removed), and iii) higher finance costs amid revision in concessionary borrowing rates. However, key positives remain, such as: i) continued re-routing of orders from China, ii) fixation of electricity tariffs at PKR19.99/unit for the remainder of FY23f, and (iii) PKR/USD slippage which will cushion margins from cost pressures, in our view. Although our coverage universe has shed 20% CYTD, we retain our Overweight stance. We continue to prefer ILP (TP of PKR90/sh) as our top pick because of its medium term expansion plans, and strong resilience of hosiery sales in times of economic downturns.

… as most headwinds are priced in

We believe the ongoing quarter is likely to remain sluggish, with flat exports growth, before picking up post-Christmas and New Year. The piling up of inventory in the US and other countries in the West (refer to the chart on the next page), is likely to keep exports growth muted. We therefore trim our FY23-24f revenue and gross margins estimates by an average 2ppt/1ppt, from our last revision (USD revenue down c.10% on average). The downwards revision in gross margins is led by i) normalizing cotton inventory costs, ii) incorporation of the expected c.50% increase in gas/RLNG costs, and iii) reduction in realized USD prices, coupled with volumes. With the recent high global inflation prints, a slowdown in exports seems likely, as seen in historical periods of slowdown. However, the prolonged US-China trade tensions may continue to somewhat cushion exports from global demand headwinds, in our view.

Textile sector continues to trade at attractive valuations

Despite the strong earnings beats throughout FY22, rising concerns over exports demand and profitability have resulted in the IMS Textiles Universe underperforming the KSE100 by 22ppt since Apr’22. The sector is currently trading at FY23/24f P/E of 4.3/3.6x (including holding companies, without which implied core-P/E is an attractive 3.5x/3.1x). The market continues to neglect the positive impact of significant PKR depreciation. However, with the elevated Spinning segment profits likely to normalize in the coming quarters, we continue to prefer stocks with greater value-added sales, due to the extensive expansion plans, ventures into new product lines and relatively consistent gross margins (in comparison with Spinning sector margins which historically have been volatile).