Pakistan’s textile exports reached USD 1.7bn during Jun’22, taking annual textile exports to a record high of USD 19.3bn (+25% YoY). Apart from increased summer demand and adequate energy availability, most of it was driven by the increased competitiveness of Pakistan’s total exports which also hit the highest level of USD 31.8bn (+26% YoY). However, macro headwinds loom at large, in terms of, i) sobering demand from the global slowdown, ii) sharp decline in cotton prices, and iii) higher energy and finance costs.
Cumulative exports of value-added segments in June rose by a decent 8% YoY (average), led by Knitwear and Readymade Garments segments, while that of Bedwear decreased 5% YoY. In terms of volumes, Readymade Garments witnessed a sharp growth of c.40% YoY (low base due to depressed demand as lockdowns prevailed in the West).
Overall textile imports increased 15% YoY (down c.10% MoM) to USD 0.4bn in June, led by raw cotton imports. A noteworthy observation is that cotton volumes increased 10% YoY amid surge in textile demand. Simultaneously, textile machinery imports declined c.60% YoY, likely due to fulfilment of TERF orders, in our view.
Textile exports growth is likely to falter in the ongoing month on account of the long Eid holidays, monsoon rain and production constraints from lower energy availability. According to channel checks, demand for Hosiery and other value-added products such as garments are likely to remain intact in the near-term, while that of Home Textiles is likely to contract. Also, the ongoing global monetary tightening to contain inflation may potentially lead to a significant moderation in exports growth, while piling up of inventory at major retailers such as Target and Walmart (among others) will further slow down exports during FY23. We retain our Overweight stance on the sector and continue to prefer ILP (TP of PKR109/sh) and GATM (TP of PKR61/sh) as our top picks.