Equity Analysis /
Pakistan

Pakistan Textiles: Remain positive even as global headwinds moderate growth

  • We revise our IMS Textiles Universe estimates by an average c.7%, stemming from potential global slowdown

  • Although order flows are likely to remain robust, we have expected GMs to normalize due to moderating inventory gains

  • We maintain our Overweight stance on the sector, while preferring ILP (TP of PKR115/sh) and GATM (TP of PKR65/sh)

Abdul Ghani Mianoor
Intermarket Securities
1 April 2022
  • We believe that the pillars supporting growth for the Pakistani Textile exports remain well-grounded, even as the sector is likely to enter a period of slower growth than in recent years amid global headwinds. 

  • Nonetheless, we have pruned our growth assumptions for revenue and earnings growth in FY23-24f led by normalizing margins. This is driven expectations of muted global growth and softer purchasing power for global consumers amid inflationary pressures world over – which have been exacerbated by the Russia-Ukraine conflict.   

  • In the present backdrop, we prefer ILP (TP of PKR115/sh), as our top pick due to the innate resilience of hosiery sales during global downturns and earlier commissioning of the Hosiery Plant 6 expansion. We also prefer GATM (TP of PKR65/sh).    

Sector positives remain broadly intact

We have upgraded the earnings estimates of our Textile Universe by an average 7% over FY22-26f, while revising our FY22 estimates by a sharp c.40%. The relatively modest earnings revision for FY23/24f stems from a potential slowdown in retail/textile sales in the West amid burgeoning inflation cutting into the spending power of consumers, in our view. However, key positives for the sector remain: (i) robust growth in exports amid continued re-routing of orders from China, (ii) likely continuation of government incentives following approval of the Textile Policy, which will sustain Pakistan’s competitiveness relative to regional competitors and (iii) further PKR/USD slippage will cushion margins from cost pressures, in our view. In the present backdrop, ILP remains our top pick because of the innate resilience of hosiery sales during periods of global slowdowns and timely expansions (rolled-over TP to June 2023: PKR115/sh). We also prefer GATM (new TP of PKR65/sh).

Global headwinds can mean slower exports growth ahead

Although order flows and margins are likely to remain robust for at least the remainder of FY22, we have assumed gross margins to normalize amid moderating inventory gains on cotton (near-record prices locally and up c.75% yoy in the global market), and slower-than-previously expected revenue growth of 11%/7% in FY23/24f (c.3ppt lower than previous). In light of the ongoing global scenario (inflation and Russia-Ukraine conflict), a slowdown in exports is likely, as seen in previous periods of slowdown (such as the Great Recession and 2015 European downturn). However, the prolonged US-China trade rift, is likely to cushion exports from global demand headwinds and keep revenue growth afloat, in our view. Also, near-term risks with regards to GSP+ status seem to have subsided for the time being (encouraging discussions with European commissions in recent times), reinforcing our liking for the sector.

Tilt our preference for stocks with more value-added sales

Despite the robust earnings in 1HFY22 (excluding one-off margins impact for ILP and weak margins for NML), our Textile Universe is down c.4% FY22td (outperforming the broad market index by c.2ppt) while trading at undemanding FY23/24f P/E of 4.7/4.1x (including holding companies, without which implied core-P/E is 4.9x/4.2x). The market has largely ignored the positive impact of significant PKR depreciation, c.25% growth in overall Textile exports and that the industry is relatively shielded from high interest rates as borrowings are predominantly based on subsidized rates. As weakening dynamics for the Spinning segment are overshadowing the value-added segment in terms of profitability, we shift our preference to stocks with greater value-added sales – as they promise more resilient growth, courtesy handsome expansion plans and new product categories.