Equity Analysis /
Pakistan

Pakistan Textiles sector update

  • Latest news articles suggest that the govt. is proposing to discontinue the electricity tariff incentives PKR43.45/unit

  • NML and KTML are likely to be impacted the most by this proposal. ILP is likely to be relatively shielded, in our view

  • We continue to like ILP (TP of PKR109/sh) and GATM (TP of PKR61/sh), as our top picks in the sector

Intermarket Securities
30 September 2022

Government proposes discontinuation of subsidized electricity rate

Latest news articles suggest that the government is proposing to discontinue the electricity tariff incentives from the current USD0.09/KwH (PKR21/KwH) to USD0.19/KwH (PKR43.45). Although the move will contradict the government’s plans on encouraging the sector to shift to the grid, away from gas-based CPPs, the sector’s competitiveness and profitability is likely to be hampered, in our view. It can be assumed that the proposed rate will be implemented for the time being (likely till Dec’22), until the new Finance Minister, after studying the scenario, takes a decision with regards to the actual electricity rate. We continue to like both ILP and GATM for being relatively shielded from the proposed electricity tariff hike.

  • According to channel checks, the proposed rate is likely to be implemented from Oct01’22 until Dec30’22. The table below shows the annualized EPS implications on the IMS Textiles Universe (ex-GATM). ILP is likely to be relatively shielded compared to peers due to diversified fuel mix and lower reliance on the grid.   

  • Both NML and KTML are likely to be impacted the most by this proposal, owing to greater energy requirements and reliance on grid electricity.  

Moving forward, FY23 is already positioned to be a challenging year. Potential revision in gas tariffs will further dampen sector profitability, as gross margins have already started moderating in the absence of cotton inventory gains and slowdown in exports, owing to global inflation and recession fears. Also, although the Prime Minister has opposed the price hike, the decision now lies with the new Finance Minister, after studying the situation, may announce a relief for the sector. That said, we continue to like ILP (TP of PKR109/sh) and GATM (TP of PKR61/sh), as our top picks in the sector.