Pakistan’s textile sector in macro sweep spot
LAHORE: The country’s textile sector is in a macro sweet spot, amid rampant demand in the domestic market and internationally, as global economies experience “return to normal” phenomenon, pushing up orders for apparels, BOL News has learnt.
Pakistan’s textile exports reached its highest level in history in FY21, being recorded at $15.4 billion (+23 per cent Y-o-Y) with the second half of FY 2021 exports exceeding that of the first half of FY 2021 by 7 per cent, the strongest since FY 2012, while compared to FY 2019, the second half exports were +19.10 per cent against 11.8 per cent in the first half, indicating a robust outlook for the sector in the near-term with order book stretching to 6 million to 9 million.
Hamza Kamal, an investment analyst at AKD Securities said: “We believe strict measures to clamp down the spread of virus in competitive economies, yielded some share to [the] local manufacturers where Pakistan’s share in the US apparel imports improved to 2.7 per cent in 5MCY21 from 2.1/1.7 per cent in the same period last year/CY19.
“Even assuming normalisation of the same, which in our view would take time given higher domestic demand in competitive economies, exports trend could persist, amid sturdy global demand (US apparel imports is expected to surpass that of 2019, $111 billion, whereas in 5MCY21 it already stands at $41.90 billion, while Europe is yet to pick up pace),” Kamal said.
The textile spinners have benefitted the most in the current scenario.
The investment analyst added that the shift in the demand fundamentals have turned the table in favour of the spinning players where the lack of investment in infrastructure in yesteryears resulted in utilisation levels of the existing players closing in at full capacity as per the correspondence with these players, while low cotton output (7 million bales in FY21, the lowest in history) pulled up domestic cotton prices +54.40 per cent Y-o-Y in FY21 (international prices +37 per cent Y-o-Y) and consequently yarn prices.
The spinning sector posted earnings of Rs2.8 billion in the third quarter of FY 2021, compared with the loss of Rs60.30 million in the corresponding period of FY 2020, and the profit-after-tax of Rs269.10 million in the third quarter of FY 2019 with impetus coming from revenue growth of 23.7/21.5 per cent over FY20/19 and expanding the gross margins (in the third quarter of FY 2021, GMs stood at 16.7 per cent, compared to 11.3/8.3 per cent in the corresponding period of FY20/19.
He said the local demand for yarn, currently contributes 60 per cent to 65 per cent of the local textile market size as per the correspondence with the spinning players, is likely to drive up profitability at least in the near-term for these players (local yarn margin stands at Rs546/kg, compared with Rs485/kg on exports).
For Kamal, medium- to long-run outlook also looks promising with the capacity expansions positioning these manufacturers to capture the share from the Chinese yarn players (issues in Xinjiang has put multinational companies in Western world in a quandary with regard to sourcing arrangements) where lately India has benefited the most given low demand domestically (5MCY21 share US yarn imports: 9.2 per cent against 7.5 per cent in CY20).
The local yarn manufacturers are unlikely to record material negative impact from the duty concessions on yarn imports since these mostly relate to filament yarn as against the cotton yarn, mainly produced by the local players.
“Hence, we see strong profits in the spinning segment continuing in the medium-run, where NCL (spinning contributes 50.70 per cent to gross profits) remains our preferred play in this backdrop,” Kamal added.
Overall, the sector is currently trading cheaply at a P/E of 3.02x, offering enticing capital upside.
Chinese companies are not satisfied with the pace of work on CPEC
Special Assistant to Prime Minister CPEC Khalid Mansoor has admitted that Chinese...
SBP took action on the rising value of the dollar
When the SBP took action on the rising value of the dollar,...
The growth of major industries in the country has increased
The growth of major industries in the country has increased during July...
Shaukat Tareen has allowed the provinces to continue collecting taxes
Finance Minister Shaukat Tareen has allowed the provinces to continue collecting taxes...
Exports in Japan up by 26 pct. In August, enduring fast retrieval from pandemic
Government statistics showed that good exports in Japan saw a 26.2% growth...