AKD Quotidian about — Apr’13 Textile exports and sector update

Karachi, May 24, 2013 (PPI-OT): As per PBS, textile exports in the month of Apr’13 slipped by 3%MoM to US$1.1 bn where yam exports dropped by IO%MoM to US$1 88mn, following a 12%MoM decline in yarn export volumes.

According to AKD Securities for IOMFYI3, textile exports are up by 6%YoY to US$1O.7bn. Following weak Chinese PMI reading, cotton futures have slipped by 5% in a week to close at UScS1 .7/lb yesterday, which is a four month low. Furthermore, applicable from Marl 3, FBR has withdrawn the `zero-rating’ tax status for textiles and as such, textile manufacturers will have to pay sales tax of at least 2% on supplies to the textile sector. AKD Securities advocates a cautious stance on the textile sector given the string of recent negatives.

Apr13 exports slip by 3%MoM: As per PBS, textile exports in the month of Apr’13 slipped by 3%MoM to US$1.1 bn where yaii I exports dropped by 1O%MoM to US$l8Smn, following a 12%MoM decline in yarn export volumes. Further, Chinese cotton yai ii imports also declined by 1 8%MoM to 164k tons, however this was still higher by 50% compared to Apr’12. For 1OMFY1 3, textile exports are up by 6%YoY to US$1 O.7bn where yam (+26%YOY), Cloth (+11 %YoY) and Garments (+12%YoY) are the notable outperformers.

Cotton futures at 4 month low: Following weak Chinese PMI reading for May’13 (reading of 49.6, indicating contraction), cotton Mures have slipped by 5% in a week to close at USc81 .7/lb yesterday, which is a four month low for the commodity. Reversal in cotton price trend in addition to a relatively stable PkR is likely to curtail margins of textile manufacturers in 4QFY13.

Withdrawal of zero rating tax regime: Applicable from Mar’13, FBR has withdrawn the zero-rating tax status for textiles and as such, textile manufacturers will have to pay sales tax of at least 2% on supplies to the textile sector.

However, manufacturers can claim refunds on exports only. As such, AKD Securities sees negative impact of this development in the form of lower margins on domestic sales, while rise in costs will increase working capital financing requirement. Within the AKD Textile Universe Space, NCL has a higher contribution (30% for FY12) of local sales as a proportion of total sales as compared with NML (23% for FY12), leaving it more susceptible to the withdrawal of the zero-rating regime.

AKD Securities estimate that the increased costs could result in GM drop of -1%, while incorporating the impact of lower margins will reduce AKD Securities FY14F EPS estimates for NCL and NML by 9% each or PkR1 .3 for NCL and PkR1 .7 for NML. While AKD Securities awaits further clarity on the issue, a 1% reduction in AKD Securities GM assumption for NCL and NML would result in a TP reduction of 20% for NCL and 12% for NML.

Outlook: AKD Securities advocates a cautious stance on the textile sector given the string of negatives in the form of i) slowdown in sequential exports, ii) reversal in cotton price trend and iii) withdrawal of zero-rating tax regime.

Furthermore, one of the budget proposals includes increase in minimum turu over tax from 0.5% to 1%, which if implemented could result in 4%-5% annualized earnings decline for NML and NCL. Reversal in zero rating SRO by the incoming PML-N government, which is perceived to be business friendly with strong ties to the textile sector is a key upside risk.

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