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Foundation ResearchEquities

24 March 2014

Textile Exports(USD mn) 8MFY14 8MFY13 YoY

Yarn 1,377 1,456 -5%

Cloth 1,879 1,732 8%

Knitwear 1,481 1,366 8%

Bedwear 1,409 1,166 21%

RMGs 1,260 1,154 9%

Others 1,750 1,581 11%

Total 9,156 8,456 8%

Source: PBS, Foundation Research, March 2014

Unit price (US$)

8MFY14 8MFY13 YoY

Yarn 3.00 2.99 0%

Cloth 1.63 1.45 12%

Knitwear 17.1 19.8 -14%

Bedwear 6.9 6.8 2%

RMGs 64.79 67.63 -4%

Source: PBS, Foundation Research, March 2014

Analyst

Fahad Irfan fahad.irfan@fs.com.pk

92 21 5612290 Ext 339

PakistanTextiles

GSP plus: Yet to reflect in exportsEvent

As per PBS data, textile exports for 8MFY14 stood at US$9,155mn, up 8.28%on YoY basis. Exports for February-14 stood at US$1,131mn (up 3.09% MoM).Against markets expectations the numbers reflect insignificant increase inexports post GSP plus attainment. 8MFY14 numbers show three major trends(1) double digit growth in Bed wear segment, (2) value/volumetric decline inexports of yarn and (3) 12% US$ based unit price increase in cotton clothsegment.

Sighting these trends and the recent PKR appreciation (5.6% since Jan-14),we point out serious concerns for spinners. We anticipate that recent PKRappreciation would dilute the US$ based price increase in the weaving segmentand expect slight dent in margins for weavers and value added players goingforward. We foresee depressed earnings for NML and estimate PKRdevaluation alone to result in ve 0.5-0.6/sh impact on 2HFY14 earnings.

Impact

Value added exports gr owth led by strong vol umes: In 8MFY14 theKnitwear/Bedwear/Readymade garments (RMGs) segment showed YoY8/21/9% and 15/20/9% growth in value and volume respectively. As statedin our daily value added items driving exports dated 22ndJanuary 2014, the

volumetric growth in value added segment is owed to the shift in orders fromChina to South Asia, due to the higher production costs in the former.

GSP plus still not reflecting in numbers: Contrary to marketsexpectation we have seen a decline in exports of value added items postGSP plus attainment (January-14). Overall the volumetric exports ofKnitwear/Bed wear/readymade garments have dropped by 18/4/3% inFebruary-14 (over 1HFY14 average). On the positive side, we have seen a14/4% increase US$ based unit prices for Knitwear and RMGs in February-14 (over 1HFY14); however we cannot conclusively associate this increaseto GSP plus attainment.

Raising red flag for spi nners: 8MFY14 exports for cotton yarn stood atUS$1,376mn (down 5.45% YoY). The decline was due to a drop in exportvolumes (down 43% YoY). According to industry players, expected abolition

of current indirect subsidy mechanism in China (i.e. through higher cottonprocurement prices) has halted purchases of yarn by Chinese importers,which has resulted in a major decline in foreign sales of Pakistani yarn. Notethat margins largely remained intact for spinners in the 1HFY14 due toinventory gains. With stagnant export prices and higher local cotton prices(up 15% YoY) we have a strong conviction that margin erosion would befurther evident in the 3QFY14 results.

Weaving on t he watch: In 8MFY14 the total exports for cotton clothstood at US$1,879mn (up 8.47% YoY), contrary to other major textileexports the US$ based unit price for cotton cloth went up by 12% YoY.

According to industry players, demand for both fashion and work wear clothfrom Europe is the primary reason for higher prices. Note that weavers willalso benefit from the stagnant yarns prices (YoY no change).

Recent developments to worry t extile players: We believe two

PAKISTAN

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