The export competitiveness of local textile industry due to Rupee depreciation against USD compared to regional competitors along with impact of cotton production and prices on local textile industry.
Regional currencies depreciation: Pakistan's textile sector still lagging
The current depreciation in PKR against USD is expected to bode well for the margins for local textile manufacturers during FY12, however, compare to regional textile exporting countries' currency depreciation, the local textile companies facing soar throat competition in margins term. With PKR depreciation of 4.1%YoY against USD during FY12, Bangladeshi Taka has depreciated by massive 11%YoY while Indian Rupee also declined by 10%YoY against USD. Therefore on the international front, comparatively low depreciation of PKR against USD pose bit steady picture but yet still fall on uncompetitive side for local textile industry.
Bumper cotton crop, FY12 gross margins to stable at 16%
On both local and international fronts, cotton prices have declined by 35%YoY and 32%YoY respectively. The decline in prices at large will intend to keep the gross margins of textile margins stable at 16% this fiscal year. However as far as cotton production is concerned, local bumper cotton crop of 14.8mn bales has kept the cotton prices below Rs6000/maund in local markets during FY12. While on international front, cotton production is estimated to be at 123mn bales (1 bale = 480lb), increased by 5.7%YoY till May 12 estimates according to U.S Department of Agriculture (USDA). However, during the FY13, USDA has estimated the cotton production to decline by 5%YoY to 116.7mn bales; however with 4 years high ending stock of 66.9mn bales this year, cotton prices on international front are expected to remain stable during FY13.
Recommend 'Buy' NML and NCL
With the stable margins going forward we recommend buy on NCL and NML with the target price for Dec-12 Rs26/share and Rs62/share respectively. NCL is trading at PE multiple of 4.2x with dividend yield of 8.9% for FY13 similarly, NML is trading at PE multiple of 4.7x with dividend yield of 4.5% for FY13.
(InvestCap)
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