June 18, 2012 (JS Research)
We anticipate the textile sector’s core business to remain under pressure during the last quarter of FY12. Our view is supported by low cotton prices (averaging at Rs5,807 per maund in 4Q) and rising energy costs (up on an average 2.4x YoY in 9MFY12). With heavy electricity load shedding in Punjab, energy costs in 4Q are likely to remain high as the industries rely on expensive fuel. Furthermore, the gas cess imposed on captive power plants in the budget and rising electricity charges are likely to add to the woes of the textile industry in our view. However, going forward the textile industry can take some respite from the recently announced free access to the EU market, which is likely to benefit the country to the tune of EUR300mn. We remain ‘Market-weight’ on the textile sector with a ‘Hold’ call on NML and NCL.
Soaring energy costs a concern
During 9MFY12 Nishat Mills Limited (NML) and Nishat Chunian Limited (NCL) have seen an increase of 2.4x YoY in their fuel and power cost. This was primarily due to reliance on expensive furnace oil amid heavy gas and electricity shortages in Punjab . Furthermore, rising electricity tariffs added to the misery of the textile industry. We believe such a trend to continue for 4Q as well and keep margins under check.
In addition, news paper reports have sighted a decline of 9.8% in exports of value added products during the last four months which is likely to keep revenues subdued as well.
Cotton prices also keeping low
Bumper cotton crop during FY12 has seen cotton prices being restricted to below Rs6,000 per maund in the domestic market. During 4QFY12 so far, cotton prices have averaged at Rs5,807 per maund compared to Rs6,027 in 1HFY12 (the procurement period). Internationally, the prices have come down to 83.05 cents per lbs from hitting a year high of 122.75 cents in 1HFY12.
EU trade concessions to ease off woes
As per recent news reports, the European Union has approved the trade concession to Pakistan . The package will allow tariff free export of 75 products to EU which is likely to benefit the country to the tune of EUR300mn over the next three years. Furthermore, the European Union has approved a law in order to refocus trade aid to poorest nations. The changes to the law are likely to help Pakistan further, as it can now apply for a more advanced GSP plus status from 2014.
Recommendation
We believe the textile sector to remain under pressure in 4QFY12 as margins are likely to remain thin. However, the approval of trade concessions by the EU and a chance to apply for the GSP plus status is likely to bode well going forward. At current levels, we maintain our ‘Market-weight’ stance on the textile sector with a ‘Hold’ call on NML and NCL.
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Also in focus
Net foreign investment falls
Net foreign investment declined by 61%YoY to US$721mn in 11MFY12. The fall came on the back of energy crises, unclear economic policies and law and order situation. Foreign direct investment (FDI) dropped by 48%YoY to US$756.4 in 11MFY12 while foreign portfolio investment (FPI) registered an outflow of US$35mn in the same period.
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