A review of Pakistan textiles sector

We upgrade our earnings estimates for the IMS Textile Universe by c.35%, maintaining our Overweight stance on the sector amid consistently strong earnings beats FY21td. The attractive present price levels of our Textile Universe (down 11% FY22td), further reinforce our liking for the sector.

Our liking for the sector emanates from robust exports growth FY22td, amid healthy demand, uptick in global vaccinations, prolonged US-China trade rift and extended government incentives.

In the present backdrop, we prefer ILP (TP of PKR115/sh) and GATM (TP of PKR70/sh) as our top picks, due to significant expansions and Ideas IPO (in case of GATM).

Textile dynamics remain upbeat…

We have upgraded the earnings estimates of our Textile Universe by c.35% for FY22/23f. The estimate revisions stem from recent PKR/USD depreciation to beyond 175, new capacities coming online in the next two years (especially in case of ILP and GATM) and elevated Spinning profits. Key positives for the sector remain: (i) robust growth in exports amid prolonged US-China trade rift and resultant re-routing of orders to Pakistan, and (ii) likely continuation of government incentives (potentially through the pending Textile Policy) which sustains competitiveness and profit margins (already at pre-pandemic levels since 1QFY22). We prefer ILP as our top pick (new TP of PKR115/sh) and GATM (TP of PKR70/sh) for entry into new segments and Ideas IPO, respectively, on top of the above positives. Our TP for the remaining covered companies have been lowered by an average 15% due to downward changes in portfolio NAVs and higher risk-free rate.

…but under-appreciated in stock prices

Despite the strong earnings in 1QFY22, where gross margins of covered companies rose 8ppt yoy, our Textile Universe is down 11% FY22td (under-performing the broad market index by 2ppt) while trading at undemanding FY22/23f P/E of 4.2/3.9x. The market has largely ignored the positive impact of significant PKR depreciation, c.30% growth in overall Textile exports and that the industry is relatively shielded from high interest rates due to the significant borrowings at subsidized rates. Of late, profitability of the Spinning segment has outperformed that of value-added segment. Yet, we shift our preference to stocks with greater value-added tilt – as they promise better growth prospects (courtesy handsome expansion plans and new product categories) and due to eventual moderating of Spinning margins, in our view.

New Textile Policy is vital to sustain present conditions

In order to counter any increased competition from regional countries, the pending Textile Policy is paramount. For at least the next five years, to ensure greater investments in capacity expansions. As per APTMA, the sector is presently undergoing expansions to the tune of US$3.5bn, while Pakistan’s textile exports are expected to cross US$20bn (up c.30% yoy). Inside we highlight ILP’s plans and future prospects. Although most incentives (utilities and borrowing rates) have been extended, further increments in DLTL and fixed utiliity rates during the policy are likely to sustain the present demand and investment growth, in our view.

Downside risks

(i) Delays in execution of expansions, (ii) reimposition of global lockdowns (supply chain constraints), (iii) PKR appreciation, and (iv) discontinuation of subsidized borrowing and utility rates.

ILP: Ambitious expansion plans to lead sector growth

ILP recently announced a series of planned expansions, which are slated for the period until FY26 and have a total outlay of US$300mn. This will entail capacity enhancements in the Hosiery, Spinning and Denim segments, while adding new product lines in the Apparel and Activewear segments. We have incorporated these projects in our estimates, where the expansions adds an average c.15% to both our projected topline and bottomline (FY22-25f period) and c.30% to our TP. These projects come at an opportune time, given that Bangladesh is likely to taken off the status of Least Developed Country by EU – by end-2025. Thus, timely expansions in the value-added garment segments (Denim, Apparel and recently sought after Activewear segment), ILP is likely to be well-positioned to gain traction in the new product lines, through leveraging current clients such as Nike, in our view. Global Denim and Activewear segments are estimated to grow at a CAGR of c.5% each over the 2021-2027 period to US$87bn and US$0.3bn, respectively.

Courtesy – Intermarket Securities Limited.

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