Total exports in September 2020 clocked in at US$1.9bn compared to US$1.6bn in August 2020, up 19% mom and 7% yoy. This takes total exports in 1QFY21 to US$5.5bn (flat yoy). Following the decline in exports in August due to monsoon rains, exports picked up sharply due to filling of delayed orders, in views of experts of Intermarket Securities Limited.

Textile exports (about 65% share in overall exports) remained above the US$1.0bn mark in September, clocking in at US$1.2bn – up 11% yoy and 18% mom. This takes 1QFY21 total textile exports to US$3.5bn (up 3%yoy) from US$3.4bn. Textile exports are nearly double the bottom levels seen during the lockdown months (April-May). They compare well with those of India (up 6% yoy), while Bangladesh’s garments exports grew a modest c.1% yoy.

Key factors behind the rise in Textile exports

• The rise in exports can be attributed to the pent-up orders that had been delayed during the monsoon rain in August, which affected all transport and port activities in Karachi and to the strong orders backlog of the sector.
• In terms of value, there has been a sharp 19% mom average increase in exports of knitwear, home textiles and readymade garments collectively (three major components). Volumes also increased by an average 27% mom for knitwear and home textiles, but by a softer 4% mom in case of garments.
• Textile imports rose 31% mom to US$0.29bn, while up by a sharp 2.2x yoy – potentially indicating export orders remaining healthy for the rest of 2020, in our view. Raw cotton imports rose a sharp 31% mom (up c.24x yoy). This is potentially due to the significant shortfall in cotton production in Pakistan. According to channel checks, only 50% of the cotton requirement for the sector is available in the market (leading to a 10yr peak in cotton prices). On the other hand, imported cotton is relatively cheaper at present. Demand for imported cotton will persist in the coming months, in our view.
• According to channel checks, exports are likely to increase in the coming months, due to the inlay of export orders till December (ahead of winter holidays in Europe and US). The demand for home textiles will remain stronger compared to readymade garments, as the second wave of the coronavirus pandemic across Europe and US will keep high-street retail sales at subpar levels, in our view. However, the threat of prolonged lockdowns in Europe and delays in US stimulus cheques pose a threat to the sustainability of present order flow, in our view, as US retail clothing sales in September declined c.5% mom. An appreciating PKR is also a risk factor, but it will be partly offset by lower cost of imported cotton, in our view.
• The Textile sector has rallied by 41% since May’20, which is partly supported by the regaining of lost export orders during the lockdown. Given the set of local and global trends, we see a high likelihood that textile exports will show double-digit growth rates for the remainder of FY21. However, we highlight that profit margins will likely be lower than before the pandemic as exporters have conceded on prices to maintain customers. We are Overweight on the sector and prefer GATM (June’21 TP of PKR50/sh) and ILP (June’21 TP of PKR80/sh).