• Global textile demand has declined steeply amid the coronavirus pandemic. Many Western retail brands and major exporters in Asia have been under financial stress. However, hefty government stimulus and recent easing of lockdowns have contained the fallout.
• For Pakistan, however, we see textile exports recovering earlier than for regional peers, courtesy much of Europe (its largest market) being out of lockdown, its home textile exports are proving resilient, and it stands to benefit from global orders being rerouted out of China. Textile exports may fall 5-10% yoy in FY21f – not 20%+ earlier thought.
• Pakistan’s government has already taken measures to eradicate past impediments to competitiveness and protect its exporters in the present environment. We think that the pandemic could be an opportunity for it to grab a larger share of the global textile exports.

This could be a turning point for Pakistan

Pakistan’s textile exports comprise c.60% of its total exports and c.1.6% of the world’s. Its exports-to-GDP ratio has shrunk from c.17% in FY03 to c.9% in FY20, because of a confluence of weak policy incentives, tough business conditions locally and regional countries becoming more competitive. The coronavirus pandemic has hurt Pakistan’s exports as elsewhere. But, we think Pakistan stands to ultimately gain from the crisis and stage a quicker recovery than peers – because of a suitable textile exports mix, rising government policy focus, and the prospect of China losing share in global textile exports, in our view. The government has already taken the right set of measures to both protect exporters in the present crisis and eradicate long-standing impediments to competitiveness. Chronic energy shortage has been overcome, several input costs subsidized, and Pakistan’s currency is no longer overvalued.

Covid-19 has wreaked havoc but there is a ray of light

The coronavirus pandemic and its socio-economic impacts have led to the worst global crisis since the financial crisis of 2008-09. Negative GDP growth of 10% or more is forecasted for many developed countries. Global textiles have suffered from not only disrupted sales and supply chains, but also depressed demand led by rising unemployment and deferred consumption. This has caused severe financial stress for major textile retail chains, where a McKinsey report predicts that one-third of all global fashion brands will not survive the pandemic. However, massive government stimulus packages (up to 20% of GDP) along with the lifting of lockdowns globally have helped to contain the fallout and led to a strong rebound in retail sales during May-June 2020. Back-to-school demand and upcoming winter holidays will be key catalysts.

Textile exports will likely recover earlier than expected

Based on our discussions with major Textile exporters, we understand that Home textile and Healthcare segments will recover earlier than will garments. There is an emerging demand for pandemic related textiles such as masks and PPEs, because consumers are stockpiling in anticipation of future outbreaks. How to play this? We favor the large textile producers, which are already well-positioned globally, have a tilt towards home textiles or defensive garments and can expeditiously undertake expansions in future. We think that Gul Ahmed, Interloop and Nishat Mills fit the criteria. The sector has corrected c.9% since the onset of the pandemic, and buying opportunities are ripe, in our view. (Intermarket Securities Limited)