Pakistan Textiles – Survived the pandemic, now set to thrive

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We believe Pakistan’s textile exports will fare better than peers during the coronavirus pandemic. They have already staged a V-shaped recovery, partly due to supportive government policies and resolution of the past impediments to competitiveness. Also, because of the US-China tensions, some exporters are seeing a rerouting of orders from China to Pakistan.

Both our picks are pure textile plays and boast sector-leading profit margins due to leading positions in their respective markets. GATM has a 10% share of home textile exports and is a household brand name in Pakistan. ILP is one of the largest producers of socks in the world and has recently expanded into denim.

Right time to be invested in Pakistan Textiles

Diverging from the past, Pakistan’s textile exports are set to enter a near double-digit growth trajectory, in our view. They have already staged a V-shaped recovery in the months following global lockdowns amid the coronavirus pandemic. Textile exports in July 2020 reached an all-time high of US$1.2bn. This was possible because (i) Pakistan has the right mix of textile exports – more home textiles than garments – while more people in the West are working from home, (ii) the government has resolved longstanding impediments to the sector’s competitiveness (notably an overvalued currency and energy cost disadvantages), and (iii) the US-China tensions are gradually rerouting orders out of China to Pakistan (meaning new customers). Before the pandemic, Pakistan’s textile exports comprised only c.2% of overall global textile exports, compared to c.4% for India, and c.7% for Bangladesh. Its total exports-to-GDP ratio has shrunk from 17% in FY03 to 9% in FY20 (c.60% textiles). After the pandemic, we think the trend is set to turn around.

GATM: Best of both worlds

GATM is one of the largest exporters of home textiles in Pakistan with about 10% market share and total exports of US$205mn. It also owns one of the most well-known retail textile brands in the country, Ideas, the size and success of which are unmatched among other major textile companies with retail presence. Before the pandemic, GATM boasted 3yr sales CAGR of 20% and gross margins consistently over 20%. It is also a rare textile company due to sector-leading historical ROEs of 16% (average 20% during FY18-19). Recently, the company has capitalized on the rise in demand for Health textiles (masks, PPEs etc.), which is also a high-margin category. Future triggers include the long-pending listing of Ideas (which contributes c.40% of its operating profits). The IPO was slated for 2020 but was thwarted by the pandemic as lockdowns had hurt GATM’s Retail segment the most. The stock is trading at a FY21f P/B of 0.9x (despite high ROEs) and EV/Sales of 0.8x.

ILP: Dominant position in socks and now expanding

ILP is one of the largest suppliers of socks and other hosiery in the world. Note that socks are an essential wearable, as garments overall have a grim outlook while Europe and US continue to grapple with the pandemic. Besides this, we highlight that ILP has the highest gross margins of over 30% (pre-Covid-19) among the major listed textile companies. The company was listed in 2019 and used the IPO proceeds to diversify into denim. The denim facility came online in December 2019 and contributed 3% (nearly PKR1.0bn) to ILP’s revenues in only the six months of operations. The stock is trading at a FY21f P/B of 2.9x and EV/Sales of 2.0x, where the premium valuations can be justified by ILP’s dominant position in a single category and resultant high profit margins, in our view.

We reinstate coverage on the Pakistan Textile sector with an Overweight stance, where growth prospects have visibly turned around. We initiate coverage with Buy ratings on Gul Ahmed Textile Mills Ltd (GATM, June 2021 TP of PKR50.0/sh) and Interloop Ltd (ILP; TP of PKR80.0/sh).

(Intermarket Securities Limited.)

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