Karachi: NML’s price performance has been among the poorest recently, where AKD Securities attributes this weakness to lower cotton prices, global growth concerns and rapid currency depreciation of export competitors.
According to AKD Securities, while they doesn’t foresee a spike cotton prices ala FY11, they understand that international textile orders prior to the Christmas season have picked up while key competitor India has finally moved to arrest the INR’s slide through higher deposit rates to overseas Indians and relaxations for local companies to borrow from abroad. These two factors could potentially combine to lift sentiment for Pakistan textile exporters where AKD’s top pick remains NML. Having shed 5% over the last month, the stock trades at a forward PER of 4.12x. In AKD’s view, current price levels provide an attractive entry point where AKD’s target price of PkR73.48/share offers upside of 74%. Buy!
Textile Exports Trend: Textile exports for 4MFY12 were up by 3%YoY to US$4.2bn while for the month of Oct11, textile exports registered at US$1 bn, depicting slight growth of 4%MoM. Breakdowns of textile exports for 4MFY12 reveals growth in exports of value-add categories driving overall export growth with `Garments’ registering the highest growth of 8%YoY. Yarn exports, on the other hand, were down by 1O%YoY to US$499mn following a 12%YoY fall in volumes to 151k tons. In AKD’s view, growth in exports of value-added categories plays well for composite textiles particularly NML where historic precedence suggests margins of textile composites being least impacted by cotton prices.
PkR Outlook: According to recent data, 4MFY12 FDI has registered at US$340.2mn, down 28%YoY. At this run rate, FY12 will become the 4th consecutive year of FDI declines, particularly if the privatization process is not revived. Moreover, considering the Current Account is expected to slip into deficit in full-year FY12 (AKD estimate: 1.3% of GOP) and IMF/Paris Club repayments are to commence from early 2012, AKD Securities sees gradual reserves deterioration leading to renewed PkR depreciation (so far, the PkR has depreciated by a contained 0.29%FYTO vs. the US$). As much has been hinted by the IMP, which has advocated a “responsive” exchange rate in the aftermath of recent Article IV discussions. AKD Securities reiterates that its Jun’12 PkR/US$ parity projection is 91.5.
Something for Pak Textiles: While E and P and Power sector stocks should benefit from PkR depreciation, AKD Securities flags exporters (top pick: NML) as key beneficiaries. In this regard, although textile exports have started to flatten, AKD Securities understands that 1) orders for the upcoming Christmas season are strong and 2) key competitor India has raised to arrest the INRs slide (the INR has depreciated by 16%FYTD vs. the US$). Regarding the latter, India has raised bank deposit rates for overseas Indians by 25bps-lOObps and also relaxed requirements for local companies to borrow from abroad (interest rate cap on 3yr-5yr loans raised from LIBOR + 300bps to LIBOR + 350bps). As a result, the INR has appreciated by 0.4% today, halting a 7 day drop.