Karachi: While textile exports continue with a strong showing – up 26%YoY to US$2.3bn, downside risk to cotton prices pose risk to overall textile export growth.
According to AKD Securities, within this backdrop, its sensitivity analysis for textile exports based on regressing 1) international cotton prices, 2) PkR-US$ parity shows that for every US$0.25/lb change in cotton price, Pakistan’s overall textile exports are likely to change by an average of -US$600mn. Over a test range of US$0.75/lb to US$1 .50/lb, full year FYI2F textile exports can range between US$10.7bn- US$1 3.Obn with the PkR/US$ parity averaging PkR9O (AKD Securities forecasts a parity of PkR91.5/US$ by June’12 end). International cotton prices maxed out in Mar’11 and were down by 6%MoM in Aug’11 to average US$1.14/lb (CotlookA index). For the full year FY12, AKD Securities expects international cotton prices to average US$1/lb (PkR6,350 per maund after applying a 20% discount) leading to full year textile exports of US$11 .5bn, down 12%YoY. AKD Securities retains NML as AKD Securities’ preferred textile proxy where lower cotton prices should support value added margin expansion. AKD Securities recommends a Buy stance on NML with a target price of PkR69/share offering an upside of 42% from current market price.
|Textile exports sensitivity to cotton prices (R2 0.75)|
|Cotton Price (US$/lb)||2.00||1.75||1.50||1.25||1.00||0.75||0.50|
|Textile exports (US$/lb)||14.67||13.88||13.10||12.32||11.53||10.75||9.96|
|Source: AKD Research|
Cotton price outlook FY12: Cotton prices in recent times have been volatile as initially expectation of a bumper global cotton crop led to a steep fall in cotton prices. Int’l cotton price was down sharply by 55% from its peak level in Mar11 to US$1.1/lb in Aug’11, its recent low. However, there has been a slight recovery in cotton prices recently as tropical storms in US and floods in Pakistan have cut cotton crop prospects for the world’s third and fourth largest producers. For FY12, AKD Securities expects int’l cotton prices to average at US$1/lb, down 56% from FY11, but would still be significantly higher than average cotton price of the last decade. Similarly, AKD Securities expects domestic cotton to average at PkR 6,350/maund after applying a 20% discount to int’l cotton price.
FY12 textile exports to likely fall in US$11 -US$l2bn range: Value of textile exports is mostly contingent upon cotton price trend and PkR/US$ parity where PkR depreciation exporters room to undercut competition. AKD Securities forecasts textile exports for FY12 to stand at US$11.5bn (-12% YoY) where AKD Securities’ forecasting technique is based on regressing expected average international cotton prices of US$1/lb in FY12 and an average PkR/US exchange rate of PkR9O. Based on AKD Securities’ cotton price sensitivity on textile exports, a US$0.25/lb change in cotton price is likely to lead to an average change of -US$600mn in exports.
2MFYI2 textile exports up 26%YoY: Textile exports for 2MFY12 increased by 26%YoY to US$2.3bn as increase in volumetric exports coupled with higher cotton prices underpin export growth. On a segment wise basis, cotton yarn and cloth exports grew by 35%YoY and 34%YoY respectively where AKD Securities attributes most of the growth to higher cotton prices. Encouragingly, exports of relatively higher value added categories like Knitwear, Bed Wear, and Garments also recorded double digit growth, where value of such exports is not contingent upon cotton price trend. For Aug’11, textile exports were down 4%MoM to US$1.1bn as the combined effect of the slide in cotton prices and slowdown in volumetric exports lead to the fall in sequential exports. International cotton prices had been on a persistent decline since Mar’11 and were down by 6%MoM in Aug’11 to average US$1.14/lb (CotlookA index). In the same vein, cotton yarn and cloth exports were down 10% and 12%MoM respectively, however Knitwear and Garment exports were up by 3% and 20%MoM respectively.
NML looks very attractive at current levels: Lower cotton price relative to last year is going to be a bonus for NML given that it would improve margins of its value added segments, where AKD Securities would like to highlight that despite the recent fall in cotton prices, exports of value added segments (Knitwear, Bed wear, and Garments) are still strong. The scrip provides an attractive upside of 42% to AKD Securities’ target price of PkR69/share.