Karachi, July 30, 2021 (PPI-OT): Pakistan Textile: Spinners turning it on!

Pakistan’s textile industry is in a macro sweet spot amid rampant demand in domestic market and internationally as global economies experience ‘return to normal’ phenomenon pushing up orders for apparels (US apparel imports +26.8%YoY in 5MCY21, Europe yet to pick pace).

Shift in demand fundamentals has turned the table in favour of spinning players where lack of investment in infrastructure in yesteryears resulted in utilization levels of existing players closing in at full capacity, while low cotton output (7.0mn bales in FY21 – the lowest in history) pulled up domestic cotton prices +54.4% YoY in FY21 and yarn prices.

Spinning sector posted earnings of PkR2.8bn in 3QFY21 compared to loss of PkR60.3mn in 3QFY20 and PAT of PKR 269.1mn in 3QFY19. Earnings outlook still remains promising where strong local yarn demand by downstream players will buttress earnings in near term while in medium run, potential shift in material sourcing by Western textile manufacturers from China’s Xinjiang province would bolster profits (India’s share in US yarn imports +1.7ppt in 5MCY21).

Recent duty relaxations are unlikely to materially alter renewed fundamentals for spinning players, being mostly related to filament yarn as opposed to cotton yarn (major produce), where NCL stands as our preferred play. Overall, the sector is currently trading at a P/E of 3.02x where price discovery going forward cannot be ruled out.

With regards to the above, in today’s daily, we identify Spinning players (based on specific FF and GP criteria) where valuation remains undemanding and potential alpha can be generated.