GSP plus likely gains for Pakistan textile industry – Topline Research
By: Muhammad Tahir Saeed,
+9221-35303331 Ext: 133
Topline Securities (Private) Limited
Textile is the backbone of Pakistan economy in terms of foreign reserves generation and job creation. Pakistan is working to get the Generalized System of Preferences (GSP) plus status in January, 2014 from EU which will allow textile products greater access to those markets. In FY13, textile contributed 53% to Pakistan total exports of US$24.6bn. Textile sector will gain as EU is likely to grant GSP plus status to Pakistan. Currently, any importer in EU who imports Pakistani textile products has to pay 11% duty, which makes Pakistani products costly. GSP plus will allow almost 20% of Pakistani exports to enter the EU at zero tariffs while a further 70% will be allowed to enter at preferential rates. Pakistan can earn an additional US$550-700mn per year through GSP plus status, according to our calculations.
Moreover, China’s share in the global textile has been reduced by US$30bn to US$270bn due to rising cost of production. This decline of China’s share in the global textile and clothing trade coupled with the anticipated GSP Plus status for Pakistan by the EU in early 2014 can most certainly prove to be a good opportunity for Pakistan textile industry.
Background of GSP
The sole purpose of GSP scheme is to help poor countries by making it easier for them to export their products to EU at reduce tariffs. In 2004, the GSP regulation was simplified from five to three arrangements: i) GSP standard ii) GSP plus and iii) Everything but arms & ammunition (EBA) in order to better focus on those countries which are most in need. The schemes will no longer end every three years, as it is the case now. Rather, it will last for 10 years which will give confidence to importers and exporters. The new GSP legislation has set enhanced monitoring of the conventions (every 2 instead of 3 years) and with scrutiny by the European Parliament.
GSP plus is not extended automatically, countries have to apply and will be qualified if they meet the eligibility criteria. GSP plus is extended to countries considered ‘vulnerable’ in their trade profile: i) exports to EU are not diversified, ii) 7 or less items make up at least 75% of their exports to EU, and iii) value less than 2% of EU’s total GSP imports. Pakistan qualifies to apply for GSP plus under the vulnerability criteria. However, trade preferences will be suspended if average value of import of textile items by EU from Pakistan exceed 14.5% of total EU imports over three consecutive years.
GSP plus offers preferences over and above the standard GSP by covering roughly 70 more lines mostly duty-free. Pakistan is currently eligible for the GSP plus status and most likely will get the status in January, 2014. Whereas its neighboring countries like India, Bangladesh are holding GSP standard which offer partial reduction in tariff and Afghanistan has EBA status which allow it to export everything but arms absolutely duty-free and quota-free.
NML will be one of the beneficiaries
Product mix of NML shows that garments and processed cloth contain almost 10% and 40% share in total sales of Rs52.4bn in FY13, with 22% and 14% gross margins, respectively. NML exports comprises almost 77% of total sales of Rs52.4bn out of which almost 27% goes to EU, so concessionary tariff from EU will bode positive impacts on the profitability of the company, especially value-added products. If textile exports increased by 20% after getting GSP plus status and margins remain stable at current levels then incremental exports sales of NML to EU will have an EPS impact Rs0.85-0.98. Currently we have a ‘BUY’ stance on NML that trades at FY14 PE of 5.5x.
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Auto industry sales show recovery from last year’s low base, with sales in 1QFY14 up 8% YoY to 32,841 units. Honda Atlas showed impressive performance (sales up +43% in 1QFY14) on the back of higher sales of Honda Civic which showed a massive increase of 111%. Whereas PSMC and Indus sales continued to show slow yet stable trend, with sales up 1.7% YoY (mainly led by higher LCVs sales) and 1.4% YoY (led by slight improvement in YoY Corolla sales growth on the back of low base). Going forward, we expect sluggish industry sales in 2QFY14, primarily due to Eid and seasonality/year‐end factor. Also Sales usually pick up from Jan‐13 onwards as people get bonuses and then highest sales witnessed in 4Q (mainly for Corolla and big cars) as rural income increases after wheat harvest