By: BMA Capital Management Limited
Pakistan textiles exports witnessed a dismal start to FY16 where 2MFY16 exports were down by 2%YoY compared to the corresponding period last year. One factor contributing to this decline was higher depreciation witnessed in regional currencies against USD in 2MFY16 where INR and CNY depreciated by 4% as opposed to PKR’s depreciation of 2%. The situation was stabilized in Sep’15 where PKR depreciated by 1% while the regional currencies witnessed an average appreciation of 0.4%. This led the 1QFY16 depreciation to reach 3% in 1QFY16 vis‐à‐vis regional currencies depreciation of 4% in the same period. The rupee depreciation was expected to mitigate the dwindling exports but it had little effect as 1QFY16 textile exports were down by 6%YoY compared to the corresponding period last year owing to tepid international demand due to Euro‐zone economic crisis. The recent depreciation of EUR by 6% against PKR holds repercussions for the demand of textile exports to EU. At a time where slowing global economic growth engine in confluence with depreciating EUR has taken a toll on Pakistan’s textile exports, 250bps lower effective interest rate in FY16 will provide some respite to the sector. Going forward, we expect volumetric increase in 2QFY16 exports owing to the seasonal impact of Christmas. However, the EU economic slowdown will affect the export demand and may limit the aforesaid recovery in export volumes. With textile sector’s outlook a bit hazy, we continue our preference for NCL due to i) 46MW coal fired power plant coming online, ii) 10% duty imposition on yarn and grey fabric and iii) potential increase in local demand for yarn by the value added sector, at our TP of PKR54/sh, rolled forward to Dec’16, offering an upside of 42% on the last day closing price.
PKR/USD Depreciation offering a level playing field: FY16 started off on a dismal note for the textile sector where 2MFY16 textile exports were down by 2%YoY. One of the factors contributing to this decline was higher depreciation of 4% witnessed in regional currencies against USD vis‐à‐vis local depreciation of 2%. The situation was stabilized in Sep’15 where PKR depreciated by 1% while the regional currencies witnessed an average appreciation of 0.4%. However, amid Euro‐zone economic crisis and tepid international demand, 1QFY16 PKR/USD depreciation of 3% failed to mitigate the dwindling export volumes (down 6%YoY).