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Textiles: Revised export package offers limited respite

In a bid to ease-off external sector woes, the GoP introduced upgraded measures extending further relief to export oriented sectors, imposing import duty on a wide range of discretionary goods. In this regard, the GoP has approved a revised export package for FY18, removing growth barometers for 50% export incentives, while adding a further 50% incentive on registering 10%YoY accretion in exports over the period. Also announced was an additional 2% duty drawback on exports made to previously untapped markets i.e. Africa. We view the said development as a positive for the export oriented sectors, particularly for textile and apparel (which holds around ~60% share in the total exports). While highlighting weak domestic textile fundamentals, we expect the export package to offer limited respite. To some extent, incentives in the package could counter margin deterioration (seen in FY17) from rising cotton prices (19%YoY in FY17), topline stagnation due to subdued global demand and rising fuel & power costs. Weighing on a standalone basis, the unconditional export incentives translate into incremental earnings of PkR1.8/2.81/sh for NCL/NML, while assuming NCL/NML to register 10%YoY growth in exports, the export incentives would add PkR3.96/6.02/sh to the bottom line.

Export package to rescue declining margin: In a move to restrict widening CAD (+2.02xYoY in 2MFY18), the GoP has revised the export package for FY18, allowing 50% of export incentives without any condition while maintaining 10%YoY export growth condition to qualify for further 50% of the export incentives. Also, the gov't announced an additional 2% duty drawback on the exports made to the unexplored markets i.e. Africa. In the view of dwindling margins in the textile sector, revised export package would offer limited respite to the textile sector, extending support to margins in the range of 2.5-3.5%. (NML/NCL gross margin in FY17 without export package support stands at 9.4%/8.65% vs. 13.1%/9.5% in FY16). Analyzing on a standalone basis, the unconditional export incentives translates into incremental earnings of PkR1.8/2.81/sh for NCL and NML, while assuming the NCL/NML to register 10%YoY growth in exports, the incentives would add PkR3.96/6.02/sh to the bottom line.

NCL; set to reap benefits of planned initiatives: Standing apart from overall weak textile fundamentals, NCL is all set to integrate and fortify efficiencies achieved through upgradation and automation of machinery. Following revision in the export package together with partial completion of ongoing BMR activity, we tweaked our FY18F/FY19F earnings estimates upward for NCL by +12/+5%. This consequently result in revision of our SOTP based TP to PkR69.26/sh (previously at PkR61.92/sh).

Investment perspective: Amongst the textile sector, we prefer NCL on the back of 1) efficiency gains achieved through low cost in-house power generation and up gradation of textile (which are yet to be reflected in earnings growth), 2) support from PM's export package (providing cushion against stagnant product prices), and 3) aggressive diversification strategy (recently opened two multiplex cinemas). At current price levels, the stock is trading at an attractive FY18F P/E(x) of 6.3 (vs. historic 3 yr. P/E(x) 10.48), offers a forward D/Y of 6.5% and has upside potential of 15% to its SOTP based TP of PkR69.92/sh. Accumulate!

AKD Research