Textiles – Exports growth slows down while margins recover

Textile exports growth slows to 12% YoY: Textile exports during 2MFY12 stood at USD2.2bn, up 12% YoY, 30pp lower than 2HFY11 average growth of 42% YoY. Textile exports for Jul-11 declined by 15% MoM, primarily due to 20-22% fall in quantity of exports of cotton yarn and cotton cloth of 20-22%. Readymade garment prices for 2MFY12 declined by 5% YoY, likely due to deteriorating demand of value added products.

Declining local cotton prices amid international price correction: Local and international cotton prices declined by 36% and 38% respectively during 2MFY11 from 4QFY11 average mainly due to higher supply expected during 2012. However, local prices rebounded during Sep-11 due to damage of cotton crop of Sind post rainfall.

Improving margins during 1QFY12: 4QFY11 average running yarn primary margins declined by 56% QoQ. NML booked core EPS of PKR1.93 during 4QFY11, down 32% QoQ due to declining textile product prices. However, margins have more than doubled during 1QFY12 to date. Our discussion with company management suggests that NML’s average cotton procurement cost for FY12 so far stands at PKR6000/maund. With current yarn price levels, we expect NML’s spinning segment margins to improve QoQ in 1QFY12.

Textile exports slowdown to 12% YoY

As per recent data released by FBS, textile exports for 2MFY12 stood at USD2.2bn, up 12% YoY, reflecting a slowdown in growth as opposed to 42% YoY growth during 2HFY11. Textile exports for Jul-11 declined by 15% MoM, followed by 3% MoM decline in Aug-11 mainly due to decline in exports of cotton yarn and cotton cloth segment. Decline in Jul-11 exports of cotton yarn and cotton cloth segment was due to quantity decline of 20-22% amid stable prices. Price of Readymade garments’ declined by 5% YoY, which suggest slowdown in demand of value added products internationally.

Declining local cotton prices amid international prices correction

During 2MFY12, local cotton prices declined substantially by 36% to PKR6,140/maund from 4QFY11 average of PKR9,576/maund, on account of lower international prices and bumper crop expected during 2012 cotton crop season. International prices corrected by 38% to USD1.15/lb from 4QFY11 average of USD1.83/lb, due to expectations of abundant supply from major cotton producers of the world. However, recent rainfall in various parts of Sindh led to increase in prices locally as well as internationally. KCA’s spot prices’ discount to international prices has narrowed to PKR23/lb during recent period, which may reduce unit margins on textile items going forward.

Improving margins during 1QFY12

4QFY11 primary margins for spinning business contracted by 56% QoQ as yarn prices corrected by 20% QoQ in contrast to cotton prices which declined by 16%. Core EPS for NML during 4QFY11 is estimated at PKR1.93, down 32% QoQ, due to lower margins. Primary margins for NML would likely have declined primarily on the back of lower yarn and other textile product prices amid fixed procurement cost of PKR8000/maund. Running primary margin for yarn rebounded by 121% during 1QFY12 to date and is expected to lead to buoyant earnings for the spinning sector. Our discussion with company management suggests that NML has procured cotton during 1QFY12 for usage up to Nov-11 at an average cost of PKR6000/maund. With current yarn price levels, we expect the company to realize higher margins for spinning segment during 1QFY12.

Economic & Political News

Food export increases by 33.53% in 2months

The export of food commodities from the country during the first two months of current financial year registered an increase of 33.53% as against the export of same period last year. During the period from July to August 2011, country earned USD670.4mn by exporting different food commodities, which was recorded at USD501.9mn during the period from July to August 2010.

Demand supply gap widens for SNGPL network

Sui Northern Gas Pipelines Limited (SNGPL) is facing gap between demand and supply due to depletion of major gas fields supplying gas to SNGPL’s network. This gap between demand and supply is being bridged through curtailment to general industry, CNG, power and fertiliser sectors. He also said that Performance Test of Qadirpur Gas Field has started from 18.09.2011 and Dakhni gas field shall also proceed for ATA w.e.f 28.09.2011 due to which SNGPL shall be facing additional shortfall of approximately 80MMCFD.
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