July 10, 2023

Pakistan Market Savvy

Abdul Hadi
Tel: (+92-304) 8326499; (+92-21) 35822822
[email protected]
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Textile: Local Cotton at 6-month low

Cotton price in local market has tumbled to six month low of Rs17,000 per Key Data
maund, while it is down 27% from peak of Rs23,200 per maund during FY23. Sector Textile
Last year, the devastating floods and record adjustment in Pak rupee against the Current Maket Cap. (Rs bn) 347
greenback took prices to peak levels. Current Turnover (mn sh) 5.3
We believe that falling local cotton prices is a blessing for local textile firms at a Current Traded Value (Rs bn) 0.1
time when electricity and gas tariffs are expected to further rise in coming days. 3m 6m 12m
Avg. Maket Cap. (Rs bn) 331 328 351
Local cotton prices anticipated to remain low this season Avg. Turnover (mn sh) 5.5 4.8 6.2
Last year, cotton prices started to increase from average Rs17,000 per maund Avg. Traded Value (Rs bn) 0.2 0.1 0.1
during July to Rs23,200 per maund during August (average cotton price of Source: PSX, Sherman Research
Rs18,500 per maund during 1HFY23). This is the duration in which most of the
manufacturers procure cotton. Just to recall, Pakistan procures 65-70% of the Local Vs International Cotton Prices
cotton from local market while meets the rest of their demand through imports. (Rs'000/maund) (US$/lbs)
With sharp rupee devaluation against the US dollar and devastating floods, 24 1.4
cotton prices remined inflated in the local market during FY23. 21 1.2
18 1.0
However, the trend is reversed in last few days after stability in foreign exchange 15 0.8
market following the IMF program announcement, along with the expectations 12 0.6

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of bumper cotton crop this season amid absence of any major flooding so far.
Higher input and finance cost to dilute impact of cotton prices
Local Cotton Prices Intl. Cotton Prices
Assuming cotton prices to remain at current levels, procurement cost for local Source: PBS, Sherman Research
cotton would be Rs70-80bn lower than last year, however, with export
refinancing rate rising by 6ppt YoY to 19% may offset the impact declining cotton
prices as finance cost may increase during FY24. Moreover, upward adjustment
in electricity tariffs and declining per unit export prices may further limit
improvement in net margins. Page 2
Exports to decline by 15% to US$16.5bn Group Wise - Textile Exports
In-line with recent trend, we estimate textile exports to decline by 15%YoY to (US$ mn) 11MFY22 11MFY23 D%
Knitwear 4,646 4,045 -13%
US$16.5bn in FY23. In segregation, major textile export groups namely knitwear, Readymade Garments 3,536 3,172 -10%
bedwear, readymade garments and cotton cloth have all shown double digit Bed Wear 3,009 2,451 -19%
decline in 11MFY23, on the back of global economic slowdown (amid high Cotton Cloth 2,237 1,859 -17%
Towels 1,020 912 -11%
interest rates) and decline in international cotton prices. However, despite a Cotton Yarn 1,113 737 -34%
13%YoY decline in the value of knitwear exports, their volumes have improved Other Textile Materials 693 657 -5%
by 9% during the period under review. Madeup Articles (Excl.Towel) 780 635 -19%
Art,Silk & Synthetic Textile 422 379 -10%
ILP remain an ideal bet in textile Tents,Canvas & Tarpulin 99 126 27%
Yarn Other Than Cotton Yarn 61 41 -33%
Declining cotton prices are likely to bode well for Interloop Limited (ILP), which is Raw Cotton 7 13 104%
Pakistan’s largest exporter in the knitwear segment. Assuming local and Cotton Carded or Combed 2 1 -39%
Total Exports 17,624 15,030 -15%
international cotton prices to remain the same, procurement cost for the Source: PBS, Sherman Research
company may remain lower by 9-10% compared to average prices during FY22,
we believe. Moreover, with company’s lower reliance on energy (energy cost
Textile Exports
constitute around 15% of conversion cost), the company is least exposed to
(US$ bn)
upcoming revision in the energy tariffs compared to other major textile 20
exporters.
15

10

0
2018 2019 2020 2021 2022 2023E
Source: PBS, Sherman Research

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Sherman Securities employs a 3-tier rating mechanism i.e. Buy, Hold and Sell, which is based upon the level of expected return for a specific stock. Time horizon is usually the
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Rating Interpretation
© Copyright 2023, Sherman Securities (Pvt.) Ltd. Buy ≥ 24.0%
All rights reserved. Sell ≤ -10.0%
Hold Between -10.0% to 24.0%