AKD Quotidian about — Textiles: GSP Plus in the news!

Karachi, November 06, 2013 (PPI-OT): The EU Committee on International Trade has reportedly approved the list of countries applying for the EU GSP Plus Status including Pakistan.

According to AKD Securities in view, the GSP Plus status for Pakistan will result in an increase in textile exports particularly in the higher value added segment of the textile chain whereby fabrics, readymade garments and made-ups will receive duty free access to the EU market. However, growth in total textiles exports under the GSP Plus scheme is capped at 14.5% p.a.

Although this may limit sector wide growth in EU export revenues to 14.5% from base-case estimates, individual companies that manage to increase their proportional share in exports to the EU should emerge as relative winners.

While the overall textile sector is likely to benefit, AKD Securities flags NML as the key potential beneficiary of the GSP Plus status due to higher presence in the high value added chain, capacity expansions in stitching, processing and weaving in anticipation of the GSP Plus Status and a secure presence in the EU market. NML offers an attractive upside of 41% to AKD Securities Jun’14 TP of PkR131/share indicating a Buy stance.

GSP Plus lined up! The EU Committee on International Trade has reportedly approved the list of countries applying for the EU GSP Plus Status including Pakistan. In this regard, AKD Securities channels checks suggest that the EU Parliament will vote to formally approve GSP Plus status for the applying countries on Dec 6’13, with commencement from Jan 1’14. In a nutshell, this will eliminate import duties on more than 6,000 items thereby helping to make Pakistan more competitive in the EU marketplace.

Considering Pakistani exports to Europe totalled US$6.1bn in FY13 (~25% of the country’s total exports), this should have a significant +ve impact on overall exports, particularly Textiles. In this regard, according to the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA), total textile exports to the EU can increase by US$580mn-US$700mn/year (increase of 9.5%-11.5% vs. FY13 exports).

Drilling deeper: The GSP Plus status for Pakistan will likely result in an increase in textile exports, particularly in the higher value added segment of the textile chain. That said, according to channel checks, home textiles are not likely to benefit significantly from the arrangement as Pakistan already has a high market share in the segment (~6% which precludes benefits under the new GSP Plus regime). Nevertheless, fabrics, readymade garments and made ups should end up as key beneficiaries.

There is a caveat however – growth in total textiles exports under the GSP Plus scheme is capped at 14.5% p.a. Within this backdrop, individual companies that manage to increase their proportional share in exports to the EU at should emerge as relative winners. In AKD Securities views, most of the benefit under GSP Plus should be delivered from volumetric sales as the bulk of decrease in unit prices post duty elimination is passed onto end-consumers.

Investment perspective: While the overall textile sector is likely to benefit, AKD Securities flags NML as the key potential beneficiary of the GSP Plus status due to a higher presence in the higher value added chain (32% revenues originating from the Weaving and Garments segments), capacity expansions in stitching, processing and weaving in anticipation of the GSP Plus Status and a presence in EU market (22% of total revenues originating from the EU).

AKD Securities believe that NML will be able to grow exports to the EU at a rate higher than 14.5%, with its capacity expansions coming into play. At current levels, NML offers an attractive upside of 41% to AKD Securities Jun’14 TP of PkR131/share where AKD Securities incorporate export growth CAGR of 9.3% over the next 5yrs. Any change to this assumption, post management feedback, may stand to increase AKD Securities EPS estimates and TP going forward.