Morning Call about Textiles and Autos – Arif Habib Limited

Karachi, December 12, 2013 (PPI-OT): 1) EU Parliament to vote on GSP+ today 2) Auto numbers in Nov’13

1) EU Parliament’s decisive vote today on GSP+ Status
The European Union (EU) Parliament held session with a debate on granting of the GSP+ Status to 10 countries for a period of 10 years.

According to Arif Habib Limited, Pakistan’s case for the granting of the status had been individually discussed in the parliament yesterday to a great length. The British members of the EU Parliament pointed out Pakistan as a strong case for the GSP+ Status as the country for the first time in its history has seen swift transition from one democratic elected govt to another.

They made another strong point to the Parliament that, Pakistan was granted the said status before in a period of military dictatorship and why not now when the country is enjoying simple-majority democratic govt. Arif Habib Limited believes even though the decisive vote by the EU Parliament is to be held today, with countries like Portugal clearly voicing their opposition, the majority vote is greatly expected to go in favor as discussed before in Morning Call dated 6th Dec’13.

EU Parliament rules out singling out individual countries
Another important development yesterday, which was passed, is that EU Council has decided against signaling out individual countries separately, and stick to its original stance of clubbing the 10 countries together. Also, a mechanism of a scorecard will be adapted in which, after a period of 3 years of the granting of the status, countries will be evaluated on the basis of performance of their 27 conventions (mainly human rights). It is pertinent to mentioned here that, Sri Lanka, in 2010, has only been a case of before where the GSP+ Status had been taken away due to severe human right violations during their Civil War conflict with the Tamil Tigers.

Recommendation
Arif Habib Limited believes the sense of optimism on GSP+ Status will prevail now with yesterday’s productive session in the EU Parliament and decisive vote expectedly in favor today, should further drive a rally in the Textile companies’ stocks. Under Arif Habib Limited’s coverage companies, Arif Habib Limited currently has a ‘Hold’ recommendation on NML with a TP of PKR130 (upside of 11%) at current levels, while on NCL, Arif Habib Limited has a ‘Buy’ call (29% upside) at current levels with a TP of PKR70. NML and NCL currently trade on relatively cheaper regionally forward FY14 PE of 5.6x and 3.9x, respectively.

2) Car sales down 4% MoM, up 7% YoY in 5MFY14
The Pakistan Automotive Manufacturers Association (PAMA) announced auto sales and production figures for the month of Nov’13. As per the latest numbers, car and LCV sales witnessed a 4% MoM decline to 9,488 units in Nov’13. Conversely, total car sales registered growth of 4% YoY in Nov’13, totaling 7% YoY in 5MFY13. Amongst companies, INDU’s sales dropped 16% MoM while posted a modest growth of 3% YoY in Nov’13 while HCAR’s sales also plunged 24% MoM and 8% YoY to 1,310 units in Nov’13. Only PSMC’s sales increased 8% MoM and 7% YoY to 5,989 units in Nov’13 while HCAR posted 26% YoY growth on a cumulative basis in 5MCY13.

Auto data           Nov-13      Oct-13      MoM      Nov-12      YoY      5MFY14      5MFY13     YoY
1300cc and above    3,604       4,378      -18%      3,649       -1%      22,821      21,333      7%
1000cc              1,262       1,258        0%      1,031       22%       5,871       5,348     10%
Less than 1000cc    2,568       1,972       30%      2,658       -3%      11,722      12,162     -4%
Total cars          7,434       7,608       -2%      7,338        1%      40,414      38,845      4%
LCV's + 4x4         2,054       2,300      -11%      1,816       13%      11,870      10,247     16%
Total               9,488       9,908       -4%      9,154        4%      52,284      49,092      7%

Company wise        Nov-13      Oct-13      MoM      Nov-12      YoY      5MFY14      5MFY13     YoY
PSMC                5,989       5,556        8%      5,584        7%      29,511      28,337      4%
INDU                2,183       2,595      -16%      2,125        3%      13,197      13,128      1%
HCAR                1,310       1,720      -24%      1,420       -8%       9,334       7,429     26%
Source: PAMA

Outlook
Arif Habib Limited still waits for the new AIDP (Auto Industrial Development Program), which is expected to be released soon (by the end of Dec’13) for clarity in the auto sector. The major expected highlights are expected to be: 1) reduction in the duties of CKD kits, and 2) the change in the import policy of used cars. Furthermore, some relaxation is also expected for the new entrants to facilitate them and make the local industry price-competitive coupled with emphasis on higher localization levels. Currently, Arif Habib Limited has a ‘Sell’ recommendation on PSMC with Jun’14 TP of PKR 128 while recently in a process of reviewing Arif Habib Limited’s case on INDU.