Akd Securities Limited.
Following China’s move to devalue CNY against the US$, global currency markets have faced similar depreciation in currency parities due to risks of competitive devaluation across the region.
Alike other regional currencies, PKR also followed a similar trend where the PkR/US$ parity has lost 2.27% in the interbank market since.
Additionally, due to weak exports, domestic textile players continue to lobby for further currency devaluation to stimulate exports.
Based on our sensitivity analysis, every 1%PkR/US$ depreciation over our current assumption, would improve NML’s FY16 / FY17 bottom-line by 0.6%/1.2%, ceteris paribus. That said, looking at the demand-supply equation, worldwide consumption growth rate and global production for cotton is likely to remain tepid, which is expected to extend current issues ranging from piling up of global yarn stock to reduced yarn margins (intense competition and lower demand).
Despite having an Underweight stance on the textile sector, we prefer NML with a Jun’16TP of PKR166/sh.
Would CNY devaluation help?
USDA: In its latest release of “World Market and Trade” for Sept’15, USDA reveals its downward revision of worldwide consumption growth rate and global production for cotton primarily underpinned by lower demand expected from Asian Region (India, Pakistan, Indonesia & Thailand). While, the report flags India and China to end up MY2015/16 as the largest cotton producers with ~29mn and ~26mn bales, respectively, it also reduces global demand by 9%YoY to ~109mn bales. USDA highlights piled up global yarn stock and reduced yarn margins on the back of intense competition and lower demand as key problem areas for global cotton market. However, during MY2015/16, Pakistan’s production is expected to total at ~10mn bales (slightly down from previous year).
Cotton Prices: Globally, cotton prices depict a slight recovery in the last few months with COTLOOKA inching up to ~USc72/lbs in Sept’15 versus ~USc65/lbs in Jan’15. However, during the last 9 months (Sept’15 included), cotton prices on average in Pakistan have traded at a discount of ~21%, settling at ~PkR4,835/maund in Sept’15 (KCA Official Rate) against PKR5,042/maund in Sep’14. With pressures from the demand side along with expected hike in global inventory levels, we expect cotton prices to remain range-bound thus constricting local players’ margins.
Cotton arrivals – PCGA: As per the statement issued by Pakistan Cotton Ginners’ Association (PCGA), cotton arrivals decreased by 24%YoY in the season to ~1.34mn bales till 1st Sept’15. Decline in the arrivals was mainly led by Punjab region settling at ~0.44mn bales where heavy rains and flooding alongwith the ongoing farmer issues (higher raw material costs, fungal and viral crop diseases) lowered the arrivals by 45%YoY. Similar trend was witnessed in Sindh and Baluchistan with cotton arrivals going down by 6%YoY and 33%YoY, respectively.