omc: no mention; hence safe - BMA Capital Management

TEXTILE
MARKETEIGHT
Budget Impact
Neutral
Sana I. Bawani
Textile Analyst
24
TEXTILE: VAT FABRIC-ATED!
June 7, 2010
Imposition of VAT stood as the foremost concern for the textile sector prior to
Budget FY11 announcement; hence a 3 month deferrel in the same is likely to
come as a relief for the sector. This is because the textile sector contributes
over 50% to the total export receipts of the country and is exempt from sales
tax. With the implementation of upcoming GST reforms, zero-rating would only
be restricted to exports while the local sales and their relevant input
transactions would be carged with VAT.
Tax credit for BMR costs
Tax credit of 10% for BMR costs is likely to be positive for the textile sector as
these companies undertake such activities to enhance their productivity. Tax
credit would further encourage these companies to keep their plants in up-todate
condition and produce quality products thus become competitive in the
international market.
Increase in FED on natural gas
A number of textile units run on gas-fired plants for which they have their own
captive power generation facilities. Natural gas is supplied to these plants at
PKR288/mmbtu. Budget FY11 has brought about an increase in the rate of
Federal excise Duty (FED) on natural gas from PKR5.09/mmbtu to
PKR10/mmbtu. Power costs account for ~10% of total cost of sales of such
companies thus the aforementioned gas tariff hike, though negative, will have a
minimal impact on the overall profitability. Also, minimum wage rate has also
been enhanced from PKR6,000/month to PKR7,000/month which is likely to
further exacerbate downward pressure on margins.
Outlook FY11E
Textile exports increased by 7% YoY to USD8,462mn in 10MFY10 with raw cotton
and yarn exports leading the way. Exports also benefitted from PKR/USD
depreciation of about 3.2% during the period resulting in higher revenues for the
sector. However, a weak PKR also led to 13% YoY increase in the import bill of the
textile products. Going forward, we believe introduction of BT cotton and higher
export prices for cotton and yarn would continue to encourage trade.
Furthermore, incentives such as zero-rated exports, availability of low cost
financing including export refinance (EFS) and Long-term Financing Facilities
(LTFF) and export rebates would continue to act in the favour of local industry.
At the same time, if Pakistan is awarded the General System of Preferences
(GSP) Plus status from the EU, textile products from the country would be even
more competitive in the international market.
Nishat Mills Limited (NML) stands as our pick from the sector. The stock
currently offers 38% potential upside to our SoTP based fair value of
PKR63/share.