Building an iron grip: Textile sector on KSE – things changing for better

By Kazim Alam, The Express Tribune

KARACHI: Over 29% of all companies listed on the Karachi Stock Exchange (KSE) may belong to the textile sector, but a majority of these stocks are illiquid. This is verified by the fact that only four out of the 100 companies that form the KSE-100 Index – the key benchmark of the Karachi bourse – are textile companies.

According to Arif Habib Investments Executive Vice Chairman Nasim Beg, the disproportionately high number of textile companies listed on the KSE is attributed in large part to the ‘licence raj’ of the years gone by.

“Back in the day when the country faced severe foreign exchange shortages restricting the import of heavy machinery, the government required textile and sugar mills to get listed. Since these companies enjoyed a near monopoly, the government wanted them to share their profits with the public at large,” he said, while speaking to The Express Tribune.

Subsequently, most of these textile companies allegedly started making off-the-book profits, which led to their stocks becoming illiquid.

However, the situation is changing for better of late. According to AKD Securities CEO Muhammad Farid Alam, many textile companies listed on the KSE – but not on the investors’ radar so far – now merit attention because of their high liquidity, dividend payouts and a strong results outlook.

A recent research report compiled by AKD Securities says that the price-earnings multiple of a select group of 11 textile companies listed on the KSE remained 4.3 in the first half of fiscal 2013. In contrast, the three-year average of their multiple had been only 2.2. Similarly, in terms of price performance, the year-on-year increase in the first half of fiscal 2013 has been a staggering 216%, the report says.

Pakistan’s total textile exports were Rs718 billion from July 2012 to January 2013, up 18.3% from the corresponding seven-month period in 2011-12. Interestingly, exports of cotton yarn alone spiked 44.3% to Rs119 billion over the same period, showing a disproportionate rise in yarn exports in total textile exports.

No wonder, six out of the 11 companies in AKD Securities’ textile sector snapshot are spinning mills while the rest are composite units with yarn production being one part of their manufacturing operations.

Although the recent better performance of the textile sector can be attributed to several reasons, preferential tariff arrangements with the European Union – Pakistan’s largest trading partner – have been instrumental in increasing the earnings of efficiently run textile companies.

The Generalised Scheme of Preferences (GSP) currently allows Pakistan to export textile products to the EU under a preferential tariff regime, which was extended unilaterally by the 27-member union of European nations to help developing countries increase their trade capacity.

However, GSP Plus – which is going to come into force on January 1, 2014 – requires that Pakistan ratify and implement 27 international conventions on human rights, labour rights and governance. Pakistan is trying to get the GSP Plus status, and if its efforts bear fruit, most of its textile products will gain access to the EU without any duties or quota restrictions.

Another tariff concession that helped Pakistan’s textile sector gain momentum in recent months is Autonomous Trade Preferences (ATP), which came into effect in November 2012 in response to the floods of 2010 and 2011. This scheme, which is going to last until December 31, 2013, allows Pakistan to export 75 products, mostly textile, to EU member countries without any duties.

“With the ATP already in place and GSP Plus status on the horizon, the textile sector is poised to post strong growth in coming years, particularly in the high value-added segment,” the report said.

Published in The Express Tribune, March 18, 2013.


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