Rupee depreciation puts textile industry in hot waters

The current rupee depreciation against the dollar is expected to bode well for the margins for local textile manufacturers during the outgoing FY12, observed the analysts at InvestCap Research.
However, they said, compared to regional textile exporting countries’ currency depreciation, the Pakistani textile companies were facing a soar-throat competition in margins term.
With PKR depreciation of 4.1%YoY against USD during FY12, Bangladeshi Taka has depreciated by massive 11%YoY while Indian Rupee also declined by 10%YoY against USD.
“On the international front, comparatively low depreciation of PKR against USD pose bit steady picture but yet still fall on uncompetitive side for local textile industry,” viewed Abdul Azeem, an analyst at InvestCap. On both local and international fronts, cotton prices have declined by 35%YoY and 32%YoY, respectively. The decline in prices at large will intend to keep the gross margins of textile margins stable at 16% this fiscal year.
However as far as cotton production is concerned, local bumper cotton crop of 14.8mn bales has kept the cotton prices below Rs6000/maund in local markets during FY12. While on international front, cotton production is estimated to be at 123mn bales (1 bale = 480lb), increased by 5.7%YoY till May 12 estimates according to U.S Department of Agriculture (USDA).
However, during the FY13, USDA has estimated the cotton production to decline by 5%YoY to 116.7mn bales; however with 4 years high ending stock of 66.9mn bales this year, cotton prices on international front are expected to remain stable during FY13.
With the stable margins going forward we recommend buy on NCL and NML with the target price for Dec-12 Rs26/share and Rs62/share respectively.
The NCL is trading at PE multiple of 4.2x with dividend yield of 8.9% for FY13 similarly, NML is trading at PE multiple of 4.7x with dividend yield of 4.5% for FY13.