Spinning Sector Overview

SPINNING | BUSINESS RISK • The business risks of the sector have been categorized as sales risk and operating risk (i.e. Cost structure). • The spinning sector's sales comprise both export & local sales. PACRA . . . • . Pakistan exported yarn amounting to PKR ~155bln in FY20 (FY19: PKR 153bln). The sector's exports are facing pressure for a few years due to low value addition and competition. This is reflected in relatively lower prices. Export prices declined by ~5.6% in last 5 years. This has resulted in declining exports in dollar terms, although exports remained relatively stable in volume over these years. The demand was further impacted during the COVID- 19 pandemic and subsequent lockdowns. The demand for local sales also remained relatively stable over the years except for FY20 due to COVID-19. The prices of local yarn increased on average by ~70-80% since FY16 on the back of robust local demand as rupee depreciated, improving margins on local sales. The gross and operating margins of the sector remain low (~5-6 % gross margin), reflecting commoditized nature of the products and low economies of scale. Large manufacturers enjoy better gross margins ranging between 8-12%. The sector is protected by favorable duty structure with yarn imports subject to up to 16% duty. With commoditized output and protection by duty structure, the duty withdrawal will impact the sector significantly although its probability remains low. Overall, the business risk of the spinning sector remains moderate on the back of declining export prices but stable export quantity, stable local demand and improving local yarn prices, resulting in better margins lately. However, the impact of COVID outbreak can impact demand and margins. 18 Source: PBS, PACRA Database

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