Case study by Caravel Management

We identified a leading textile company in Pakistan as a beneficiary of increased European Union (EU) trade quotas. The EU recently awarded Pakistan GSP+ status, which is awarded to developing countries who can demonstrate sound management of ESG issues and provides preferential treatment for trading with Europe.


As an exporter to blue chip global clothing and household goods firms, the company has a strong track record of supply chain compliance and as a result has the potential to materially increase garment exports to Europe.

We expect that the company will double garment production to 12.5 million pieces per year over three years, and that this will add 10% to revenue growth and 12% to gross profit. Consolidated gross margins are expected to expand from 15% to 16% given the higher margins of the European garment business.


Although there are no known cases of child labour throughout the company’s supply chain, the risk exists in Pakistan, as demonstrated by data from the International Labour Organisation. Failing to meet labour standards could compromise the company’s ability to export to Europe.

We model a downside scenario to reflect the consequences of potential supply chain issues. Compared to a base case of US$100 per share, the downside scenario produces a fair value of US$49 per share. Whilst a probability can be applied to the bear case to determine a risk-adjusted NAV, the value of this approach is to quantify the downside risk under a specific negative ESG-related event.

  • Downtime: Should labour issues come to light, we assume six months of downtime related to addressing these issues, based on historical occurrences at similar companies in the region. The base case revenue for the export segment of the company is halved, bringing the target price down by US$9 per share.
  • Lost contracts: We assume that the company loses one third of if its contracts as a result of child labour issues. As a result, the target price is brought down by an additional US$27 per share.
  • Higher personnel costs: Based on government penalties and historical occurrences, hiring new staff and compensating victims and their families were assumed to increase personnel costs by 10% in perpetuity. Accordingly, the target price is brought down by US$8 per share.
  • Corporate governance discount: Given the above events, we reach a new net asset value. We apply a 10% corporate governance discount to the NAV bringing down the price per share by a final US$7. This produces a bear case scenario of US$49 per share.

Caravel Management

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    A practical guide to ESG integration for equity investing

    September 2016