Textile stocks have been soaring on the bourses over the last few days with some touching their 52-week highs on high expectations from the new textile policy. But this could be a bubble as most of the textile companies have not been fairing too well; the weak balance sheets of many are testimony to this fact.

Plagued with fiscal worries

“Two-thirds of the small textile stocks are in bubble zone, with some having shut down their textile business and others facing serious balance sheet issues,” said G Chokkalingam, founder of Equinomics Research and Advisory.

On Wednesday, share prices of companies such as Aarvee Denims and Exports, Banswara Syntex, Birla Cotsyn (India), RSWM, Sutlej Textiles and Industries touched their 52-week highs whereas Zodiac Clothing Company, Bombay Rayon Fashions, Hanung Toys and Textiles, Morarjee Textiles and Kitex Garments were volume gainers. Garden Silk Mills’s shares touched a 52-week high of ₹39.45, backed by robust volumes.

This, after the Cabinet approved incentives to boost job creation, manufacturing and exports in labour-intensive textile sector. The announcement is indeed positive for the sector, which has been witnessing pressure on exports due to receding labour cost advantage that India enjoyed compared to countries, such as Bangladesh and Indonesia. However, the rupee depreciation of late has somewhat mitigated the negatives.

Pankaj Sharma, Head of equities at Equirus, feels that the rally in textile stocks has been more sentiment-driven and it remains to be seen whether the policy will benefit all. Vinod Nair, Head — Fundamental Research, Geojit BNP Paribas, continues to like exporters within the textile space as the rupee has depreciated to 67 levels from 55 levels in the last five years.

Ruling at high PEs

Some frontline companies, such as Kitex Garments, Indo Count Industries, Welspun India, Maxwell Industries, KG Denim, Sangam (India), Himatsingka Seide, Soma Textiles and Industries, Donear Industries, Siyaram Silk Mills, RSWM, Celebrity Fashions and Nitin Spinners are trading at high valuations with price-to-FY16 earnings multiple between 8-26 times and price-to-book value ranging between 2-6 times.

Moreover, performance of companies such as Maxwell Industries, Soma Textiles and Industries, Donear Industries, Siyaram and Nitin Spinners has been disappointing in FY16.

Yet their share prices have zoomed between 3-114 per cent in the last one year. For example, Soma Textiles and Celebrity Fashions reported adjusted loss in FY16 but their stock price is up 23-34 per cent in the last three months.

As for the rest, while topline growth in FY16 has been disappointing for some, including Kitex, KG Denim and RSWM, the companies have shown improvement in net profit margin.

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