Textile stocks gain investor interest on strong Q2 and focus on emerging areas

 Textile stocks, mainly cotton and fabric manufacturers, have been attracting investors interest in recent times at the bourses.

According to analysts, strong Q2, momentum in domestic economic activity  and focus on emerging areas such as technical textiles and home furnishing have led to an interest in textiles companies. 

Top performers such as Trident, Welspun, Raymond, Gokaldas Exports, Indo Count Industries Ltd have seen a turnaround in their fortunes. 

Shares of Trident opened at Rs 36 (- 2 per cent from previous close) on the BSE and have gained 15 per cent in the past three months. Gokaldas Exports opened at Rs 800.65 (+1 per cent) and delivered 59 per cent returns during the period. Raymond was almost flat at Rs 1,861.70 and has lost five per cent in three months, while Indo Count gained 38 per cent and opened at Rs 287.10 (near its 52-week high of Rs 302.05). 

ICICI Securities and Edelweiss have initiated a Buy recommendation for Gokaldas Exports keeping the target price at ₹973 and ₹933, respectively. Axis Direct recommends a Buy on Welspun with a target price of ₹160. 

A report released by FICCI-Wazir Advisors in October noted that Indian textile and apparel market size was around $165 billion in 2022, including the domestic market of $125 billion. Given the long-term positive outlook, the market size is projected to grow at a 10 per cent CAGR to reach $350 billion by 2030. 

Industry sources said though the production of cotton, the key raw material, is likely to be lower, textile firms are expected to manage the situation through blends. Also, prospects for cotton production in the US are bleak which can result in a big opportunity for India to capture a greater share in global market. Indian textiles is expected to manage the lower crop with a good carryover stock.

Brushing aside the headwinds such as Covid pandemic, global recessionary trends, Russia-Ukraine war, volatility in raw material prices, inflation, etc, the industry is expected to witness significant growth. Though there were reports of sluggish export orders, piling up of inventories ahead of the Fall season, the broader picture seems to be a bright one. 

Abhishek Jain, Head of Research, Arihant Capital, told businessline: “Recently, we’ve observed notable improvements in inventories with several large companies boasting of strong order books which is a positive sign. Despite the recent rally over the past six months, there remains a sense of optimism for the textiles sector. Additionally, the reduction in US channel inventories and consistently decent retail numbers for the past few weeks, if sustained, can provide much-needed momentum. The industry has also witnessed consolidation and many players are confident in delivering good numbers.” 

Bright prospects 

According to CARE Ratings, the destocking at the retailers-end in the US and key export markets amid the recessionary trend in Europe and the cut-down on non-essential expenses in the US due to the high inflation has impacted the demand. With the destocking at the retailers-end coming round, the home textile industry witnessed an increase in order flows from the US during H1-FY24. 

The rating agency believes the demand is expected to improve in FY24 on account of the uptick in orders as the inventory levels at the retailer-end normalises, which will also aid in the improvement of the operating margins due to the improved operating leverage attributed to higher capacity utilisation. 

According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the textiles industry faced headwinds in FY23 due to weak demand and high input prices. Global growth slowdown impacted demand. “But the situation is improving now and divergent trends are visible in the industry. Cotton yarn and fabric manufacturers are doing well. Export orders are good for this segment. This is visible in the Q2 results of companies like Welspun India which has posted good top and bottom lines and optimistic commentary.” 

The government’s measures ranging from giving a push to technical textiles, the PLI scheme, launch of mega textile parks under the PM-Mega Integrated Textile Region and Apparel (PM MITRA) scheme, Silk Samagra scheme to boost sericulture and silk industry, SAMARTH Yojana aimed at skill development, to signing of FTAs with many countries, etc have helped. 

Raw material prices 

One of the advantages that textile mills enjoy is that prices of raw materials have stabilised. Jain dubs this as a favourable factor which can work wonders for the textile sector. 

JM Financial projects a stronger 2HFY24 demand outlook for the textile sector. “Reduced cotton prices (down over 40 per cent in 12 months) coupled with improving scale in H2 2023 could lead to a material margin boost. With UK FTA ($1billion additional opportunity for India) in the horizon and possibility of “China+1” picking pace can significantly re-rate earnings and multiples for the space,” a note said. 

India is targeting an average GDP growth of over 7 per cent per annum to become a $5-trillion economy by 2025-26. As the world’s fifth-largest economy with a population of 1.4 billion people, and with demand for home products increasing at 20 per cent per annum, business growth opportunities are galore for textile sector and the stocks too are likely to perform well. 

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