The reduced purchasing power in key export markets, like the US, due to recession is expected to weigh on the order book of Indian exporters, and could in turn hamper the near-term earnings for the textile companies.
The beleaguered textile sector in Pakistan is grasping at straws seeking policy supports from the prime minister. The move has got experts hot and bothered about the scenario in India as well.
In its submission to the prime minister, the Pakistan Textile Mills Association has stated that international demand has weakened with the clouds of a worldwide recession looming close and, without price competitiveness, it is not possible for the industry to retain its market share.
The reduced purchasing power in key export markets, like the US, due to recession is expected to weigh on the order book of Indian exporters too, and could, in turn, hamper the near-term earnings for Indian textile companies.
Textile stocks have run up significantly in the past two years but ICICI Securities believes the current headwinds could, in the near term, outweigh the long-term structural story of the sector.
Arun Malhotra, Founding Partner and Portfolio Manager at CapGrow Capital Advisors, cautioned that Tiruppur which constituted more than 50 percent of the textile exports in FY2022 is in the middle of a slowdown and has seen demand sinking by 30-40 percent. He added that the slowdown is clearly visible in orders and exports.
Experts believe it is difficult to ascertain whether the slowdown in orders is a one-quarter or a one-year problem since the scenario is quite hazy.
On the contrary, Kush Ghodasara, an independent market expert, is of the view that impact of the US recession is largely discounted in the stock prices.
A sharp rise in cotton prices in the cotton season 2021-22, which is October 2021 to September 2022, has led to lower capacity utilisation (around 50 percent) by spinning mills and decline in exports, impacting players in the cotton textile value chain, said Malhotra.
Hence, due to supply shortages and disturbance in the container supply chain, domestic cotton prices touched at around Rs 1,00,000 per candy as compared with average price of Rs 46,000 in the 2020-21 season, he said.
According to Sunil Damania, Chief Investment Officer, MarketsMojo, rising shipping costs have also hurt the companies. “At the same time, export-oriented companies have seen reduced demand from the US,” he said.
The US is one of the key textile markets for India, accounting for 50 percent of home textile exports and 28 percent of apparel exports, ICICI Securities pointed out.
All these factors colluded to drive textile stocks into an unexciting 2022 after a stellar rally over the past few years.
Ghodasara is of the view that in 2022, the Russia-Ukraine war has dampened global exports and it was the main reason for this year’s slowdown. “But last few years have been positive because much of the unorganised business has been channeled towards the organised business,” he said.
There are other factors as well for the run-up in textile stocks in the past few years, like increased government intervention and favourable incentives such as Rebate of State and Central Levies and Taxes, the Mega Investment Textiles Parks scheme, and Production Linked Incentive for the Man-Made Fibre segment and the China Plus-1 theme.
“Many large global retailers diversifying their sourcing and reducing dependence on China and looking for a dependent partner in terms of nation and company. Further deleveraging of balance sheets by many players and increased capacity utilisation coupled with lower raw material prices have been favourable, triggering a rally,” Malhotra said.
Financials
On a consolidated basis, KPR Mill achieved its highest ever quarterly revenue of Rs 1,605.0 crore in Q1 of FY23 with an on-year growth of 71 percent, while profit after tax increased by 35 percent to Rs 226.7 crore. The company’s operating margin in the quarter came in at 24.2 percent from last year’s 27.8 percent.
Meanwhile, home textile company Trident’s total income rose 13 percent YoY to Rs 16,717 million in Q1 of FY23 and net profit was up 39 percent to Rs 1,238 million. However, its EBITDA (Earnings Before Interest Tax Depreciation and Amortization) shrunk to 15.5 percent in June quarter from 25.8 percent in the corresponding period last year.
Page Industries, which is the exclusive licensee of Jockey International Inc and Speedo International, also clocked an all-time high revenue and net profit in the first quarter of the current fiscal. Its revenue came in at Rs 13,413 million, up 167 percent YoY while profit after tax stood at Rs 2,070 million, up 1791 percent YoY.
At a comprehensive level, with a longer-term perspective, the textile sector is slated for robust growth on the back of policy support, access to priority capital and resurrection of aggregate demand globally. However, the sector remains vulnerable to near term challenges, according to Nirav Karkera, Head of Research, Fisdom.
Many companies operating in the home textile space exited the last financial year on a healthy note on account of recovery in exports and realisations. Going ahead, margins in the segment may witness pressure from factors like elevated feedstock prices, subdued demand from import destinations as an effect of the ongoing macroeconomic upheaval and supply chain-related challenges, Karkera explained.
The upcoming quarter will witness commissioning of committed capital expenditure while holding back on any fresh expansion. On the profitability front, gross margins across segments of the industry is expected to remain under pressure reflecting a muted to negative impact on earnings, he believes.
ICICI Securities said that the recent commentary from global retailers suggest multiple headwinds in the near term with respect to the demand and costs. Excess inventory holding by many global retailers may impact near-term demand, which could lower order flows to sourcing partners across globe, including Indian apparel and textile suppliers.
Further, higher logistics cost and higher unit cost is likely to make it difficult for sourcing partners to pass on the higher raw material costs, thereby hurting their margins.
As a sector, there are good structural tailwinds like shifting of manufacturing from China, need for a large and skilled labour pool, strengthening dollar, reducing cotton import duty, and government’s commitment to PLI for the sector. Having said that, even Kanika Agarrwal, Co-founder of Upside AI, believes demand headwinds from the US and Europe, lower pricing power, rising input costs, competition from China, Bangladesh, Vietnam, remain big variables.
The domestic textile (including apparel) industry can be expected to grow at a 10 percent compounded annually to around $200 billion by FY26. Of which, the apparel industry itself is estimated to grow to about $130 billion through the period. Whereas, exports achieved a record milestone of $44 billion in FY22; growth in the segment can put it on track to achieve around $65 billion by FY26, Karkera pointed out.
“However, international retailers had a tough 2QCY22 but freight costs and congestion are normalizing now and demand should see a seasonal rebound in 4QCY22,” said Batlivala & Karani Securities India.
Additionally, the US Department of Agriculture is forecasting marginally higher cotton production globally in the coming season which could lead to lower input costs and support margins, the brokerage firm wrote.
Cotton prices have been declining lately which is a big relief, implying better profitability for textile companies. “In the past month, cotton prices have been down by 18 percent, and in the last three months, by 23 percent,” Damania pointed out.
Corporates have also pointed out that Free Trade Agreements (FTAs) with major economies hints at an encouraging outlook for the sector.
KPR Mill had said in its latest annual report, “The FTA negotiations with major countries will also help India to get concessional duties for its textile products”.
The management of Gokaldas Exports pointed out that the continued military conflict, the extent of global monetary tightening and the trajectory of China’s economy are causes for concern, but it sees the long term macro-economic factors as very favourable for business growth which prompted the company to go ahead with its capital expenditure plan. It added that the US apparel imports are showing growth but higher inventories and rising inflation may pose a near-term challenge.
From the valuation standpoint, Karkera highlighted that there has been a substantial correction across the board since peaks during the trailing twelve months (TTM).“However, companies primarily operating in the yarn and fabric segments have witnessed the steepest correction to the tune of one-third to almost half of its peak valuations basis TTM P/E,” he said while adding, “Such a correction is majorly attributable to the adverse price and supply dynamics discussed earlier. Home textile brands and ones with strong export books, have been relatively insulated with a comparably lower drop in TTM P/E since peak.”
Source: https://www.moneycontrol.com/