Textile Celeberation

Special Report

Shares of textile companies have been up on the bourses on hopes of free exports post - 2005. Will the party continue?

Textiles are back in fashion. Leading textile scrips - Arvind Mills, Bombay Dyeing, Raymonds and Century Textiles among them - have been surging on the back of good volumes at the bourses.

The upsurge of investor interest has not been limited to the frontliners, with even second-rung stocks like Vardhman Textiles, Nahar Spinning Mills and Mahavir Spinning Mills raking in the moolah.

Arvind Mills posted the biggest gains among its peers, up 53.33 per cent during the last month to Rs 37.95 (as of May 23, 2003). The performance has been even more impressive over a 12-month period with the scrip appreciating by more than 144 per cent.

Bombay Dyeing advanced by 48.02 per cent during the past month, while Raymond and Century Textiles came in next with 27.90 per cent and 27.41 per cent jump respectively. Vardhman Spinning, Nahar Spinning and Mahavir Spinning also surged around 25 per cent.

The immediate trigger: The lifting of the quota system by 2005, which is expected to give a boost to Indian textiles and apparel, especially in the export market.

For a forlorn market seeking excuses for optimism, the expected upside for textile companies was a godsend. "Right now, under the quota system, it's a very restricted market for Indian companies.

The lifting of the system will boost their exports", says Karthik Ramakrishnan, analyst with domestic securities firm Sunidhi Consultancy.

The domestic textile industry, which is estimated at Rs 130,000 crore, presently has only a three per cent share of global exports. Compare that with China, which enjoys a 21 per cent share of the world market.

Textile exports to the US and EU markets, thought to be the most lucrative, are currently restricted by quotas created under the Multi-Fibre Arrangement (MFA).

While China has a 19 per cent share of quotas to the US and 26 per cent to the EU, India lags way behind with only two per cent and four per cent respectively.

Under the WTO agreement, these quotas will be fully removed by January 1, 2005.

Apart from expectations of better times to come, the good current performances of textile companies has been another factor behind the revival of buying interest at domestic textile counters, say dealers.

"Textile scrips have also been buoyed by the structural and policy changes happening in the industry over the past few months. Companies like Arvind have managed to turn around, which helps sector sentiments", notes Ramakrishnan.

A rise in global demand, improved product-mix, better capacity utilisation and falling interest rates have helped the revival.

Excise rate cuts announced during the Budget for PFY, filament yarn and cottom garments have also given a fillip to the sector, which had been in the doldrums in the not-so-recent past.

Arvind Mills led the way, clocking a Rs 91.31 crore net profit for the nine-months ended December 2002, as compared to Rs 20.26 crore for FY02.

"The turnaround is attributable to the company's strategy to move away from basic denims to valued-added denims, revival of denim prices and successful completion of its debt-restructuring exercise," notes Jayesh Shah, director & chief financial officer of Arvind Mills.

According to analysts, the company is expected to post a net profit of Rs 120-130 crore for FY03.

However, considering the bright future prospects, the estimated FY03 P/E of 8x is too low for the scrip, feel analysts.

With exports already constituting 52 per cent of the revenues, the scrip is set to go up. "Rs 45-46 may be a good level to book profits at the counter", says technical analyst Sumeet Rohra.

Exports have also been Raymond's thrust, clocking a 25 per cent jump during the last fiscal. Both Arvind Mills and Raymond have also improved their return on capital employed (RoCE) and the operating profit to capital employed ratio.

Rohra is also optimistic on Raymond, which currently rules at a P/E of 6x. "The scrip had a good run of late and if it keeps above the Rs 126 level it has an upside potential of Rs 140," he says.

Bombay Dyeing is still some way off from matching the above mentioned peers, though the company did post a net profit of Rs 33.41 crore in FY03 as compared to a Rs 29.06 crore loss the previous fiscal.

Good sector sentiments could impact the scrip positively, notes Rohra. "If the scrip maintains itself above the Rs 70 level, it may see upsides upto Rs 85 levels".

Companies like Vardhman Spinning and Mahavir Spinning also improved their showing in the last fiscal. Vardhman recorded a net profit of Rs 21.04 crore, a whopping 315 per cent surge as compared to FY02 on net sales of Rs 590.50 crore for FY03, while the latter posted net sales of Rs 848.26 crore and net profit of Rs 42.52 crore (up 67 per cent compared to FY02) during the same period.

With exports anticipated to provide the big thrust, many companies are already expanding capacities to meet additional export requirements.

Global procurement companies are also responding by setting up offices in India, in anticipation of higher volumes from the country in future.

With the sector's focus likely to be on foreign trade, analysts feel that companies like Arvind Mills and Raymond may be the biggest beneficiaries under the post-quota regime. Arvind Mills' strength is its ability to supply products ranging from fabrics to garments.

Exports will drive revenues in the coming years since leading global brands such as Levi's, Lee and Wrangler have been sourcing denim from the company in the past.

"Apart from denim, Arvind is the largest manufacturer of shirting fabrics in India with its capacity of 30 million metres. About 52 per cent of our sales constitutes direct exports and another 25 per cent is sold to garment companies in the domestic market who manufacture for the export market", Shah adds.

While India has some cost advantages in textiles - low labour costs and proximity to cotton-growing areas being two of them - analysts caution that it is not going to be easy cashing in on the new regime since several other countries are also preparing for the bonanza.

They also expressed concerns about the price volatility of key raw materials like cotton and naphtha, while changing fashion trends may impact exports of materials like denim, Arvind's main target product.

"There are concerns that India may not be as cost competitive compared to countries like China when it comes to labour and infrastructure. The product quality will also be tested", notes Ramakrishnan.

The immediate past has also been a cause for concern. According to reports, the textile industry suffered a loss of over Rs 100 crore due to the SARS and Iraq war scares.

While mid-size export houses had to face the brunt of the drop in orders from prospective clients, it could turn out to be a blessing in disguise.

Reason: SARS has actually had a bigger negative impact in China. Indian exporters can, thus, realistically look at cornering a bit of China's marketshare in the near future.

According to estimates, the Indian textile and apparel industry is expected to touch $30 billion by the end of 2010-11, while it contributes around 33 per cent of the country's foreign exchange earnings.

With most of the leading players reporting good numbers in the last couple of years, analysts expect the good tidings to continue.