 "Don't buy textile stocks on Bangladesh crisis, wait for dips: Analysts")
Bangladesh Crisis: Leveraging the crisis in Bangladesh, textile and garment-related stocks surged up to 19 per cent on the National Stock Exchange (NSE) on Tuesday. Analysts, however, caution against chasing the rally as the crisis may provide only a "temporary window" for gains.
They, rather, suggest investors wait for the rally to cool off before adding fundamentally sound companies, with high return on ewuity (RoE) to their portfolio from a long-term perspective.
"The ongoing crisis in Bangladesh means fresh order flow may get diverted to India till the situation stabilises. This, however, is a temporary window as Bangladesh remains advantageous on the cost front. If the stocks continue to rise sharply, market participants need to think even before taking a trading bet," said Deepak Jasani, head of retail research at HDFC Securities.
On the bourses, Kitex Garments rallied 19 per cent to Rs 251, Gokaldas Exports surged 18.7 per cent to Rs 1,095 (record high), followed by KPR Mill (16.7 per cent at Rs 965; record high), RSMW 15.4 per cent to Rs 267, Arvind (13 per cent at Rs 420; record high), GHCL Textiles (10.7 per cent at Rs 123; record high), Indo Count Industries (8.3 per cent at Rs 408), and Faze Three (8 per cent at Rs 561.25).
These stocks ended up to 17 per cent higher as against 0.26 per cent dip in the Nifty 50 index.
These stocks ended up to 17 per cent higher as against 0.26 per cent dip in the Nifty 50 index.
The textile sector is one the major export income sources for Bangladesh with monthly apparel export pegged at $3.5-3.8 billion. Bangladesh has a high double-digit export market share in the European Union and the United Kingdom, and a 10 per cent market share in the United States, reports suggest.
With the political crisis deepening in the border country, analysts expect international buyers to shift their focus to alternative markets like India. They anticipate the gain to be around $300-400 million per month, assuming 10-11 per cent of Bangladesh's exports get diverted to Indian hubs.
More From This Section
Investors, however, should not jump to buy textile shares solely based on the Bangladesh trigger. Bangladesh's textile industry, they said, will not shut down, though it will take a temporary hit.
"This will provide a sentimental boost for related stocks, though the rally should not be chased on this trigger alone," concurred Kranthi Bathini, director-equities, WealthMills Securities.
Buy the dip for long-term
The long-term investment in textile stocks, analysts advised, should be based on attractive valuations of select shares, government investments, growth in the domestic demand on account of the rising disposable incomes, and the growing popularity of 'fast fashion' products.
On the cost front, average cotton prices declined 3.3 per cent year-on-year (Y-o-Y) in the June 2024 quarter (Q1-FY25) and 0.3 per cent quarter-on-quarter (Q-o-Q) to reach Rs 162.1 per kilogram (kg), while average yarn prices increased 0.7 per cent Y-o-Y and decreased 0.5 per cent Q-o-Q during the same period. Moreover, cotton yarn spread widened 7.7 per cent Y-o-Y and shrank 1 per cent Q-o-Q to Rs 99.7/kg.
Demand from the US and EU markets improved, while the domestic market remained muted.
Given this, Vardhman Textiles posted a net profit surged of 74 per cent Y-o-Y to Rs 238.5 crore in Q1FY25 with net profit margin expanding to 10.04 per cent from 5.66 per cent Y-o-Y.
Nitin Spinners, meanwhile, clocked a net profit growth of around 46 per cent Y-o-Y to Rs 42.12 crore with net profit margin at 5.24 per cent as against 4.68 per cent last year.
Going ahead, analysts at JM Financial expect demand for Indian home textile and apparel exporters to improve in coming quarters led by improved global retailers' inventory position.
"Extended runway for revenue growth over the next three years aided by impending Free-Trade Agreements (FTAs) / China+1, the government's increased focus on textile ecosystem (rebates/PLI) and deflation in commodity price make a strong case for improvement in FY25 earnings trajectory," the brokerage firm said.
Deleveraged balance-sheets of Indian textile players leave ample room for chasing revenue growth as and when structural demand drivers pick pace. Huge addressable market size and/or top-notch execution, and de-leveraged balance sheet bode well for key players in the home textile and apparel sector, it added.