Strong demand and higher realisations set to boost fortunes, but debt concerns remain.
Textile companies — including fabric manufacturers, garment makers and those in the spinning business — have seen a steep rise in their share prices over the past one month. While the Sensex gained only 3.4 per cent, textile stocks surged 16-48 per cent. Rising cotton prices, higher exports, strong domestic demand and good results in the September quarter are some of the factors fuelling the rally.
Cotton prices to ease
Growing demand from China, the Pakistan floods and crop failure in the US (the largest cotton producer) have pushed cotton prices to the unprecedented level of Rs 41,000 per bale (a bale is 170 kg), rising by 65-75 per cent over October 2009. In the local market, the marketing season for cotton has been delayed by a month, which is straining supplies and keeping the prices firm. Additionally, the government has allowed the export of 5.5 million bales of cotton, pushing the prices up. While most of the yarn players have raised cotton yarn prices, the surge in raw material costs (40-45 per cent) meant they were unable to pass on the price rise completely. Analysts expect prices to dip marginally after the US and Indian harvests come in by December 2010. Sridhar Chandrasekhar, head, Crisil Research, says, “Cotton prices should start coming down by 10-15 per cent by early January 2011.”
| ON THE RISE | ||||
| FY12E in Rs crore | Net Sales | Ebitda Margin (%) | Net profit | P/E (x) |
| Alok Industries | 6,906 | 26.20 | 502 | 7.80 |
| Arvind | 4,424 | 13.90 | 134 | 11.80 |
| Shri Lakshmi Cotsyn | 2,243 | 14.00 | 142 | 3.50 |
| Siyaram Silk | 988 | 13.40 | 65 | 6.40 |
| Bombay Rayon | 3,435 | 22.80 | 361 | 6.60 |
| Kewal kiran | 276 | 27.70 | 47 | 14.40 |
| Vardhman Textiles | 4,108 | 20.40 | 275 | 7.50 |
| RSWM | 2,040 | 12.50 | 65 | 6.90 |
| Source: Bloomberg, analyst reports | ||||
Robust demand
The rising global demand has improved the outlook for polyester yarn and fabric. The Chinese domestic demand is also very strong, leading to reduced Chinese supplies in global markets. This is helping the Indian players grab a bigger slice of the export market at better prices. There could also be a trend towards polyester as the differential between cotton and polyester is rising sharply, with higher cotton prices. However, a revival in the European Union market, a key export destination, is crucial. Spinning companies are expected to outperform players in other segments, as they will be able to pass on the cost increase. Analysts believe that if the supply scenario continues to remain tight, the textile companies will make additional hikes in the finished products.
We review the prospects of some of the textile manufacturers.
Shri Lakshmi Cotsyn
Shri Lakshmi Cotsyn is likely to gain from the pick-up in the demand for textile products and from bulk buyers like IKEA. The company has been able to pass the hike in raw material costs and thus brokerages expect the operating margins to improve. The technical textiles project, which will be operational by September 2011, will drive the growth momentum for the company. Over FY10 to FY12E, while the revenues are expected to grow 20.9 per cent, the profit growth is pegged at 24.4 per cent. Brokerages expect a 41 per cent upside potential from the current levels.
Arvind
Arvind is currently operating at almost full capacity because of robust fabric demand, which has given it strong pricing power. It plans to monetize land assets and use the proceeds (Rs 1,000 crore) to deleverage the balance sheet and fund the capex plans. Its subsidiaries Arvind Retail and Arvind Lifestyle Brands are expected to post a strong growth of 40 per cent over the next three years and will signal the tilt of its business model with a focus on the retail customer. Analysts peg the fair value of the stock at Rs 70, which translates to a marginal upside. Buy on dips.
Alok Industries
Alok Industries is planning to infuse Rs 900 crore over the next two years to increase capacity. The company plans to increase export revenues significantly from Rs 1,500 crore in FY10. It is increasing its H&A brand outlets to 1,000 in the next two years from around 50 now, which is expected to boost realisations. A high debt burden (Rs 8,789 crore) and rising interest costs are major risks. Its consolidated revenue is expected to grow 29 per cent over FY10-12. Expect an upside of 15-20 per cent from the current levels.
Siyaram Silk
Siyaram Silk Mills owns well-known brands like Siyaram, J Hampstead and Mistair, among others. On the back of capacity addition and better utilisation, its fabric volume is set to grow 18 per cent over FY10-13. The sales and net profit are poised to grow 21 per cent and 36 per cent over FY10-13, respectively. The company’s FY10 debt-equity ratio stood at 1.1x, which is one of the best in the textile industry (the industry average is of 2x). Brokerages expect a potential upside of 37-40 per cent on the stock from the current levels.
