Are textile stocks hanging by the thread of optimism?

Are textile stocks hanging by the thread of optimism?

Source: Live Mint

The political crisis in Bangladesh, a major exporter of ready-made garments (RMG), drove several listed Indian textile stocks to new 52-week highs in July and August. This surge reflects anticipation that the unrest in Bangladesh could lead large RMG brands and retailers to reassess their supply chains and reduce dependence on the country. With the “China + 1” sourcing strategy already in motion, India is viewed as a potential beneficiary to fill the demand gap created by upheaval in the neighbouring nation.

This potential shift could benefit Indian RMG exporters like Gokaldas Exports Ltd, K.P.R Mill Ltd, and Arvind Ltd. Unsurprisingly, shares of these stocks touched new highs, reflecting the Street’s optimism. Sentiment boosts aside, grabbing a meaningful chunk from Bangladesh’s textile export pie may not be easy. In fact, some analysts point out that the gains for Indian textile companies from the Bangladesh crisis could be temporary in nature because of the difference in product portfolio and the country’s pact with the European Union, which puts it in a relatively stronger position.

Moreover, the political turmoil in Bangladesh may be short-lived. Given that RMG exports form the backbone of its economy, Dhaka is likely to stabilize the situation swiftly. And while Indian textile companies may have the production muscle to meet increased demand, they still face challenges in terms of cost competitiveness.

Read this | As Bangladesh descends into chaos, India’s trade and security hang in balance

After a challenging FY24, marked by inventory issues and weak demand, signs of recovery are beginning to emerge for Indian textile firms.

“Our analysis of top 20 listed textile stocks shows that in Q1FY25, year-on-year sales growth muted at around 4% due to weak domestic demand even as external demand prospects improved,” said Aditi Gupta, economist at Bank of Baroda. However, profit after tax and profit before interest, tax, depreciation and amortization, rose 25% and 14%, respectively, aided by a favourable base and volume led growth strategy adopted by companies, she added.

For spinners, improved international and domestic demand, thanks to favourable Indian cotton prices, aided June quarter’s earnings. Liquidation of excess inventory gave volumes for garment companies and home textile firms a push. This can be a factor driving more investor interest in the sector. For textile stocks in the Nifty 500 index, foreign institutional investors’ ownership rose to a 14-quarter high in Q1FY25.

However, sluggish demand in key importing markets such as the European Union and the US suggests that the recovery of textile exports in FY25 may be moderate. This is despite government efforts to support export competitiveness in the Indian textile sector.

“Export order inflows have started to improve, albeit by a margin. Sustenance of orders from key importing economies, the US and EU are crucial given the domestic challenges their economies face,” said Shradha Saraogi, associate director, India Ratings and Research. 

As for FY25 earnings outlook, delayed demand recovery could hurt Ebitda across the value chain. Exports of yarn and fabrics to Bangladesh from India could get impacted if the crisis prolongs. This could hurt realizations of the cotton yarn makers, added Saraogi.

Another key factor influencing earnings is cotton price movements. When international cotton price falls below domestic price, it makes Indian industry uncompetitive in international markets, especially when demand is muted. Further, management commentaries of key textile companies in Q1FY25 pointed to a year-on-year increase in freight costs due to disruptions in the Red Sea, making the trajectory of freight expenses critical for the sector.

Also read | India’s answer to EU’s carbon tax: Green textiles

It’s important to remember that many textile stocks fall into the mid-cap and small-cap categories, which have been on the rise regardless of fundamentals. In the event of a market correction, these stocks could decline more sharply than large-cap counterparts. Therefore, the current rally in textile stocks should be approached with caution.

 



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