Analysts believe the textile sector is weaving a new story.
Textile companies had a tough year in FY23 because demand was low, retailers had too much inventory, supplies were limited, and cotton prices were on the rise. Having said that, they are now hoping the worst is over and will be soon witnessing a revival in demand.
Giving a new spin
Textile players expect demand to pick up again by the third quarter of FY24 as global retailers reduce their inventories. Trade volumes are expected to improve further in the second half of FY24 as global retailers start giving orders for their Summer/Spring 2024 collections, some market participants pointed out.
“Reduced inventory on shelves of global retailers and likely mean reversal of inventory to sales ratio over time is expected to lead to a stronger second half of FY24 demand outlook,” said JM Financial Institutional Securities.
Plus, a host of factors including competitor countries staring at geopolitical uncertainties are seen adding colour to the sector. With this, textile players are in for consistent earnings growth and improved cash flows, according to observers.
“China + 1 strategy, supply uncertainties and potential FTAs (free trade agreements) with the UK/Europe would drive strong earnings growth for garment/home textile players. With completed capex (capital expenditure) the focus will be on strengthening balance sheet and improving return ratios,” said Sharekhan by BNP Paribas.
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The brokerage firm explained that with material capex already behind, textile players are set to leverage their expanded capacities. Moreover, falling cotton and crude prices are likely to bolster margins and enhance India’s competitiveness in export markets, it added while highlighting that the industry has successfully gained market share in the garments and home textile categories in key export markets.
“Better capacity utilisation, enhanced product mix, lower cotton/yarn prices and a fall in supply costs will boost industry margins in the coming years,” the brokerage said.
Scope for rerating
JM Financial also said that the UK FTA, which represents a $1-billion additional opportunity for India, on the horizon and the possibility of a China+1 push picking up pace, significantly raise the possibility of recalibrating earnings and multiples for the sector. The government’s focus on the overall textile ecosystem with production-linked incentives and stable duties is the cherry on the cake, according to the brokerage firm.
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Meanwhile, a strong medium- to long-term outlook has prompted Sharekhan to upgrade its view on the textile sector to ‘positive’ from ‘neutral’.
Its preferred picks in the space are Gokaldas Exports, KPR Mill, Himatsingka Seide, and SP Apparels, which are expected to gain export markets share riding on opportunities and setting the stage for strong growth. The firm also initiated coverage on shares of Gokaldas Exports with a ‘buy’ call.
For JM Financial Institutional Securities, Gokaldas Exports, which has a huge addressable market size and top-notch execution, remains top pick in the sector, whereas Welspun India remains a key beneficiary of the FTA and China+1 theme, it said.
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