UK-India FTA promises big boost for textile sector, but fund managers remain cautious

Fund managers note that Indian textile exports, currently valued at over $20 billion, have long been disadvantaged in the UK due to a 10–12% import duty.

India's textile sector stands to gain significantly from the recently signed Free Trade Agreement (FTA) with the United Kingdom, which eliminates longstanding tariffs and places Indian exporters on a more competitive footing. However, fund managers are approaching the development with cautious optimism, awaiting greater clarity before making new investment allocations.

Shares of Gokaldas Exports Ltd., Arvind Ltd., and KPR Mill Ltd had gained nearly 19 percent on Wednesday, May 7, a day after the announcement of the agreement. The stocks continued trading in the green on May 8 as well, with Gokaldas Exports being the biggest gainer at 6 percent as of 3:10 pm.

Also read: FTA with UK to benefit Indian textiles, leather, toys, gems and jewellery

What does this mean for investment strategies?

From an investment perspective, fund managers are treading carefully and waiting for more clarity before making allocation decisions. “The sector is definitely on the radar, but it’s still early. Apart from the UK FTA, most other developments are still narratives without signed agreements,” Abhilasha Satale, Fund Manager and Quantum Mutual Fund, suggested. “We're waiting for better entry points and more confidence from company managements on scaling capacity.”

Shibani Kurian, Fund Manager and Head- Equity Research at Kotak AMC added that global supply chains take time to adjust, so benefits won't be immediate. "Still, it gives India a more competitive position in the UK garment market," she said.

Similarly, Manish Gunwani, Head- Equity at Bandhan AMC added that they have a favourable view of the sector as the valuations are quite low and the addressable opportunity is large.

Among listed players, export-focused firms like Gokaldas Exports, Indo Count, Welspun Living, and KPR Mill are seen as potential beneficiaries, while companies like Arvind, which cater more to the domestic market, may not gain as much.

Valuations in the sector are currently ahead of historical medians. "Textiles is a capital and labour-intensive sector, and also cyclical. The median valuation is typically 15 to 20 times earnings. Right now, there’s a lot of optimism priced in,” Satale said. She pointed out that spinning, which is more commoditised, trades at a discount, while garmenting, due to higher value addition,n commands a premium.

Kurian added that valuations are currently reasonable but vary significantly across companies. "It’s essential to take a stock-specific approach within the sector. Some stocks have already seen gains, while others still trade at attractive valuations. It’s difficult to comment on average valuations, but there are still pockets with reasonable pricing, particularly when compared to historical averages," she said.

On the operational side, Satale noted that cotton prices have been stable, but spinning has come under some pressure. “Garmenting demand is heavily linked to the US market. The overall sector is seeing 10–12% growth, with domestic growth at about 9–10%. These rates are expected to hold, assuming global demand remains stable and there's no US recession.”

What does the agreement mean for the sector?

Fund managers note that Indian textile exports, valued at over $20 billion, have long been disadvantaged in the UK due to a 10–12% import duty. “Countries like Bangladesh and Vietnam already had FTAs with the UK, so India was not playing on a level field. With this FTA, that changes — it opens up a relatively under-penetrated UK market for Indian exporters,” Satale said.

Kurian concurs, adding that there is an opportunity in textiles. "The UK is one of the largest importers of textiles globally and holds a significant market share within Europe. The country imports approximately $23 to $25 billion worth of textiles across various categories each year. Most of these imports come from countries like China, Bangladesh, and Vietnam," she said.

The FTA, which covers tariff elimination on 99 percent of tariff lines and virtually 100 percent of the trade value, is expected to drive growth in labour- and technology-intensive sectors such as textiles, leather, marine products, and gems and jewellery. In particular, bed linen and garments (both woven and knitted) are seen as major beneficiaries.

“Retailers typically outsource these categories, and now Indian suppliers can compete directly with peers in Bangladesh and Vietnam,” Satale added.

She said that while the UK is a promising market, it is still smaller in scale compared to the European Union. Adding to it, she said, “Bangladesh exports around $4 billion worth of textiles to the UK. If even $1 billion of that shifts to India over the medium term, it would be a meaningful boost. But the EU FTA would be a bigger trigger for the sector.”

Gunwani concurred. “We do expect that in general, due to the change in supply chains globally, there will be a shift of manufacturing away from China, and the Indian textiles is one of the segments that can benefit from this trend. The UK FTA is one important step in the journey," he said.