Textile Sector: Brighter Days Ahead?
The textile sector is one of the worst-hit sectors by the ongoing pandemic. As markets stage a recovery, majority of the sectors in the domestic markets are hoping for a stable way ahead. In this article, Geyatee Deshpande discusses the state of the textile sector and the way ahead
India is considered to be one of the world leaders in the textile industry and possesses the entire manufacturing value chain from fibre to apparel and also provides the distinct advantage of backward integration. The rich and diversified Indian textile industry is marked by radical innovation, shifting markets, evolving supply chains and distribution channels. It is also gradually drifting towards responsible and sustainable manufacturing. India ranks second in terms of textile export by contributing 6 per cent towards the global share while it ranks fifth in apparel exports, contributing up to 4 per cent towards the global share. The Indian textile markets consist of home textile, technical textile and apparel. The apparel demand in India dominates the domestic textile industry with a share of around 74 per cent of the total textile and apparel market. Going ahead, technical textile is expected to be one of the fastest growing segments of the textile industry. The figure alongside highlights the growth momentum in terms of market size of the textile sector in India, highlighting maximum contribution by apparel, followed by technical textile.
With around more than 45 million of directly or indirectly employed workforce in the sector, any dent directly impacts its success story. The Indian textile sector is said to be a sector having a success story waiting for a happy ending. Over the last few years, a strong growth momentum was seen in the industry before the growth flattened onwards of 2019 as a result of new competitors and domestic issues. The major cause of trouble for the industry was the implementation of GST, post which imports witnessed a sharp surge. Importing goods from low-cost manufacturing destinations such as Bangladesh and Sri Lanka was preferred by most.
On the other hand, the volume of exports failed to increase despite various government initiatives. Since the textile industry is extremely capital-intensive in nature and is heavily dependent for its capital requirements from borrowings through banks and financial institutions, lack of credit availability impacts its profitability and business operations. Supported by credit initiatives, companies in the industry strive hard to maintain operational efficiency and debt management. From the figure alongside we can see that the falling trend in the NPA ratio portrays the growing capability of the textile sector to service its debt obligations within time in spite of facing various hurdles.
The Pandemic Impact
The corona virus-triggered pandemic has severely damaged this sector, halting operations for months and resulting in the increase of dead stock. Prakash Shah, a stock broker, mentions that investors invested in textile stocks are worried about their investments as in spite of recovery in the markets, textile stocks have failed to catch up with the existing rally seen in healthcare and IT stocks. Additionally, the companies seem to have piled up stocks that could not be shipped due to the pandemic and now have lost their market value given the fact that the textile and apparel industry is mostly season-dependent.
With majority of the population confined to their homes even during the festive season, there is uncertainty over demand and revenue growth. The pandemic and lockdowns also disrupted supply chains, thus causing shortage of raw materials. Considering this as the worst-hit impact the textile sector in India has seen in its history, investors are worried over the timeline of the recovery where business will return to ‘as usual’ generating promising profits as currently it is seen that payment recovery from retailers has also suffered quite a bit.
Export orders were affected and came down by around 50 per cent as many outlets situated abroad remained closed. With hardly any business being done by showrooms, the clothing business took a harder hit. The struggle of the companies belonging to the textile industry is evident from the quarterly results. The top 10 companies by market capitalisation shown in the figure highlight the sharp decline in net sales on QoQ and YoY basis.
As per the data released by the Confederation of Indian Textile Industry (CITI), recovery for the domestic market is expected to be comparatively steep post-pandemic with the domestic market estimated to reach USD 120 billion by 2024. Apparel retail is estimated to contract by USD 27 billion in FY 2020-21 as compared to the pre-pandemic estimations for the same period of USD 20 billion.
Shift in Business Products
Recouping from the impact of the pandemic, textile companies have started focusing on digitalization and customer connect to improve their business. Grabbing the opportunity, businesses have also diversified into manufacturing medical and healthbased products as there is a high demand for the same. Businesses and supply chains witnessed a drastic shift from traditional products to new ones such as PPEs, N-95 masks, technical textile, synthetic material, etc. Prior to the onset of the pandemic, the PPE requirement in India was approximately 50,000 units per year. In recent times, the domestic production capacity of PPE coveralls has reached around 4,50,000 units per day from zero production capacity, thus making the country self-reliant.
With the very limited availability of medical textile manufacturers in the country, manufacturing of PPE kits was a challenge and hence the apparel and garment segment was brought into the production stream for PPE coveralls. Proactive actions, wide outreach and intensive interactions with fabric manufacturers and garment companies resulted in an extensive network of PPE manufacturers in the country. Thus, many firms were able to regenerate their sales revenue based on these products.
Capitalising from Chinese Backlash
A spurt in textile sector growth is necessary for the Indian government’s self-reliance strategy. Following the US–China trade war the Indian textile sector is better placed to capture China’s export markets. Additionally, many economies were seen putting the blame of the pandemic and its subsequently caused ill-effects on China. This soured trade relations for many. As a result, the domestic textile sector has received an opportunity to grab and improve its overall exports to US and other EU nations. Various countries are looking at Indian markets so that there is an attempt by Indian manufacturers to ramp up supply chains, improve quality and deliver products as per promised schedules.
This may lead India to become a market leader in the textile sector. Meanwhile, with China’s weakened position as ‘factory of the world’, domestic textile companies have reduced their dependency on Chinese imports of raw materials. According to the Ministry of Textiles, countries like Bangladesh and Vietnam have zero duty access to the EU markets whereas Indian exporters face a duty disadvantage of 9.6 per cent in the EU market. Thus, in order to aid Indian exporters, a rebate of state and central taxes and levies scheme to assist exporters has been extended. The different schemes announced under the Rs 20 lakh crore post-pandemic packages by the government will also assist exporters and their counterparts.
Additionally, to mitigate the disadvantages faced by Indian textile companies compared to the companies from countries that have zero duty access to big, thriving markets, the government has proposed some schemes such as the mega integrated textiles region and apparel parks along with the product incentive scheme. Removal of the anti-dumping duty of purified Terephthalic Acid (PTA) opened up the man-made fibre (MMF) sector of textiles, which is still in its premier stages in India. A National Technical Textiles Mission was announced with a four-year implementation period from 2020-21 to 2023-24 at an estimated outlay of Rs 1,480 crore.
These initiatives will put Indian firms on a similar level with international competitors in the man-made fibre and technical textiles sectors. Analysts believe that slow sales recovery will be seen Q2FY21 and onwards. Trident Ltd. posted 65.69 per cent QoQ growth in net sales for Q2FY21 compared to a drop of 12.51 per cent YoY. The company’s net profit for Q2FY21 rose significantly but remained subdued on YoY basis. Not only do positive results bring a relief but the increasing confidence of investors in textile stocks boosts overall sentiments. The stock of Alok Industries has gained by 10.98 per cent since the beginning of October 2020 and has recovered by more than 300 per cent from its March lows. The figure below highlights the list of stocks which have been able to sustain the impact of the pandemic and give positive returns on YTD basis.
Conclusion
Since the textile industry is a largely consumer-driven industry, its growth and performance is majorly dependent on India’s growing economy. The growth in the textile and apparel sector is sustained by strong domestic consumption as well as export demand over the medium term. With vast abundance of raw material, especially with respect to cotton where it is quite cost-competitive along with healthy infrastructure and skilled labour force, the sector is expected to flourish well in the coming years.
The current situation can be considered as a small hiccup for the sector that investors should neglect to look at positive long-term outlook. Truly, the impact of the pandemic will continue to result in contraction and lower growth and market value for the next couple of quarters as compared to historical average but with the unutilised potential that the Indian textile sector has, it is estimated achieve new heights going forward, thus giving positive returns to stakeholders who risk to remain invested and believe in long-term growth.
Even though the textile sector has long-term growth potential, at the current moment it looks unattractive for investors because of the uncertainty surrounding the sector. When it comes to stocks it is always a game of relative valuation. There are greener pastures available in the market and hence textile stocks may not be looked at aggressively by the investors. For those actively seeking investment opportunities in the textile sector should adopt a bottom up approach while focusing on larger capitalization stocks within the sector. Focus can also be on those textile stocks with high dividend yield stocks with a track record of consistent dividends.
Stock Recommendations
These are our top picks from Textile sector
KPR Mill Ltd.
CMP (Rs ) : 645.50
BSE Code : 532889
Face Value (Rs ) : 5
Mcap FF (Cr.) : 1,110.42
52 Week High / Low : Rs 714.20 / 316.90
KPR Mill is a public limited company and one of the largest vertically integrated organisations. It has diversified businesses like garments, fabrics, yarn and white crystal sugar. The company has been working in the textile industry from the last 40 years. KPR Mill has also marked its global presence with the help of superior quality and delivery excellence. It manufactures various textile products like fabrics, melange, combed yarn, readymade knitted apparel and polyster. The company has state-of-the-art production facilities in Tamil Nadu. Its spinning division has over 3,54,240 spindles which produce 1,00,000 MT of yarn per annum.
The knitting division has the capacity to produce 40,000 MT of fabrics per annum. Its fabric processing unit has a capacity to process over 18,000 million tons per annum. Its garment division has a capacity to produce over 115 million garments per annum. The company has installed 66 windmills with total captive power generation capacity of 61.92 MW. Looking at the quarterly trends on a consolidated basis, for Q1FY21 the company reported net sales of Rs 521.74 crore, a decrease of 38.88 per cent as against the net sales of Rs 853.59 crore for Q1FY20.
For Q1FY21, the company gained operating profit of Rs 126.82 crore, a contraction by 31.29 per cent compared to the operating profit of Rs 184.58 crore gained in Q1FY20. The company gained net profit of Rs 60.30 crore in Q1FY21, which is a contraction by 34.62 per cent compared to the net profit of Rs 92.23 crore gained in Q1FY20. On the annual front, in FY20 the company reported net sales of Rs 3,205.76 crore, a decrease of 1.79 per cent over net sales of Rs 3,264.22 crore reported in FY19. For FY20, operating profit increased by 1.5 per cent to Rs 658.41 crore from Rs 648.65 crore reported in FY19. The company gained net profit of Rs 376.68 crore in FY20, which is an expansion by 12.49 per cent compared to the net profit of Rs 334.87 crore gained in FY19.
Yarn exports have fallen considerably in the first quarter. Imports of China have also declined which accounts for a third of India’s yarn exports. Imports by Bangladesh, which accounts for a fifth of India’s yarn exports, also declined. The company has carried out strategic investments in wind power projects and cogeneration plant for captive consumption. It has taken future-focused initiatives and is leveraging technology through automations across all departments. The company has established a state-of-the-art garment manufacturing facility at Ethiopia.
It has entered into the retail segment by launching its maiden retail brand FASO. FASO offers a collection of innerwear. Products under this are 100 per cent organic. India possesses strongly skilled labour and it also has enough raw materials. As fears of the pandemic begin to recede, global brands are looking for other sourcing opportunities than China, and especially India because of the advantages it is expected to gain. As life is getting back to normal, people are expected to indulge in shopping for apparel on account of the return of the ‘feel good’ element after months of lockdown and depression. Hence, we recommend BUY.
Trident Ltd.
CMP (Rs ) : 7.91
BSE Code : 521064
Face Value (Rs ) : 1
Mcap FF (Cr.) : 1,289.89
52 Week High / Low : Rs 8.57 / 3.05
Trident Limited is a company of the Trident Group, a USD 1 billion Indian business conglomerate and a global player. It was incorporated in the year 1990. Trident is a leading manufacturer of yarn, bath linen, bed linen, wheat straw-based paper, chemicals and captive power. The company’s segments include textiles, paper, chemicals, energy and others. The textile segment includes yarn, towel and bed sheets. The paper and chemical segment includes paper and Sulfuric Acid. The segment of others includes sale of software and related services. The company is also involved in the production of energy.
It possesses the largest spinning installation of its kind at a single campus in India. Trident has state-of-the-art manufacturing facilities in Punjab and Madhya Pradesh. The company exports its products to more than 100 countries. India is among the world’s largest producers of textiles and apparel. The domestic textile and apparel industry contribute 2.3 per cent to India’s GDP and account for 13 per cent of industrial production and 12 per cent of the country’s export earnings. Looking at the quarterly trends on a consolidated basis, for Q2FY21 the company reported net sales of Rs 1173.98 crore, a decrease of 12.51 per cent as against the net sales of Rs 1341.87 crore for Q2FY20.
For Q2FY21, the company gained operating profit of Rs 233.77 crore, a contraction by 11.81 per cent compared to the operating profit of Rs 265.07 crore gained in Q2FY20. The company gained net profit of Rs 105.25 crore in Q2FY21, which is a contraction by 25.32 per cent compared to the net profit of Rs 140.94 crore gained in Q2FY20. On the annual front, in FY20 the company reported net sales of Rs 4,727.67 crore, a decrease of 9.93 per cent over the net sales of Rs 5,248.60 crore reported in FY19. For FY20, operating profit decreased by 15.31 per cent to Rs 869.19 crore from Rs 1,026.31 crore reported in FY19. The company gained net profit of Rs 343.28 crore in FY20, which is a contraction by 7.61 per cent compared to the net profit of Rs 371.55 crore gained in FY19.
Trident is the largest company in terms of terry towel capacity and one of the largest players in the home textile space in India. Cash flow from operations has significantly increased to Rs 1,209.4 crore in FY20 on account of reduction in inventories. The company has reduced its net debt significantly in FY20. It has given return on equity of around 15 per cent consistently. Trident has partnered with some of the best technology companies worldwide to strike a rare mix of quality with cost-efficiency in its products.
In response to the pandemic, the company is focusing on anti-virus product launches and upgradation of its existing product portfolio. Introduction of antimicrobial treatment as standard across its bath linen category has received very good response from its export customers. With a presence on all major e-commerce platforms, Trident is aiming at an increase in revenue contribution from digital platforms. The gradual opening up of economies around the world has increased demand. The company is looking at capturing the same through innovative offerings and increased customer interactions. Hence, we recommend BUY.
(Closing price as of October 20, 2020)