Textiles: Competition, High Input Cost to Hit Cos Hard.

Although the stocks of textile companies have seen buoyancy in the past three months, they have lagged the gains seen in the broader market. Going ahead, the underperformance is likely to continue given the rising cotton prices and the slowdown in India’s garment exports to the US.

The ET Textiles index, which comprises 13 frequently traded textile stocks, has gained 10% in the past three months. The benchmark Nifty has increased by 16% during the period. While as much as 12% jump in the Nifty took place in just about a month, the ET Textiles index has not budged much. The underperformance can be explained from its burgeoning valuations.

The price-earnings ratio of the ET Textiles index has shot up from just over 18 in June to 21 by the end of September. But the returns do not fully justify the increase in the P/E. What could then explain the surge in valuations is the fact that earnings growth of companies has not matched the rise in their stock prices thereby widening the P/E ratio.

In the June quarter, the aggregate net profit of over 300 textile companies in our sample fell by 11% despite the robust jump of 25% in the topline. At 2%, operating profit growth was also tepid. It indicates contraction of profitability on account of higher operating and non-operating expenses; the latter includes interest charges and depreciation.

Textile companies that use cotton and cotton yarn as a major raw material have seen a sharp rise in their input costs over the past few quarters due to rise in commodity prices.

According to the data from the ministry of textiles, cotton prices for medium-long variety have escalated by 36% and for long variety by as much as 69% in the last one year. In contrast, prices of cotton yarn have increased by just 14-35%. This means, yarn players were not able to pass on the entire increase in input cost to their customers.

Another concern is the stagnant demand for Indian apparels from the US, the biggest apparels importer in the world. According to the office of textiles and apparels, US Department of Commerce, in 2009, the volume of India’s garment exports to the US rose by just 3%. But China, the biggest apparel exporter to the US, shipped 10% more during the year.

The gap has further widened in 2010. In the first seven months, India’s garment export to the US rose by 5%, whereas Chinese exports grew by 25%. The Chinese exporters are also able to earn better realisations compared to their Indian counterparts.

The growing competition from China and Bangladesh has added to the woes of Indian textile manufacturers. The threat is likely to loom large in the foreseeable future given the low-cost production by these countries. Hence, a further rise in valuations of textile stocks looks restricted.

Source : economictimes.indiatimes.com