Shares of textile companies bucked the weak market trend and managed to rally on Thursday as improving exports of Cotton and Made-up apparel, along with attractive valuation and earnings growth visibility, make analysts bullish on the sector. .
Shares of Super Fine Knitters, Super Spinning, and Filatex India rallied up to 10 per cent intra-day. Those of JCT, Surat Textile, Swasti Vinayaka, KPR Mills, Gokaldas Exports, Vardhaman Textiles, Sumeet Industries, Bhandari Hosiery, Minaxi Textiles, and Bombay Rayon, meanwhile, gained between 4-5 per cent.
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In comparison, the S&P BSE Sensex fell over 1 per cent, or 900 points, intra-day and slipped below the 60,000-mark.
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The Covid-19 pandemic has altered the global textile and apparel (T&A) supply chain with several apparel brands preferring more than one sourcing destination. Further, the US-China trade war and the subsequent imposition of additional duties on Chinese T&A imports have led to importers in USA scouting for other destinations such as India.
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"In December 2021, the US signed into law legislation that bans imports from China's Xinjiang region over concerns about forced labour. As Xinjiang constitutes nearly 20 per cent of the global cotton market, the supply re-adjustment on account of this ban has led to more demand for Indian Cotton and Cotton yarn," analysts at Spark Capital said while initiating coverage of the sector.
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They further highlighted that Cotton and Cotton yarn exports from India have surged at a 34 per cent CAGR (between April and October) from FY19-21. And since, the US market is 15 per cent of the global T&A imports, it is one of the key consumers of the global T&A trade.
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Countries such as China, Bangladesh, Vietnam, Cambodia have become reliant on India for their cotton requirements post the ban leading to Indian cotton exports skyrocketing in the past 8 months.
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Separately, India has witnessed increased exports in the Made-ups segment due to underlying demand for home furnishing, and have witnessed robust offtakes over the past 18 months.
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"The demand in the segment has significantly increased due to lockdown led home confinements and the pandemic induced new Standard Operating Procedures (SoPs) which has led to the underlying volume demand improving. India being the second largest supplier of made-ups naturally benefitted on account of Chinese suppliers losing market share," Spark Capital pointed out.
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To put things in perspective, exports of Cotton and Made-ups, together, formed roughly 37 per cent of the total textile exports in FY21.
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That apart, various schemes announced by the Indian government, including Rebate of State and Central Taxes and Levies (RoSCTL; incentive scheme for textile exporters), MITRA (textile parks’ scheme), and performance-linked incentive (PLI) for the Man-Made Fibre segment, are also favouring a turnaround in the sector.
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Moreover, the stance of the government on Free Trade Agreements (FTA’s) is also a welcome policy change for the T&A players.
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"The government since 2014 has been hesitant to sign any new meaningful FTAs, which resulted in the Indian T&A sector losing market share to Bangladesh and Vietnam. However, fresh FTAs should act as a key earnings’ catalyst for the Indian textile industry and it should be able to gain share across product categories," Spark Capital said.
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The stocks in the sector are also ripe for a re-rating as robust export opportunities give strong and sustainable earnings visibility, say analysts at ICICI Securities.
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"Revival in the hospitality sector, along with duty reimbursement by the government of India, and market share gain on China+1 theme will drive earnings trajectory going forward. Spread between Yarn and cotton prices continues to remain high and should enable yarn producers to report strong earnings for Q3FY22," said a note by JM Financial.
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From investment view point, analysts suggest playing the theme by going long on Vardhman Textiles, Trident, Sutlej Textiles, Alok Industries, KPR Mill, Nitin Spinners, Welspun India, Indocount, Himatsingka Seide, Gokaldas Exports.
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