Garment, textile makers and spinners to make gains


The move will help keep prices under check, thereby easing pressure on margins at a time when global demand for finished goods is subdued due to economic slowdown

The ban on cotton exports will act as a double-edged sword for the textile sector. While farmers, exporters and ginners will be an unhappy lot, the move will prove fruitful for garment and textile makers and spinning companies. Apart from increasing availability for the domestic market (and curtailing hoarding in international markets), the ban is likely to bring down cotton prices in the short term, given the increased production. Deepak Prajapati, assistant general manager, CARE Ratings, said: “Cotton prices are expected to be stable, albeit with a moderate decline, and vary between Rs 31,000 and Rs 34,000 per candy (356 kg).”

Subdued global demand, along with higher cotton prices (earlier), have hit spinners and garment makers. Most players witnessed a substantial squeeze in their earnings before interest, taxes, depreciation, and mortification margins during the nine months to December 31, 2011. A higher debt burden, which remains an acute problem for some companies, especially for spinning firms, also impacted net profit. But the outlook for garment and textile markers as well as spinners is looking better on soft cotton prices. Also, a pick-up in domestic demand in the recent past, an increase in Chinese manufacturing cost and a stable exchange rate are some macro positives for the sector.

In terms of gains for individual companies, the ban will be more beneficial to players who secure raw material on a short-term basis, say analysts. In other words, companies having lower raw material inventories are likely to gain more from the fall in domestic cotton prices. Standalone yarn makers also stand to gain, as analysts expect them to register higher yarn exports.

STRONG FY13 OUTLOOK
In Rs crore Arvind Alok
Industries
Vardhman
Textiles
Net sales 3,626 6,158 2,979
Y-o-Y change (%) 27.5 48.1 9.9
Ebitda margin (%) 14.6 28.8 12.3
Y-o-Y change (bps) 153 88 -1252
Net profit 369.0 96.0 53.0
Y-o-Y change (%) 241.5 -55.7 -84.0
EPS (Rs) 7.8 1.2 8.3
FY13 ESTIMATES
Net sales 5,161 10,356
Net profit 340 559
EPS (Rs) 13.4 7.1
All figures other than those for FY13 are for the nine months ending 31-Dec-2011
Source: Companies, Analyst reports

“Even if cotton prices fall by 10-12 per cent from current levels, cotton yarn prices are expected to remain firm in the medium term due to sufficient demand for cotton yarn in the global market. This would also address the concern related to inventory loss for spinners,” said Prajapati.

Experts believe the positive impact of this decision (banning cotton exports) for end users would be significant, if prices stabilise at these lower levels. Further, it would also improve competitiveness of Indian companies in the global market, wherein demand is relatively weak. Another potential impact could be an improvement in domestic demand.

CRISIL Research wrote in a report in January: “In the 2011-12 cotton season, both global and domestic productions are expected to be at an all-time high, whereas demand is expected to remain sluggish due to uncertain market conditions in the European Union and US. Both these factors will put downward pressure on cotton and other prices in the fourth quarter of 2011-12 and 2012-13. However, domestic demand is likely to pick up due to lower raw material prices for garment manufacturers.”

Arvind
The company’s debt-equity ratio is expected to fall from 1.3 times in 2010-11 to 0.9 times in 2011-12 and to 0.7 times in 2012-13, partly aided by land monetisation (expected to fetch Rs 200 crore this financial year) and improving performance. Arvind, which had reported a loss for 2008-09, has done well since then. Barring last quarter, wherein core profitability was impacted, the company’s profits have been on the rise in 2011-12. Recently, through a joint venture with Tata Housing, Arvind launched a Rs 2,200-crore integrated township project near Ahmedabad, which should add to its revenues and profits in 2012-13 and 2013-14. In the core business, new brand launches and increased share of business to consumer sales (from 32 per cent in 2010-11 to 41 per cent in 2012-13) are expected to drive future growth and margins. Though the stock has outperformed in the past year, investors may consider it on corrections.

Alok Industries
The company, with low raw material inventories (one-two months of requirement), will see a minimal impact from the ban. That’s because, while it sources cotton for 15-30 days based on the orders bagged, most of the orders have a pass-through clause (gains as well as higher costs). It is also shifting focus towards polyester, which will make it less exposed to volatility in cotton prices and improve its return ratios. However, its debt of nearly Rs 10,000 crore remains a concern, and ate away nearly half of its operating profit of Rs 1,437 crore in the nine months to December 2011. Its debt/equity, though expected to come down from 4.3 times in 2010-11 to 3.9 times in 2011-12, is way ahead than that of its peers. Any development over its plan to sell its Mumbai-based real estate (estimated to be worth Rs 1,200 crore) to lower debt should help to some extent.

Vardhman Textiles
The company witnessed a slowdown in yarn and fabric businesses due to higher cotton prices and lower demand, which impacted its performance during the nine months to December 2011. Additionally, given that Vardhman procures raw materials to meet six-eight months’ requirements (indicating relatively higher inventories), gains on account of lower prices may not reflect immediately.

The management believes the demand scenario appears to be stabilising. However, like most textile companies, Vardhman has high debt, resulting in a debt-to-equity ratio of 1.45 times. And, this is likely to remain an overhang on the stock in the near term

Advertisements

17 thoughts on “Garment, textile makers and spinners to make gains

  1. Hey, you used to write magnificent, but the last few posts have been kinda boring… I miss your tremendous writings. Past several posts are just a little out of track! come on!

  2. I have recently started a blog, the information you provide on this web site has helped me tremendously. Thank you for all of your time & work. “A creative man is motivated by the desire to achieve, not by the desire to beat others.” by Ayn Rand.

  3. Some really nice and utilitarian information on this web site, as well I conceive the layout has got fantastic features.

  4. Great – I should certainly pronounce, impressed with your site. I had no trouble navigating through all tabs and related information ended up being truly easy to do to access. I recently found what I hoped for before you know it in the least. Reasonably unusual. Is likely to appreciate it for those who add forums or something, web site theme . a tones way for your client to communicate. Excellent task.

  5. I was suggested this blog by my cousin. I’m not sure whether this post is written by him as no one else know such detailed about my trouble. You are wonderful! Thanks!

  6. I wanted to thank you one more time for the amazing blog you have built here. Its full of ideas for those who are really interested in this kind of subject, primarily this very post. Your all actually sweet along with thoughtful of others plus reading the blog posts is a good delight if you ask me. And what generous present! Dan and I will have enjoyment making use of your recommendations in what we must do in a month’s time. Our record is a distance long so your tips will definitely be put to excellent use.

  7. Hi there Website Owner! Very nice blog you have here, I kinda like it! I noticed you were using WordPress and I figure I’d share a tip with you. There’s a plugin for WordPress I use on my own websites that will help you boost your traffic significantly ! You can easily get a spot on the page 1 for your specific keywords ! Here is the link … ! If you need help with anything feel free to contact me ! Have a nice day !

  8. Just wanna comment on few general things, The website design is perfect, the articles is rattling excellent : D.

  9. It¡¦s really a nice and helpful piece of information. I am satisfied that you simply shared this useful information with us. Please stay us informed like this. Thank you for sharing.

  10. I’m having a small issue. I cannot subscribe to your rss feed for some reason. I’m using google reader by the way.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s