Textile sector to be targeted for next 12 months

The slow-down in demand in both domestic and export markets and the anticipation of a spurt in global cotton production resulted in sharp correction in cotton and yarn prices during H1FY12. This resulted in cotton yarn players reporting significant losses in H1FY12 as they were carrying high cost cotton inventory from the last season. The sharp drop in cotton yarn prices also enhanced its price competitiveness vis-a-vis polyester (a substitute for cotton) limiting the flexibility of MMF players to pass on the hike in the costs of their inputs, which are derivatives of crude oil

Valuations of cotton yarn companies and MMF players are nearing their FY09 historical lows with a one-year forward price-to-book value (P/Bv) average multiple of 0.4x and 0.5x, respectively. On the other hand, branded apparel manufacturers are trading at historical highs of one year forward P/Bv multiples of 4.7-5x, against an average of 2.9x from April 2007 to April 2011.

The following stocks are expected to provide minimum 25 to 30% returns in next 12 months.

• MMF (man-made fibre ) segment
• JBF Industries
• Sangam (India)
• Alok Industries
• Shri Lakshmi Cotsyn
• RMG (ready-made garment ) segment
• Kewal Kiran
• Cotton yarn segment
• Nahar Spinning Mills
• Maharaja Shree Umaid Mills

Textile sector to be targeted for next 12 months
CRISIL Research has come out with its report on profitability of textile companies. According to the research firm expects profitability of cotton yarn and man-made fibre (MMF) players to improve over the next few quarters on account of decline in input costs and moderate demand growth.

Companies’ valuations offer potential upside as margins expand

During H1FY12 (first half of the financial year 2012), these players witnessed severe profitability pressures which led to significant erosion in their market capitalisation. In the past one year, cotton yarn and MMF players have registered a negative return of 48% and 37%, respectively, compared to negative 20% return for S&P CNX NIFTY.

However, CRISIL Research believes that the current valuation of these players discounts the current negative sentiments around the sector and offers good scope for upside. Further, stocks of ready-made garment (RMG) companies seem to be fairly priced in spite of being at historical highs, as they offer relatively high and stable returns among the textile companies during the present uncertain times. The stocks of branded RMG companies have out-performed the S&P CNX NIFTY significantly and posted 25% return on a one-year basis.

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