CRISIL Research’s Report estimated Profitability of Textile Companies to Improve

CRISIL Research released its report on profitability of textile companies on 14 December 2011. According to the research firm, profitability of cotton yarn and man-made fibre (MMF) players are expected to improve over the next few quarters on account of decline in input costs and moderate demand growth.

During the first quarter of 2011-12, the textiles companies witnessed severe profitability pressures which led to significant erosion in their market capitalisation. cotton yarn and MMF players have registered a negative return of 48% and 37%, respectively in the past one year.

CRISIL Research opined that the current valuation of players discounts the current negative sentiments around the sector and offers good scope for upside. Also, stocks of ready-made garment (RMG) companies are 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.

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 in the first half of  2011-12. This resulted in cotton yarn players reporting losses in the same period as they were carrying high cost cotton inventory from the last season. However, the sharp drop in cotton yarn prices also enhanced its price competitiveness vis-a-vis polyester (a substitute for cotton) thereby limiting the flexibility of MMF players to pass on the hike in the costs of their inputs, which are derivatives of crude oil.

CRISIL Research covered seven textile stocks– Nahar Spinning Mills and Maharaja Shree Umaid Mills in the cotton yarn segment, JBF Industries , Sangam (India) , Alok Industries and Shri Lakshmi Cotsyn in the MMF segment, Kewal Kiran in the RMG space. Of these, most companies have a valuation grade of 5/5, indicating that these stocks have a strong upside (more than 25%).

The existing scenerio

India, the world's second-largest textile supplier, had this year set a target to increase its textile and garment exports to USD 33 billion.

The textiles industry has a bank loan of over Rs one trillion and most companies have reportedly started defaulting on their payments to banks as a massive spike in raw material prices and a steep fall in demand have eaten into their margins. Cotton yarn production is down 15 percent and fabric output 19 percent during the April-October period from a year earlier, shooting up prices.