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The Textile Magazine
DECEMBER 2011
Profitability of
textile companies
will improve
in second half
– CRISIL Research
industry news
CRISIL Research expects profit-
ability 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. During the first half
of 2011-12, 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 per cent and 37 per cent respec-
tively.
However, CRISIL Research be-
lieves that the current valuation of
these players discounts the prevail-
ing negative sentiments around the
sector and offers good scope for up-
side. Further, stocks of readymade
garment (RMG) companies seem to
be fairly priced in spite of being at
historical highs, as they offer rela-
tively high and stable returns among
the textile companies during the
present uncertain times.
The slowdown 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 the first half. This resulted in
cotton yarn players reporting sig-
nificant losses during the period 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
costs of their inputs, which are de-
rivatives of crude oil.
Said Mr. Ajay Srinivasan, Head
- Industry Research: “Like in the
past, we expect easing commodity
prices to support moderate demand
growth in 2012-13 and help EBIT-
DA margins of players across the
value chain to improve by 100-300
bps y-o-y.”
Valuations of cotton yarn compa-
nies and MMF players are nearing
their 2009 historical lows with a
one-year forward price-to-book val-
ue 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.
According to Mr. Tarun Bhatia,
Director - Capital Markets: “With
profitability outlook for FY13 im-
proving, valuations of cotton yarn
and MMF players are expected to
offer substantial upside potential
for investors. RMG stocks, though
fundamentally strong, appear to be
fairly priced.”
CRISIL Research has seven tex-
tile stocks under coverage – Nahar
Spinning Mills and Maharaja Shree
Umaid Mills in the cotton yarn seg-
ment, JBF Industries, Sangam (In-
dia), Alok Industries and Shri Lak-
shmi Cotsyn in the MMF segment,
and Kewal Kiran in the RMG space.
Of these, most companies have a
valuation grade of 5/5, indicating
that these stocks have a strong up-
side (more than 25%).
w
Mr. Ajay Srinivasan
Head - Industry Research