Investment in securities market are subject to market risks. Read all the related documents carefully before investing

New Guide Available for Download
Small Cap Multibaggers
in the Making

mailtimers.com


**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a daily newsletter from Equitymaster
covering exciting investing ideas and opportunities in India.


AD

Are Textile Stocks Stitching a Revival?

Jul 28, 2021

'What is happening in textile companies?'

A friend asked me this over the weekend.

His confusion stemmed from the fact that if a majority of people are working from home and if socialising is limited, then who is buying clothes?

I don't remember the last time I had shopped for formal wear. But I know that Textile stocks have more than doubled over the past 6 months.

Is it just speculation or is a structural change happening in the sector?

It's important to identify a theme early. Even if it's a cyclical one. This is how investors can maximise profits.

To understand the global textile market, I thought it best to start with India's neighbour, Bangladesh.

While researching I came across a headline which ignited quite a debate among the political and economic community in 2020, both in Bangladesh and India - 'India Falls Behind Bangladesh in Per Capita Income by US$280'.

In 2007, Bangladesh's per capita GDP was half of India's. In little over a decade, our neighbour's per capita GDP is more than ours.

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Don't invest in small caps...

A small group of Equitymaster readers are going to hear from our Head of Small Cap Research tomorrow at 5 PM.

Book your spot at this meeting and get this complimentary guide delivered to your inbox.

Book your spot
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

What changed? the one word answer is Textiles.

Exports of readymade garments account for 85% of Bangladesh's total exports.

In fact, Bangladesh is the world's 2nd largest readymade garment exporter after China.

So why couldn't India with better infrastructure capitalise on the massive textile export opportunity?

The differentiating factor was labour cost.

It's estimated that the unit labour cost of producing a cotton shirt is US$7 in the USA, 50 cents in India, and just 22 cents in Bangladesh.

In other words, Bangladesh has a 56% cost advantage over India. That's why it's 'Made in Bangladesh' on most of the shirts in USA and Europe and not 'Made in India'.

Over the past couple of months there has been a lot of talk about India's textile industry. Many textile stocks have doubled over the past 6 months.

While Bangladesh is the 2nd largest exporter of readymade garments, India is the largest exporter of yarn (the raw material for Bangladesh).

--- Advertisement ---
Investment in securities market are subject to market risks. Read all the related documents carefully before investing

How to Potentially Build Wealth Safely... Without Taking on Excessive Risk

Access Our Premium 'Low Risk, High Return Potential' Stock Research at 60% Off

Full Details Here
Details of our SEBI Research Analyst registration are mentioned on our website - www.equitymaster.com
---------------------------------------------------

So what has changed for India suddenly? Our costs are still higher than Bangladesh.

The change can be found in the companies engaged in...

  • Converting cotton to yarn. These have thrived especially over the past 6 months. I am referring to the spinning mills that have been buzzing and working overtime.
  • Companies that export home textiles and are backward integrated.

Let us look at what has changed over the past 6-9 months.

First, a ban on import of cotton/cotton made products from China to the US opened up a big opportunity for India.

The US passed a legislation banning all cotton and cotton made products from the Xinjiang area in China as a protest against the human rights violations and the widespread use of forced labour in the region.

This has led to a pair of lucky breaks for some countries, including India.

1) An increase in international yarn prices.

2) The shift of China's market share to India, Vietnam, and Brazil.

Textile companies engaged in the conversion of cotton to yarn not only benefit from increase in margins but also additional demand.

So the 'Made in Bangladesh' T-shirt in USA will use more of 'Made in India' yarn.

Also, it takes at least a 15-18 months to set up a new spinning unit. This structural change has led to multi-year profitability for spinning companies.


Opening up of the developed world has led to 'revenge buying'.

If the last one year was about staying/work from home which benefitted companies in the home textile space, I believe the next one year will propel demand for revenge shopping.

When was the last time you upgraded your wardrobe or went shopping for party clothes?

As the pace of vaccination picks up in developed countries and people get back to socialising, the demand for outerwear and formals will see a huge uptick.

Value Stocks: Stocks with Limited Downside but Good Upside Potential

This will drive the demand for yarn which is 'Made in India' to be used in clothes which are 'Made in Bangladesh'.

India is a strong player in the mid and premium readymade garment segments.

Bangladesh is known to export cheap readymade garments. India on the other hand has a higher share in premium garments.

A shift in value chain is likely to benefit India going forward. Companies which have contracts which global giants like Walmart, Marks& Spenser, H&M, Zara, and others are likely to do well.

Besides, Indian exporters are moving up the value chain. Plain contract manufacturing is now taking the shape of value addition in the form of designing the final product.

So what about the stock market? Well, it's the spinning mills and exporters who have outperformed the domestic readymade garment sellers.

Why is that so?

The fixed overheads in operating stores and a chain of front-end networks by textile retailers is cash guzzling. This has capped their profits and their share prices.

On the other hand, tailwinds like the ban on Chinese exports and revenge shopping in developed markets, has resulted in price gains as well as market share gains for Indian spinning companies and exporters.

The increasing reliance on Indian companies could be a long-term positive structural change.

To maximise your long-term gains in this sector, focus on exporters with strong global clientele in readymade garments as well as spinning companies.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

Recent Articles

Market Crash? My Top Strategy for Investors in a Downturn March 18, 2024
How should investors approach the current market?
How Indian Companies Are Competing With Giants Like Google March 15, 2024
There are strong Indian companies in India's technology revolution.
Stocks to Profit from India's Semiconductor Boom March 14, 2024
These under the radar stocks are likely to benefit from India's semiconductor boom.
Market Bubble or Potential Rally in Deep Tech Stocks? March 13, 2024
Can India's top tech stocks leverage the government's US$ 1.2 billion AI fund?

Equitymaster requests your view! Post a comment on "Are Textile Stocks Stitching a Revival?". Click here!

1 Responses to "Are Textile Stocks Stitching a Revival?"

Pandu

Jul 28, 2021

Hi, nice article and very nicely explained on this textiles topic.

I think if you can mention few stocks which are leading in this textiles space area or which can benefit out of this in future, that would help to take a look at them and understand the specific details of those stocks.

Thanks.

Like (1)
  
Equitymaster requests your view! Post a comment on "Are Textile Stocks Stitching a Revival?". Click here!