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Business News/ Market / Mark-to-market/  Market consolidation keeps growth hopes alive for home textile exporters
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Market consolidation keeps growth hopes alive for home textile exporters

Rupee appreciation and firm cotton prices undermine home textile exporters' profitability, but investors are attaching little importance to these emerging risks

Graphic: Subrata Jana/MintPremium
Graphic: Subrata Jana/Mint

A firm rupee, higher raw material prices (cotton) and subdued demand in the key export market (US) are doing little harm to home textile exporters’ stocks. Even as the rupee appreciated 3.8% against the US dollar in the last three months and cotton prices rose 20% from a year ago, shares of Indo Count Industries Ltd, Trident Ltd, Himatsingka Seide Ltd and Welspun India Ltd gained 20-40% in the last three months.

The rupee appreciation and firm cotton prices undermine home textile exporters’ profitability. JM Financial Institutional Securities Ltd warns that cost pressures can impact India’s competitive advantage. “Higher Yuan depreciation vs. INR (Indian rupee) appreciation and reduced cotton price spread between India and China is impacting the Indian advantage," adds JM Financial.

To be sure, companies get to pass on the costs. But that happens with a three-six months’ lag. In the meantime, they will have to absorb the cost pressures. The recently notified duty drawback scheme is expected to provide some cushion, but as one analyst with a domestic broking firm points out, cost pressures outweigh the benefits from the scheme.

Still, as can be seen from the gains in share prices, investors are attaching little importance to these emerging risks. Why? There are two reasons.

One, many see the cost pressures as transitory and not risky yet. One analyst says the situation can turn adverse if the rupee continues to appreciate, say 5-6% from hereon. Pawan Jain, president (corporate affairs) at Trident, says that while cotton prices remained firm on tight supplies, as the new crop arrives he expects the cotton prices to turn range bound.

The second and another important reason for the resilience in the home textile stocks is consolidation in the market. According to Jain, organized and large firms are gaining market share in the export market. So, even as the US market is not seeing notable growth, companies like Trident see much scope for market share gains, he adds.

Also providing growth and earnings visibility is backward integration and capacity expansion. Himatsingka Seide expanded sheeting capacity (bed linen) and is aiming to commission spinning capacity, which helps in backward integration, next fiscal year. Similarly, Indo Count Industries is expanding bed linen capacity and is planning to build a new plant. Analysts expect the new capacities to help these firms improve profitability and market share. “(Indo Count) expects 10-12% volume growth in FY18. Also, Indo Count believes its volume growth has the potential to grow at a higher rate post FY18," IDBI Capital Market Services Ltd said in a note.

Of course, the new capacities will be of no help if the market situation deteriorates or the rupee appreciation and cotton price rise intensifies. But if the external environment does not turn for the worse, home textile makers can overcome the current cost pressures with scale benefits. The key is market share gains. “Ability to garner incremental market share in the context of the recently added capacity by Indian players will be the key monitorable, going forward," adds JM Financial.

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Published: 24 Mar 2017, 07:26 AM IST
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