Near-term outlook for textile firms is muted
1 min read 26 Aug 2022, 11:16 AM ISTWhile there are significant headwinds in the near term, a downward trend in cotton prices, easing of the supply chain, and measures taken by government to tackle inflation suggests a much better 2HFY23 for the industry
PremiumA mix of unfavourable factors is likely to weigh on the performance of home textile companies in the near future.
Sluggish demand, high inflation, destocking, and geopolitical concerns have led to a severe margin pressure on these companies. An earnings analysis of key textile companies in 1QFY23 by Motilal Oswal Financial Services showed that aggregate textile margin declined 720 basis points year-on-year (y-o-y) to around 16% on account of an increase in cotton prices amid lower volumes. One basis point is 0.01%.
In 1QFY23, major home textile companies such as Welspun India, Indo Count Industries Ltd, Trident Ltd. and Himatsingka Seide Ltd. reported a cumulative revenue decline of 8% each y-o-y and sequentially in the textile business, said the Motilal Oswal report dated 25 August.
In spite of a dismal Q1, their managements remain positive on the sector's medium to long-term demand on the back of various government initiatives.
"While there are significant headwinds in the near term, a downward trend in cotton prices, easing of the supply chain, and measures taken by government to tackle inflation suggests a much better 2HFY23 for the industry," added the Motilal Oswal report. Also, companies expect to reduce their inventory backlog in the upcoming holiday season, it said.
Analysts at JM Financial Institutional Securities Ltd. said that a higher depreciation in Bangladesh's currency and Pakistani rupee at 11% and 21%, respectively, year-to-date as against 7% in case of the Indian rupee has placed Pakistan and Bangladesh in a better position, optically. "However, increased raw material imports and energy price inflation has disallowed Pakistan and Bangladesh to capitalise on a favourable currency," it had said in a report on 18 August.
In addition, economic crisis and currency collapse in Sri Lanka is likely to impact garment exports, resulting in orders moving away from the island nation, it said.
To conclude, the benefits of government measures along with the aforementioned factors would reflect only in the long-term for domestic home textile companies. For now, it is a turbulent ride for investors in these stocks, caution analysts.
