Underlying Strengths Outweigh Prevailing
Pessimism
Over the last 12 months, the textile stocks have largely underperformed the
broader market, and are currently trading at a significant discount to their
respective average long‐term trading multiples. In fact, five of the seven
stocks covered in this report are trading in a discount range of 13%‐47% to
their respective 5 year average valuation multiples. Such discounts offer an
opportunity to invest in these stocks, given the strong brand positioning of
their products coupled with robust growth prospects, going forward.
We have picked stocks based on two key determinants:
Attractive Valuations & Robust Growth Prospects: Raymond,
Vardhman Textiles, Siyaram Silk Mills, S Kumars Nationwide & Maxwell
Industries
Strong Financials & Brand Positioning: Kewal Kiran Clothing & Page
Industries
Huge Potential for Fiber Consumption in India: Per capita fiber
consumption in India is low at 5‐6 kg vs. global average of 10.8 kg. The per
capita consumption of man‐made fiber in India also remains very low at 3.5
kg vs. global average of 12 kg.
Urban India – the Engine for Branded Clothing: We believe that high
apparel spending by the urban population over the next decade will provide
huge potential to the domestic textile/apparel industry. It is estimated that
total apparel market will reach US$ 50bn by 2016 and with the rise of average
household income; increased spending for wardrobe is imminent. As per the
UN estimates, India’s urban population will rise by 171 mn over next 15
years, while the country’s working‐age population will grow by 170 mn,
which indicates sturdy demand for branded fabric and apparel in India.
Govt support for Second‐largest Employment‐Generating Sector: The
Government plans to put forth fiber‐neutral Excise Policy and to set up
Integrated Apparel Clusters to provide employment generating
opportunities in 12th Five Year Plan. It has been supporting the industry with
favorable policies and incentives like TUFS, facilitating Integrated Textile
Parks, permitting 100% FDI under automatic route, Duty Drawback Schemes
and Excise Duty abatement on readymade garments etc
A. Key Sectoral Takeaways
The Indian textile sector contributes approximately 12% to manufacturing output,
4% to GDP and 17% to the country’s exports. As per the industry estimates, India’s
textile and apparel share in global textiles trade stands at 4.5%, having a potential
to reach 8% to $80 bn by 2020. The country’s textile exports grew at CAGR of
13.6% to $30.9 bn in FY12 from $16.4 bn in FY07. Besides, Indian textile industry is
the second largest employment provider – next to agriculture – provides direct
employment to over 45 mn people at present; which is further expected to reach 52
mn people by 2017.
B. Sectoral Convergence Indicates Tremendous Growth
Potential
India’s apparel market – pegged at US$35 bn in 2011 – is expected to grow at
CAGR of 7.5% to US$50 bn by 2016, while the domestic organized apparel retail
market – pegged at US$5.5 bn in 2011 – is likely to grow at CAGR of 8.5% to US$8
bn by 2016.
Huge Potential for Fiber Consumption: We see a huge potential for fiber
consumption in India, as the per capita fiber consumption in India is low at 5‐6
kg vs. global average of 10.8 kg. The per capita consumption of man‐made
fiber in India also remains very low at 3.5 kg vs. global average of 12 kg.
India’s Innerwear Market: Growing at a faster rate compared to the overall
apparel market, the Indian innerwear market – valued at Rs. 140 bn – has
witnessed 16% revenue CAGR in FY06‐10 period.
India’s Retail Market: The Indian retail market – pegged at US$470 bn in 2011
– is likely to grow at a CAGR of 7.5% to US$675 bn by 2016. The organized
retail market – accounting for ~6% of the overall retail market in 2011 – is
likely to grow at a CAGR of 26% to US$84 bn by 2016, driven by various socioeconomic
factors, according to Technopak.
Bumper Crop: With bumper crop of 34 mn bales in cotton season, the spinners
procured cotton at relatively lower prices.
C. Favorable Demographic Divergence
India’s consumer spending is going through fundamental change where lifestylefuelled
consumption is growing fast owing to rising disposable incomes and
enormous available options. As per Technopak, around 35% of the country’s
population will be living in the urban areas, and the contribution of urban
population to GDP is likely to increase by 5% to approximately 65% by 2016. Apart
from urban India, the expenses on apparel would also remain significantly high in
smaller cities and rural areas due to rising affluence, which would provide
necessary impetus to the industry.
D. Governmental Support to Boost Growth
The Government of India has been supporting the industry with plethora of
encouraging policies, schemes and incentives like TUFS, Integrated Textile Parks,
permitting 100% FDI under automatic route, Duty Drawback Schemes and Excise
Duty abatement on readymade garments etc. It also plans to put forth fiber‐neutral
Excise Policy and to set up Integrated Apparel Clusters in 12th Five Year Plan.
Key Triggers
Stock price underperformance to its 5 year mean reflects margin of safety
Sectoral Convergence – Tremendous Growth Potential Ahead
Favorable Socio‐Economic Factors to Boost Growth
Supportive Government Policies & Schemes
Key Risks
Volatility in Yarn & Fiber Prices to affect Margin: soft yarn prices can boost
the margins of the apparel and innerwear players. While the margins for
spinning and weaving players will depend on local fiber prices and
government stance on fiber export front.
Weaker Macro Economic Environment
Inventory Management & Extended Discounted Sales: Stack‐up of inventory
during subdued demand period, leads to prolonged discounted sale that push
inventory or/and inventory write‐offs.
Forex risk: Our covered stocks in the report largely cater to domestic markets
except for Vardhman Textiles & Raymond where the export revenues are in
the range of 18%‐25%. We believe that sharp appreciation of the INR could
affect the top‐line of these two companies.
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