Ad campaign Buland Bharat ki Buland Tasveer by a two-wheeler manufacturer in the 90s highlighted the aspirations of Indian households and the rest is history. Fast forward to 2021, a health & hygiene company is running a signature campaign Period of Pride. This too is likely to be a redefining moment for India on many counts.
Despite being one of the largest exporters of textiles, India depends heavily on imports in some product categories such as sanitary napkins, diapers, wipes and protective clothing, amongst others. Period of Pride emphasizes the need to bring the discussion on Menstrual Hygiene Management (MHM) to the forefront. Also, it underscores the need to first become self-reliant in manufacturing these products at competitive costs.
On this backdrop, the developments with respect to the much touted New Textile Policy, which is in the draft stage at present, become crucial to track.
The textiles sector in India contributes 2% to the country’s GDP and provides employment to nearly 4.5 crore people. Textile exports account for ~12% of India’s total exports. Between 2018 and 2026, the industry is expected to grow at an 11% compounded annualized rate. Seven mega plug-and-play textile parks are likely to boost India’s market share in the export of textiles and apparel.
(Source: IBEF, National Investment Promotion & Facilitation Agency, Ventura Securities)
The technical textiles market is likely to grow even faster than the overall sector.
Out of 32 major technical textiles fibers imported in India, 12 categories are dominated by China. UAE, Qatar, Taiwan and Russia are other countries are dominant suppliers of select fiber specialties. Technical textiles are looked upon as a sunrise sector with the government encouraging the industry to tap a vast import substitution scope.
The post-COVID response can be encouraging.
As you must be aware, India didn’t domestically manufacture Personal Protective Equipment (PPE) kits in the pre-COVID times, nonetheless, within a few months from the outbreak of the pandemic last year, it became the second largest producer of PPEs in the world.
However, the devil is in the details, as always.
India’s textile sector is plagued with multiple challenges including the lower productivity, elevated debt, lack of foresightedness of company managements and import dependence in the key textiles categories as discussed earlier.
As you can make out easily, these are structural issues and they might not fade away on their own even if the economy recovers sharply. For instance, cost structures of many textile companies are rigid. Raw material costs, power and employee costs together account for 69% on an average. If you add financial costs, depreciation, marketing and other expenses to the above tally, you can imagine the wafer-thin margins many of these companies work at.
Based on FY20 numbers
(Source: ACE Equity)
We considered 242 listed companies classified as textile companies to analyze the cost structures at large. We filtered out companies having a market cap of less than Rs 250 crore. We were left with 39 companies. For these companies, raw material cost made up 28%-92% of the net sales with the average being 53%. Moreover, the energy bill was as high as 15% of the top line in some cases whereas the average power cost was about 5%. The average wage bill for these 39 companies was 11% (of the revenue) with 34% being the highest in the category.
As you must be aware, after metals, textiles and apparels was the most stressed sector of the economy and claimed a huge share in the Non-Performing Assets (NPAs) of Indian banks. Some famous old companies such as Garden Silk Mills, S. Kumars Nationwide, Alok Industries either got acquired or liquidated.
Now that famous brands and global retail chains are diversifying their supplies and looking out for cost-competitive manufacturing destinations, India stands a chance to claim its share.
Many of you might ask if India can compete not only with China but also with some other prominent textiles and apparel exporters—Vietnam, Bangladesh, Thailand etc.
India’s cost competitiveness
(Source: National Investment Promotion and Facilitation Agency)
India’s real concern has been poor infrastructure and apathy to use technology to improve productivity. The textile sector is highly fragmented and it’s possible that some large players might not be using the best of processes and manufacturing technologies.
Governance can be another area of concern. There have been instances of promoters forming other entities to do similar businesses outside the listed entity. Their book keeping practices, capital allocation and capital costs may raise even more eyebrows. And these issues are often deep-seated although you may not be able to figure them out easily, merely by looking at the most common equity valuation matrices.
That’s why many companies in the textiles sector failed to attract investors and never became long term money compounders.
If you hunt for value in the textiles sector without paying attention to their cost structure, corporate governance records and addressable market opportunity, you might end up falling in a value trap.
Don’t get swayed away by large players claiming a big market share in production capacities. Instead, nimble companies achieving greater plant automation, optimizing costs and adopting prudent capital allocation strategies may have promising prospects.
(Source: ACE Equity)
In the post Q3 earnings discussions, some textile manufacturers have indicated that yarn prices have started moving up slowly and cotton prices have been stabilizing. If this trend continues in future, margin expansion is likely.
COVID-19 forced companies to axe costs which boosted margins, and now managements are facing this question a lot these days at analyst meets—how much of the cost savings are permanent in nature. Some textiles companies have completely revamped their cost structures during the pandemic and are now confident of retaining their cost savings even in future.
Take the example of SP Apparels. The company reported a 17.3% EBITDA margin for 9MFY21 as against 13.9% reported in 9MFY20. In the year of the pandemic, the company shifted from small rented factories to a large one. This helped it reduce rent and other overheads. The company worked on improving consumption optimization and wastage control besides curbing other costs. The management remains confident about maintaining margins going forward.
SP Apparel’s staff consists 70% of women. In the post earnings discussion, the management has indicated that the company intends to increase its capacities without incurring additional capex. In other words, it wants to run more than a shift at its production facilities. The Budget 2021 has allowed women to work in shifts at manufacturing units with adequate safety. One of the biggest beneficiaries of this decision is likely to be the textiles industry.
Coimbatore-headquartered KPR Mill on the other hand invested heavily in technology which not only can produce various blends and a range of viscose yarns but can also help it eliminate two major processes. This can potentially result in savings of a lot of power and manpower costs. Moreover, the company’s investments in technology will help it completely eliminate the usage of salt in the manufacturing process and reduce the water consumption by 30%. Q3FY21 numbers reflect these process sophistications and enhancements.
KPR Mill has a production base in Ethiopia as well. The company has been exporting its products from this facility to the US. Now it remains to be seen how the forthcoming New Textiles Policy will affect future expansion plans of the company. Total employees on the payroll of KPR Mill are 19,469 of which nearly 84% are women employees as per the latest disclosure.
In the wake of technical textiles becoming a sunrise sector, tracking the performance of companies such as 3M India, SRF, KPR Mill and Vardhman Textiles has become crucial. It’s noteworthy that these are not stock recommendations.
Concluding thoughts
Cotton occupies 60% of the raw material bucket of Indian textile companies. Despite being one of the largest producers of cotton in the world, India’s productivity is one of the lowest, according to the Cotton Association of India. True, the focus is likely to be on manmade fibers in future but a dedicated policy for a sector can’t help much unless the entire ecosystem is well-aligned.
Interestingly, agrochemical companies have a busy capex schedule nowadays. So is the case with Indian Railways. Once these pieces achieve their desired benchmark, raw materials and the freight bill of the textiles sector can drop substantially. Will that be a period pride for India’s textiles industry in true sense?
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
You may also like to read: Deadline for filing EoI extended; is BEML going BPCL’s way?
Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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