The worst is over for the textile industry! Receding global retail inventories has given the Indian textile industry heft, indicating a brighter outlook from the second half of FY24 (H2FY24), brokerage house Sharekhan highlighted.
In view of the strong medium to long-term outlook, the brokerage upgraded its view on the textile sector to 'positive' from 'neutral' earlier.
According to the report, the industry has successfully gained market share in the garments and home textile categories in key export markets.
"The Indian textiles sector is strategically consolidating its position in key export markets such as home textiles and readymade garments, capitalising on opportunities arising from the US-China trade war. India has witnessed a notable increase in its share of exports in these segments to the US. After challenging and subdued FY2023 affected by muted demand, higher retailer inventory, supply constraints, and rising cotton prices, the textile companies believe the worst is over and anticipate a demand revival by Q3FY2024 with reducing inventories on global retailers’ shelves," explained the note.
It further noted that factors such as the “China + 1” strategy, geopolitical uncertainties in competitor countries, and potential free-trade agreements (FTAs) with the UK and Europe offer promising prospects for consistent earnings growth and improved cash flows.
Also, with material capex already completed, textile players are poised to leverage their expanded capacities. Moreover, falling cotton and crude prices are expected to bolster margins and enhance India’s competitiveness in export markets, it added. The Indian textile sector is well positioned to overcome challenges and looks forward to riding the next upcycle, believes Sharekhan.
Stocks
According to the brokerage, textile companies with a better product profile, strong export clientele, an integrated business model, and expanded capacities are expected to post strong double-digit earnings growth of 20-41 percent over FY2023-25E. With recovery on the cards, Sharekhan believes it is the right time to invest in some quality textile companies with strong growth prospects and under-stressed balance sheets. it prefers Gokaldas Exports, KPR Mill and SP Apparels in the garment space while we prefer Himatsingka Seide in the home textile space.
Gokaldas Exports, KPR Mills, Himatsingka Seide, and SP Apparels are strategically poised to gain export market share, riding on opportunities and setting the stage for strong growth, said the brokerage. It also initiated coverage on Gokaldas Exports with a Buy rating.
Gokaldas Exports: The brokerage initiated coverage on Gokaldas Exports with a buy recommendation with a price target of ₹635, indicating an upside potential of 32.5 percent. The company is trading at 17.8x/13.5x its FY24E/25E EPS. It will deliver a strong earning CAGR of 72 percent over FY20-25E driven by capacity expansion, the addition of new clients and market share gains in the key US market. The company is likely to generate strong cash flows in three years, said the brokerage.
KPR Mill: The brokerage maintained a buy on KPR Mill with a revised target price of ₹800, indicating an upside of 27 percent. It trades at 20.9x and 16.6x its FY2024E and FY2025E EPS. The company is one of India’s largest vertically integrated textile players, which has a steady financial record with a sturdy balance sheet. The strength of its integrated model helps the company achieve a consistent EBITDA margin, which is much better than some exporting peers. Its revenues and PAT are expected to grow at a CAGR of 20 percent and 28 percent, respectively with a capacity expansion expected to contribute ₹250 crore in the coming years, rationaled the brokerage.
Himatsingka Seide: Sharekhan maintained its positive view on the stock with a target price of ₹140, indicating a potential upside of 24 percent in twelve months. The stock trades at 8.0x and 4.9x its FY2024E/FY2025E EPS, which is attractively valued after a sharp fall. As demand is likely to recover, the management expects to clock revenues of ₹750-800 crore per quarter. EBITDA margins will improve to 18-21 percent. With capex almost completed, the company will focus on repaying debt through improved cash flow thus strengthening its balance sheet in 2-3 years, noted the brokerage.
SP Apparels: The brokerage retained its positive stance on SP Apparels with a target price of ₹515, indicating a potential upside of 23 percent in twelve months. The stock is trading at an attractive valuation of 9.0x/6.5x its FY2024E/25E earnings. SPAL posted resilient performance in tough FY2023 as the kids' wear category didn’t face any significant demand constraints unlike other categories due to inflationary headwinds. The company has strong order booking for the coming quarters and expects to generate consistent double-digit earnings growth, noted Sharekhan.
