I do not track chemicals because first I don’t understand the space much, second its difficult for me to find complete information to give me the conviction to put big money. I just know due to capacities being shut down in China prices have increased and demand has come to Indian companies. But is that permanent I don’t know, alternate supplies, I have no idea, ground situation…except for few chemical companies (Hikal, Bharat Rasayan, Aarti ) being very upbeat about the demand in their concall nothing more. I tried my hands on borrowed conviction but neither I could put big money due to lack of my own conviction nor could I make any money worth it. So sorry I have no views.
Same way, Pharma is one sector I want to understand deeply but my understanding is still quite shallow.
Coming back to textiles, high cotton prices will eventually get transferred in form of higher yarn prices but with some time lag…in any business when raw material prices increase its not automatic adjustment but a gradual adjustment in prices but it does happen its just a matter of time. So higher cotton prices do impact margins but only in short term. In higher counts its much easier to pass on price increase, in lower counts it takes more time depending on demand and supply.
We should also understand Textiles is still 90% unorganised and only 10% organised sector. And there is a difference - organised players are relatively big capacity wise, have professional teams for tax and compliances and have credit lines from banks to withstand any increase in working capital whereas unorganised sector had hard time to get used to paper work and working capital problems due to refund issues related to input tax credit. To add to injury government reduced incentives of duty drawback and reduced import duties (though import duties has been amended now). So it was kind of perfect storm. Lot of people have changed their occupation in Surat and Tirpur - textile hubs.
I read that with US China trade war, India has the opportunity to grab huge market in Textiles. US and Europe market is more of winter wear whereas we make more of Summer wear. That is because of wrong focus and Government policies but I am no one to lecture on that. I think Vietnam is in better position to take advantage of it rather than India. But yes we will get some part of the pie especially in home textiles where we are the leaders. My bets are more on yarn side because it should benefit both directly due to higher cotton yarn demand from China/ elsewhere and indirectly, through higher demand from home textile players.
NBFCs are facing crisis of confidence…money lending is another commodity business but with huge leverage. Leverage means there is no room for mistakes. And I get amused to see messages being forwarded on social media without checking the facts !! Its like if the business situation won’t kill the business fear mongering will…so new threat is fear mongering…an event like 2008 and we may see much more sharp corrections and volatility.
I track TGV SRAAC former sri rayalseema alkaly. They are 4 th largest producer of caustic. And worth looking at its result. Their expected sales this year is around 1400 cr and cash earning around 125 cr on capital of 90 cr. Mit cap is approx 350 cr. They have recently started production of chloromethene and it have very good demand in Hyderabad drug company .
I have not been tracking data points currently especially at industry level but have worked with the sector in the past so for what it’s worth some industry level macro points. Essentially there are 3-4 sub sectors within the textile industry, all of them react differently to changes in macro that are being discussed here.
a) Garments - end product, largest part of the industry but most players who are into exports are unlisted. This vertical broadly operates on conversion cost basis so while there is an upside from rupee depreciation, contract renegotiations will negate this in a couple of quarters, especially as entry barriers are less and there is good amount of competition and not much pricing power. E.g. Gokuldas Exports, Ambattur clothing etc.
There is a second category in this of garment manufacturers who are also having their own domestic brands (Arvind/ Raymond) - per se they are the highest guys in the value chain but as companies & stocks they have underperformed due to various business issues, poor inventory management/ competition etc.
b) Spinning - Capital intensive, will be benefitted by lower cotton prices. Standalone spinners as a business model don’t work over a cycle have as operations have kinda become highly commoditized. That said this is a cyclical business and there is possibly money to be made, an simple search on moneycontrol for some of these guys shows them trading much below book value, so more digging may produce interesting results. Don’t own any stocks in this space and have not tracked for some years so need to research before i say more.
c) Fabric/ integrated players - Fabric is where most of the value addition in the chain happens from a technical perspective if not necessarily an financial one, fabric guys are generally integrated into spinning and hence should benefit significantly from a cyclical turn either in form of lower commodity price, or demand expansion or even rupee depreciation. Better than spinning players because they get benefit of both RM pricing + better realization as fabric is less commoditized than yarn.
Track/ own some stocks here namely Himatsingka Seide & Vardhman textiles which IMO are the best managements in the business. Himatsingka which is into silk, bed linen & upholstery I particularly like because they are the only guys in export who are integrated and own their own brands in the international markets (they are license holders for products such as Tommy Hilfiger, Calvin Klein, Barbara Berry for their categories). Hence they will not need to pass on the rupee depreciation to their customers but will get full benefit of the same. Till now this is not reflected in books due to hedging but will come into play soon. Both Himatsingka and Vardhman are available pretty cheap on PE basis but possibly delta will be lower than standalone spinners who seem to be making losses/ no profits currently so will benefit more from cycle turn.
Hello jiten sir. I am tracking fundamentals of many cyclicals for 8 years.i have found that average 10 year roe of these companies is greater than 15 % to 25% and price to book less than 0.5 to 0.25 .dividend yield (consistent dividend)greater than 5%.top one or two players do not fall much but tailenders fall very much due to fear in sector eventhough they have good roe metrics.can eros international be considered as cyclical as average 10 year roe is 16% and price to book of 0.29
Very true.There is no clarity on cotton prices,so we should not jump to conclusions.
However, I feel currency depreciation works in india’s favour because:
China is top apparel exporter with 35% market share( 158B $) and it’s yen has depreciated 4.85℅.
B’desh is no.2 with 6.5℅ (30B$) and its taka has depreciated by just 1.2℅.Also, they have rise in production cost due to more focus on safety.Fearing stiff competition from India, their exporters are demanding separate exchange rate.
Vietnam is 3rd and it may devalue it’s currency fearing Chinese dumping.
India is 4th with 10℅depreciation.
Indonesian rupee has also depreciated 7.5% and would compete with India.
Very good result by TGV SRAAC. They have shown very good results. It’s improving quarter by quarter. This quarter they have shown around 30 cr profit( 17 cr + 12 cr extra one time int charges) on 91 cr capital.
I have personally visited their plant in last AGM and look very good script to invest.
I Request other member to do FA aNd TA of the tgv.
Their recent expansion to chloromethene is very profitable. And in our forum some member has posted environmental clearance report which suggest that company is doubling capacity of caustic and chloromethene
Interesting part is market cap is 350 cr for company with turnover of 1300 cr . Expected earning 17 cr + 30 cr + 30+ 30 cr assuming same earning in rest two quarter ei 107 cr + 50 cr depreciation so company earning 157 cr a year on 90 cr capital.
Infrastructure , Manufacturing & Utilities have been in down cycle since 2008 . Does any one see cycle changing … What is emerging opportunities in these sectors …
SPL industries is one of the largest vertically integrated Knitwear plants in India… 60% revenue from export… Market cap 104 cr…will it be beneficiary because of textile industry turn around? seems stock is undervalued…
Sorry missed the message, per se it is a space with a lot of growth potential but also a much more diffused product range and client base. As in if you are into fabrics or home textiles they are much easier markets to follow and understand, here your client can can be anyone from hospitals to automobiles so sector is difficult to penetrate, R&D capabilities are also required to greater extent but conversely if you have done so moat is also bigger.
IMO there is no Indian company that has achieved the scale or capability to make it big in this business. A few like Rajapalyam group, Ginni etc have been in the sector for a while with inconsistent results. I feel while India has some natural advantages in cotton chain, in technical it is very difficult for us to compete with China.
Textile garment export up in Oct 18. Light at the end of the tunnel. But tunnel end is far away.
Vietnam , Bangladesh exports ,due to their cheap labour , give stiff competition.
Import duty hike on 400 textile items and various GOI measures , easing of GST refund issues augur well for textiles Industry.
Lets’s first go breifly in past. Before 1980 US and Europe were major textile hubs but after 1980’s due to high labour costs manufacturing shifted to Asian countries like China, India, Bangladesh, Indonesia, Pakistan, Vietnam, Cambodia and Thailand. China was able to carve out a large portion of export pie due to low labour cost and huge natural resources. Bangladesh, Indonesia, Pakistan took advantage of FTA’s to gain benefit.(Search out why FTA’s helped these countries)
But India was not able to gain market share as per its demography(Only 5% whereas China 40% in global exports).
Reasons were :
Poor government policies of earlier governments(Read UPA policy on cotton export.How I got to know this, see margin of textile companies in 2008-2012)
Governements not doing any FTA’s with EU,US
High Lending rate (<10%)
Defragmentation/unorganized sector not cost competitive in global scale.
China able to do better on all above fronts.
Why Industry might be turning now:
Present Government imposed import duties on textile products.(Help Curb china as no FTA with China)
Taking measures to do FTA with EU (Search google and you may find number of articles and steps taken)
Central government providing special packages to textile industry .
Setting up textile parks to avoid defragmentation and do large scale manufacturing.
Under GST, unorganized to organized sector shift.
Devalue of rupee, making india more cost competitive.
Marging level of textile companies on uptrend first time after GST/Demo setback.
India growth story. Domestic consumption rising.
China slowing down. Increasing wages in china.
Bangladesh , Indonesia having labour union issues. So countries going for 2 country approach like in all imports.
Hope these points may help you take some decisions in your investments. Currently also tracking Recycled paper industry. Feel free to connect for sharing ideas.
Nice note !!
Well cheap labor though important is not the only pre-requisite. A lot of investment is required in plant & machinery, technology and process and systems and in building horizontal and vertical integration. Pakistan, Bangladesh and Indonesia are at the lowest end of the value curve. Vietnam and Ethopia - lot of Chinese are building capacities to take advantage of lower duties and cheap labor and FTAs
Problem with India is Government’s short sightedness in promoting cotton based textiles only. Most of the textiles produced in India is good for summer wear and of course home textiles where we are the leaders now. But the biggest market lies in winter wear and fashion wear dominated by Chinese. And the kind of eco system they have built cannot be replicated by others so easily - its like saying that if US India Trade war breaks out China or Pakistan or some xyz country will be able to take over software development market share from India.
Moreover, China is slowly automating with help of Robots so if cheap labor is the only advantage that other countries enjoy that might not stay for long.
Textiles have certainly turned around going by the results this quarter but lets be objective in our assessment and not driven by wishful thinking
Hi @jitenp (or anybody in forum),
No discussion on steel for more than 8 months (I’m a cyclical newbie), There was a bulk deal on Tata Steel though it is down, but lots of smaller companies’ stocks are down a lot.
a) Is the cycle peak over ?
b) Went through a few earnings and conf-call reports (Tata, JSW, Sarda, Prakash, Kalyani) but everyone sounds bullish (as all business men should be )
I was thinking of entering but being cautious, thank you for the great forum !
We don’t know yet, if cycle has turned. And my process and experience tells me to exit when everything looks very rosy.
Early entry, early exit.
Had exited most steel stocks, except one, which has now come back to my avg price. And reason for staying in that, there was a corporate action happening in that.
STEEL SECTOR: CHINA STEEL PRICE CORRECTING MAKING IMPORTS VIABLE | INDIAN STEEL STOCKS AT RISK!
Steel stocks looks vulnerable given the sharp correction in steel prices in China, steel imports have become viable
** Landed cost of HRC Imports from China is ~INR 42000/ tonn v/s Domestic price of INR 46000/ tonne. Whereas the anti-dumping duty price threshold is INR 35000/ tonne.
** One can expect prices to correct by INR3000-4000/ tonne over next 2 months. This will trigger earnings downgrade cycle for Indian Steel stocks
** Tata steel, SAIL, JSPL appears most at risk For every INR 1000/t correction in EBIDTA the target price of Tata Steel reduces by INR 80/ Share
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