Commodity and Cyclical Plays

(Savishesh) #776

To answer your points:
1.Operating leverage coming into play (how will the demand for the textile sector increase? Can someone pls mention some triggers)
First, demand for garments has been increasing `steadily’ since 2012…go through concalls you will get the numbers too. Operating leverage will be in form of better capacity utilization and higher margins for premium products. Also some of the pent up demand due to gst and de-stocking in US, coming back

  1. Rupee depreciation.
    Yes but see it in light of how our currency has depreciated vs our competitors i.e. other Asian countries - China, Vietnam, Bangladesh, Pakistan, Indonesia

  2. Decreasing price of cotton. (however I am unsure as to whether cotton will fall in the near term or remain stable for next few qtrs)
    Not sure how you arrived at this…but cotton prices have increased from 38,000 per candy last season to around 46,000 per candy.

(Jiten Parmar) #778

Very good note and understanding Savishesh. Keep it up.

(manan1379) #779

demand cud also come due to us tariff on chinese textile

([email protected]) #780

@bharat19 would like to know other players in the caustic space apart from gujarat alkalis, i believe a check on other players and the way they have reacted might help to bring in a conviction in the caustic story

([email protected]) #781

@jitenp - Have a basic question on the textile sector turnaround
Have been tracking the cotton prices (source: indexmundi) and they are on an uptrend for quite some time.
Since this being a key raw material for the textile sectors, (for ex purpose : Trident) will that not impact them.
All I am trying to understand with my limited knowledge is when a sector is turning around the key raw material prices softening down will add to their margins which is not the case yet in the textile sector.

Your views will be greatly appreciated.

([email protected]) #783

thanks @bharat19 for the quick response, would you mind sharing the source to track the price of caustic if it is available as a free source data

([email protected]) #785

thanks @bharat19 appreciate your inputs

(sahil1311) #786

As per my understanding from Q3,Q4 FY18 Indo Count conference calls, cotton price also depends on the area for cotton plantation area. Management pointed out that cotton plantation area has increased in FY18 which would lead to drop in cotton prices in FY19.

I was bit surprised to see impact would take quite longer and be seen in FY19. On google search, I could see that
“Its growing season of approximately 150 to 180 days is the longest of any annually planted crop in the country.”

Hence, I believe cotton cycles would take 1-2 years to reach peak as RM cotton prices would reach bottom. However, i am relatively new to cyclicals and learning the traits. @Jitenp Sir would be able to validate my understanding.

(nil_71) #787

Excellent summation.

One good example of pessimism in sector was , eg Welspun India management gave a guidance of top line growth of 10% and margin of 18-20%, discussed all these cotton price and rupee stuff in Q1 call in details, still market hammered it badly as pessimism index was at its peak…

(nil_71) #788

Regarding cotton price increase, please listen to Q1 concall of good textiles cos, they already mentioned it that gain from rupee depreciation will nullify Cotton price increase to a good extent. Infact they mentioned that Price will hover around 46000-48000 in this season. So this price of cotton is not a news to Industry. Good management is already prepared

They hedged around Rs69. Benefits of Rs71 will come Jan 2019 onwards…

(Savishesh) #789

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.

(HIMSHAH) #790

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 .

(lastgenesis) #791

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.

(SOHAN) #792

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 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

(SOHAN) #793

Hello sir what is your views on technical textiles space

(Jay vaghasia) #794

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.

(HIMSHAH) #795

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

(HIMSHAH) #796

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.

(Shailesh) #798

Infrastructure , Manufacturing & Utilities have been in down cycle since 2008 . Does any one see cycle changing … What is emerging opportunities in these sectors …

(Karthick Chennai) #799

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…