~: From the Research Desk: The Devaluations of INR and Textile Sector:~

If the INR is devalued (say, Rs.52.50 per USD) against the US dollar, there is likely to be both benefits and costs to the U.S. economy. It would mean that imported Indian goods to the US, will be cheaper than they would be if the INR would have appreciated to say, Rs.45 per dollar. Hence, a devalued INR could boost US, imports from India now, especially the textiles and auto ancillary. 

This kind of devalued INR against the USD, lowers prices for U.S. consumers and dampens inflationary pressures. Now since the Chinese Yuan is also said to be devalued, hence the US now have a double bonus in terms of inflation control and therefore can keep their rates soft for some more days. 

It also lowers prices for U.S. firms that use imported inputs (such as parts) from India (and China) in their production, making such US firms more competitive. In the same way, such devalued INR could benefit the Indian exported sectors, like IT, Textiles and Auto Ancillary.

Now when the U.S. runs a trade deficit with the China, this requires a capital inflow from China to the United States, such as Chinese purchases of U.S. Treasury securities. This, in turn, lowers U.S. interest rates and increases U.S. investment spending-a positive for the US. 

On the negative side, lower priced goods from India and China may hurt U.S. industries that compete with those products, reducing their production and employment. In addition, an undervalued Rupee and Yuan makes U.S. exports to China and India more expensive, thus reducing the level of U.S. exports to these two Asian giants. Hence, a devalued Rupee and Yuan are both harmful and beneficial to the US economy. 

Now, since, a devalued rupee make the US, imports cheap and hence, this could be a boon for the Indian Textile sector, both in terms of the US and China. In case of devalued INR, the cheap Chinese imports to the Indian sub-continent could get some amounts of impediments, especially in case of textiles and chemicals, where China, is a leader. In case of some companies in the sugar sector, who has large overseas presence like Shree Renuka Sugar, it the devalued INR against the USD would be beneficial. However, in case of those who imports crude oil, this could be a fly in the ointment. 

However, the relationship is a little more complex. Now looking at China we find that an increasing level of Chinese exports are from foreign-invested companies in China that have shifted production there to take advantage of China’s abundant low cost labor. Now this could be a case for India too, as large Retail Companies are like Wal Mark, are to set tag Indian markets for their long term goals. Thus, after China, India could be become one of the fastest growing markets for U.S. exports. 

Hence, we can concluded that an undervalued or devalued (more appropriate term) would be positive for the Indian Textile sector, which find China as one of its chief competitor. Moreover, since the textile sector is more or less an export driven sector, and  so most of the textile, companies who have large overseas presence would be beneficial. 

I have already recommended Alok Industries Ltd (at Rs.18) and now I am recommended another of those gems from the same sector, SEL Manufacturing Ltd (CMP: Rs.10.10), which has been performing steadily  in the last few quarters.. 

Now with the devaluations of the INR against the USD, it is expected to make windfalls gains in the coming quarters. According to my sources, the 1st part of its mega-project in Madhya Pradesh has already started to function. The whole project is expected to be completed by the 2nd quarter of 2012. Moreover, previously a web-site has raised questions about its high debts on the books, but according to a top sources who refused to named: "We are maintaining our Interest Obligation in every quarters and hence large amounts of debts on the books, is not at all a cause for concern for the company. In view of so many ongoing projects, it is natural that SEL Manufacting Ltd (CMP: Rs.10.10) maintains some debt levels on its books. It has recently inaugurated a project in Punjab. The company is doing excellently well and depending on the market conditions, the company could come up with an IPO for SEL Textiles Ltd, a subsidiary of the company, in the next few months, increasing the shareholders value further". 

Now if we look at the company's fundamentals we would find that the Book Value of the shares of the company is whooping Rs.100.39, against the CMP of Rs.10.10 (or one tenth, which is a simply an absurd concept) while the EPS is Rs.8.69. Also, the P/E of the shares of the company is only Rs.1.17 against the industry P/E of Rs.8.42. A modest P/E of 6 for the scrip could take it around Rs.45-50, in the coming days---and I see no reason why this cannot happen in the next few months. According to my close sources, the December, 2011, results of the company would also be according to the expected lines (good). Also, the fall in the cotton prices is expected to have a positive effect on most of the textile companies, who deals with finished products. 
In view of this, I strongly recommend a buy on SEL Manufacturing Company Ltd at Rs.10.10 for a target of Rs.18-25-32-42-55-70--82, in the next few months time frame.