The Repo Rate Hike: Inflation Gave the Cover, the Rupee Gave the Reason

 Profitability of textile companies to improve from H2FY12

Decline in input costs and moderate demand growth will help improve the profitability of cotton yarn and man-made fibre (MMF) manufacturers to improve over the next few quarters, after facing severe profitability pressures which led to significant erosion in their market capitalisation in first half of the current financial year.
In the past one year, cotton yarn and MMF players have registered a negative return of 48 per cent and 37 per cent, respectively, compared to negative 20 per cent return for S&P CNX NIFTY.
However, according to CRISIL Research, the current valuation of these manufacturers discounts the current negative sentiments around the sector and offers good scope for upside. Further, stocks of ready-made garment (RMG) companies seem to be fairly priced in spite of being at historical highs, as they offer relatively high and stable returns among the textile companies during the present uncertain times.
The stocks of branded RMG companies have out-performed the S&P CNX NIFTY significantly and posted 25 per cent return on a one-year basis.
The slow-down in demand in both domestic and export markets and the anticipation of a spurt in global cotton production resulted in sharp correction in cotton and yarn prices during H1FY12.
This resulted in cotton yarn players reporting significant losses in H1FY12 as they were carrying high cost cotton inventory from the last season. The sharp drop in cotton yarn prices also enhanced its price competitiveness vis-a-vis polyester (a substitute for cotton) limiting the flexibility of MMF players to pass on the hike in the costs of their inputs, which are derivatives of crude oil.
According to Ajay Srinivasan, head, industry research, ''Like in the past, we expect easing commodity prices to support moderate demand growth in FY13 and help EBITDA margins of players across the value chain to improve by 100-300 bps y-o-y.''
Valuations of cotton yarn companies and MMF manufacturers are nearing their FY09 historical lows with a one-year forward price-to-book value (P/Bv) average multiple of 0.4x and 0.5x, respectively. On the other hand, branded apparel manufacturers are trading at historical highs of one year forward P/Bv multiples of 4.7-5x, against an average of 2.9x from April 2007 to April 2011.
Tarun Bhatia, director, capital markets, ''With profitability outlook for FY13 improving, valuations of cotton yarn and MMF players are expected to offer substantial upside potential for investors. RMG stocks though fundamentally strong appear to be fairly priced.''

According to Ajay Srinivasan, head, industry research, ''Like in the past, we expect easing commodity prices to support moderate demand growth in FY13 and help EBITDA margins of players across the value chain to improve by 100-300 bps y-o-y.''
Valuations of cotton yarn companies and MMF manufacturers are nearing their FY09 historical lows with a one-year forward price-to-book value (P/Bv) average multiple of 0.4x and 0.5x, respectively. On the other hand, branded apparel manufacturers are trading at historical highs of one year forward P/Bv multiples of 4.7-5x, against an average of 2.9x from April 2007 to April 2011.
Tarun Bhatia, director, capital markets, ''With profitability outlook for FY13 improving, valuations of cotton yarn and MMF players are expected to offer substantial upside potential for investors. RMG stocks though fundamentally strong appear to be fairly priced.''

Source: www.domain-b.com