India : Textile Counters Going Strong

In a market desperately looking for the `next best thing' in the aftermath of the technology debacle, textile counters seem to be attracting unexpected attention. With most of these stocks appreciating by over 30 per cent in the past three months, things can only get better for the sector, say market experts what with a general increase demand and lifting of quotas under the WTO agreement by January 2005 among other positives.

In fact, most of the optimism for the sector seems to be riding on the WTO agreement. According to a recent report from domestic broking house Enam Securities Pvt Ltd, abundant supply of manpower has kept labour costs in India relatively lower as compared to developed nations, thus resulting in the country's textiles exports growing at 10 per cent CAGR over the past decade.

One of the key factors constraining growth in textile exports to developed markets such as the US and Europe is the prevailing quota regime. Furthermore, in India, quota allocations are largely based on past performance, thereby creating an artificial entry barrier for a new entrant into the business. However, under the WTO agreement, these quotas are proposed to be abolished effective January 2005. This opening up is expected to lead to a substantial shift in garmenting operations to more labour cost competitive countries, largely in Asia.

"According to experts, cross border trades could actually double by 2010 as massive capacity relocation takes place. Clearly, this would open up a window of opportunity for labour cost competitive countries such as India, and more importantly for players capable of successfully managing large-scale garmenting operations,'' the report says.

Mr Amish Aggarwal, research analyst, Pranav Securities Ltd said, ``A lot of companies that have integrated operations will benefit from the quota restrictions being lifted under the WTO agreement because many retail stores foreign are now looking at India to outsource readymade garments. Also, there is a general demand increase in the textile industry, particularly in the fibre and cotton textile segment. However, the gains from current resurgence in the sector will be reflected in the balance sheets of these companies only by 2005-06.''

In terms of individual stories, one company that is being hailed as a turn around story in the sector is Arvind Mills Ltd (AML). According Enam, which has put a buy recommendation on the stock, ``the company has managed one of the most successful financial restructuring exercises in India by substantially reducing its debt burden and rescheduling repayments. Also, denim fortunately came back into fashion, strengthening the company's cash flows. "Going forward, AML is focusing on leveraging its existing strengths to forward integrate into garments, where huge opportunities are expected to open up post- January 2005 with the removal of the quota restrictions.''