The pre-pandemic situation
In FY20, the domestic textile and apparel (T&A) sector stood at $106 bn (source: Wazir Advisors) and thrived on the apparel demand, constituting $78 bn of the domestic market. Over the years, the sector has witnessed decent growth on the back of the growing income and the rising demand for fashion and lifestyle products.
However, when it comes to exports, the sector has largely been stagnant. Growing labour costs in China paved the way for other nations to tap into the global export market. However, India failed to seize this opportunity primarily because of the duty-free access enjoyed by poorer countries, fierce competition and trade barriers in the international market.
During the pandemic
COVID caused widespread disruption to the T&A sector. The sector faced a complete shutdown for around two-three months, while a few manufacturers involved in manufacturing only PPE kits were permitted to function. Thereafter, most of the units operated at sub-optimal levels for several months because of production issues like the migration of labour, transportation bottlenecks, local lockdowns and so on. The pandemic-led lockdown across the country has resulted in a slump in the retail sales of apparel. As estimated by Wazir Advisors, in FY21, the domestic T&A market would decline by 30 per cent, while exports would decline by 15 per cent.
With the work-from-home culture gaining momentum, there was an increase in the sales of casual and innerwear through e-commerce, while those of the formal category took a beating. On the other hand, the ban of Chinese cotton products by the US augured well for the Indian export market. Exports of home textile also saw an improvement, owing to the growing hygiene concern and wellness consumption across western markets.
The present situation
A highly critical sector, T&A employs 4.5 crore workers and contributes around 30 per cent to the country's total exports. To support its long-term growth, the government has taken various initiatives, such as a production-linked incentive scheme of Rs 10,683 crore, which is aimed at facilitating the manufacturing of man-made fibres and technical textiles and planned textile parks. A steady increase in the vaccination drive in the western markets has revived the economy, thereby boosting exports.
STOCK VIEW: TCNS Clothing
TCNS Clothing is involved in manufacturing women's ethnic apparel and operates three brands with each having differentiated offerings - W, a fusion of Indian and western wear brand catering to work and casual wear requirements of modern Indian women; Aurelia, a contemporary ethnic wear brand and Wishful, a premium occasion-wear brand. Over the years, the company has quickly expanded its retail network and today, has a pan-India presence with 3,685 outlets across various formats, along with a strong online presence.
Women's apparel constitutes around 37 per cent of the $78 billion Indian apparel market. Out of this, around 71 per cent is constituted by Indian wear. However, the sector is highly unorganised in nature. TCNS is playing a leading role in the shift from unorganised to organised sectors. Factors like an increase in the number of working women, the shift towards aspiration rather than need-based buying and the emergence of home-grown brands are acting as a catalyst for the company.
Most of its products are sharply priced at under Rs 1,000, enabling the company to attract a larger target group and seize the opportunity to expand.
The competitive edge
With people staying more at home, sales of ethnic and casual wear took a severe beating. In FY21, its sales fell by 44.7 per cent over FY20 sales. However, the company remains debt-free with cash and current investments worth Rs 187 crore on its books as of FY21. With the economy opening up and people going back to normal life, the company's brands are expected to recover faster. Besides, aggressive pricing, coupled with strong brand equity, will further help the company even if customers downtrend their purchases to lower pricing points. The management has devised aggressive growth plans. Given the opportunity in the dull real-estate market, the company plans to open more than 60 stores in FY22 on a net basis. It is also planning to expand its footprint in tier-III and tier-IV towns.
Financials & valuations
Before COVID hit, the company was growing at a swift pace. During March 2017-20, the company grew its sales and profits by 18 and 64 per cent YoY, respectively. In each of the preceding quarters, its sales improved and its Q4FY21 sales were at the same level as that of the last year. However, risks associated with a third wave of the virus are still imminent and investors should enter the stock with the expectation of medium-term turbulence. Amid the ongoing bull market, the stock price has returned 75 per cent in the last one year and currently, trades at a P/B of 6 as compared to the three-year median of 5.3.
ABOUT THE CHART AND THE TABLE
Sensex vs sector stocks portfolio
In the analysis above, we have given a three-year chart of the portfolio comprising the top stocks in the sector vis-à-vis the Sensex. This chart will help you assess the movement in the sector as compared to the market. The stocks considered for this chart are the ones given in the table of key stocks. It was assumed that one invested an equal amount in each stock three years ago. If a company was not listed three years ago, it was incorporated in the portfolio from its listing and the appropriate adjustment was made.
Key sector stocks
This table mentions the top stocks in the sector, along with their key financial stability numbers. Given that most companies in the sectors discussed have witnessed a significant drop in their profits, profitability related metrics may not be very useful. One must assess their balance-sheet and cash-flow strength. Following are the key columns in this table:
Net debt-to-equity: This is the debt to-equity ratio adjusted for cash and current investments. A negative ratio indicates more cash/current investments than debt. This is a comfortable position to be in.
Free cash flows: Cash flows from operations minus capital expenditure is free cash flows. They indicate that a company is able to incur capital expenditure from its own cash flows rather than depend on outside funding. This is highly desirable.
Cash flows from operations: This is cash generated from a company's operational activities. A positive value is desirable. A negative value indicates that profits, if any, are not getting converted into real cash, an undesirable scenario.
Interest-coverage ratio: It indicates how easily a company can service the interest on its debt. The higher the number, the better.
Also in this series: