Resham Jain, Fund Manager, DSP Investment Managers, gives his outlook on the chemicals and textiles sector for 2022
You have overweight positions in chemicals and textiles in your DSP Small Cap Fund. What's your outlook for these two sectors in 2022?
The Indian chemical sector continues to enjoy good tailwinds supported by the global need for alternate supply chain (China+1 strategy), domestic need for substitution and industry responding through continuous investments. Investments are happening at multiple fronts, including higher backward and forward integration, scale expansion, improving capabilities through R&D, getting into adjacencies, etc. Some of the industry players supplying to discretionary sectors like building material, auto, textiles, etc., saw softness in demand during pandemic-induced lockdowns, while players supplying to sectors like agri, pharma, staples saw stable performance.
Over the last few years, the balance sheet of most of the listed chemical players saw significant improvement backed by improved profitability and capital raise. This has further helped the players to take slightly bolder and long-term-oriented decisions. Overall, the sector remains attractive to capture a much higher global market share from just 3 per cent currently.
The Indian textile sector experienced quite a bit of volatility over the last 18 months. Initially, it experienced a pandemic-led global lockdown, which disrupted demand-supply dynamics, both at the producer and the retailer level. In addition to this, the sector is currently facing inflationary headwinds, cotton being the key variable and export logistics being the other one. On the other hand, demand has been quite resilient both in the domestic and export markets, helping the producers to pass on the cost inflation.
Among various sub-segments, cotton-yarn players have enjoyed a significant improvement in profitability backed by strong demand. Some of the large mills carrying low-cost inventory were significant beneficiaries. The new cotton season has started at 30 per cent higher prices than last year and even then, margins are higher than normal times. The other sub-segment which is experiencing good demand conditions is knitwear exports and home textile exports. Integrated players are currently much better positioned, given that they can manage inflationary headwinds much better, and also the global retailers are expecting a much faster turnaround time of orders, given tight supply situations and lean inventory in shelves. Lastly, going forward, some of the macro factors have the potential to further help Indian textile players positively, like geopolitical issues necessitating China+1 strategy, Xinjiang cotton issue, favourable policy support encouraging more investment (production-linked incentives, MITRA scheme), and EU FTA (free trade agreement).
This interview was conducted in December 2021.
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