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Shanthi Venktaraman

OVER the past year, textile stocks have spun back to life. With the deadline for dismantling of quotas nearing, confidence levels among investors about the industry's prospects have gone up.

Announcements by international retailers such as Wal-Mart and J. C. Penney's have also spurred investor interest in the stocks of garment players such as Indian Rayon and Zodiac Clothing.

The stocks of frontline textile companies have appreciated by about 70 per cent over one year.

Following the favourable Budget package for the textiles industry, the stocks of select textile and garment companies got re-rated yet again. The decision to make Cenvat optional and the reduction of excise duty rates across the value chain are likely to fuel growth in the fabric and garments business, which would lead to increased demand for yarn.

These factors have led to a rather sharp run up in the stocks of spinning companies such as Mahavir Spinning, Super Spinning and GTN Textiles; the Vardhman Spinning stock has also appreciated by about 25 per cent since our first recommendation in April.

As things stand, investors appear to have factored in, to a large extent, the favourable impact of the removal of quotas as well as the reduction in excise duty on the performance of these companies. Investors can, therefore, hold on to their stocks.

A key concern for investors in spinning company stocks is the possibility of a poor cotton crop this year. With cotton trading at an attractive price internationally, imports of cotton appear to be on the rise. This could lead to a dip in domestic price levels.

Besides, inventories of low cost, relatively contamination-free, imported cotton should stand these companies in good stead in the near term.

Arvind Mills and Raymond emerge as among the better plays in the fabric sector. Both companies are expanding their garments capacity in the hope of making a splash in the garments business.

The Arvind Mills stock is stiffly valued at a price earnings multiple of 17. Raymond does appear to have good long-term prospects.

However, the fall in April-June quarter profits, although largely because of a foreign exchange transaction, is a worrying factor. Investors can, therefore, hold on to both the stocks for the time being.

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