Have Textile And Cement Stocks Bottomed Out?

Cement and textile stocks are showing weakness and are underperforming the broader markets. Tanay Loya and Yogesh Supekar explore if these set of stocks have bottomed out and whether good days lie ahead for these sectors.

When it comes to investing in equity markets, taking a view on any particular sector is of paramount importance. Often it is found that successful investors are able to identify the broader sectoral trend. It is commonly observed that 50 per cent or more of big winners usually belong to leading sectors and industries and it is very rare to see a particular stock grow while the sector is witnessing growth challenges. A major part of the strength in any stock is driven by the strength of its respective industry and hence it is important to look at the prospects of the leading industry. It is equally important to avoid investing in sectors or industries that are under stress. When the problem relates to a particular sector, it is natural for the stocks in the sector to underperform. Some of the recent examples are PSU banks, telecom and steel companies.


What is sectoral analysis?

A sectoral analysis is nothing but an assessment of the economic and financial condition of the given sector of the economy. The prospects of the particular sector are studied in detail while doing the sectoral analysis. The common objective in any sectoral analysis is to find whether the sector is worth investing in and that the stocks in that particular sector are likely to outperform.

Sector analysis is done by those set of investors who believe in top-down approach of investing and is performed usually by analysts or investors who specialise in a particular sector. The reason for doing a sectoral analysis is that not all sectors do well in an economic upturn. In other words, some sectors do better than other sectors and are influenced by different stages of the business cycle. 

We have identified two sectors, viz., cement and textiles which have lagged the broader markets in the first half of the current fiscal and chances are that the stocks from these two sectors may provide bottom fishing opportunities in the coming quarters.

Cement Sector

The cement stocks are underperforming the broader markets even as the major cement stocks such as ACC, Ambuja Cements, Shree Cement and Ultratech Cements have recently touched their 52-week lows. The cement sector is reeling under pressure owing to rising costs, in spite of decent growth in volumes. Monsoon is not considered to be a season where the sales reflect growth, hence the sentiment may remain weak for cement stocks. Majority of the cement companies are looking to improve their market share and are overlooking the profitability aspect at the moment. Investors can expect some positive development in the sector as the fundamentals will only improve from here.

Out of 32 cement stocks that are traded on the bourses, 21 companies have hit their 52-week lows in the last one month, whereas only two companies (out of 32) have hit their 52-week highs in the last 5 months. In other words, 62 per cent of the cement companies have touched their 52-week lows in the last one month.

Bonanza Portfolio Ltd

What is your view on cement stocks as most of them are hitting 52-week lows?

India is the second largest cement market in world with capacity of 500-plus MTPA and there are about 560-plus operational plants in India. Despite the positive volume growth in all cement companies, the realisation per tonne of cement has seen de-growth last year. Many of the cement makers got this volume spike due to capacity additions, whereas the demand growth is absent at this time as the construction and real estate demand has slowed down. This is the period where some companies are focusing on protection of operating margins by changing fuel mixes and adapting renewable power. If fixed costs come down, they will see better prospects for having steady profits but, by and large, most of the companies have failed to meet expectations as their topline and margins have got affected. 

Talking about FY19 and FY20, it is still expected that the sector would see some growth, but it will be more or less likely to be lower than the estimates by street analysts. The profitability margins and debt metrics of the cement companies may also come under pressure in the coming quarters on higher pet coke, coal and diesel prices. The demand may come from low cost housing and some rapid construction going on in Telangana and Andhra Pradesh. Investors should also note that the cement market in South India is different in nature from North India. Per tone EBITDA, operating efficiency, captive power, cost of power are the company parameters that one should look for, whereas demand is something that truly affects the sector.

Vivek Banka

CEO and Founder, Altiore Capital

Which sectors in your view will outperform in the coming quarter? 

The last few months have been a volatile period, especially for the mid-cap and small-cap stocks. Some of the sectors that have taken a big beating have been telecom, public sector banks and infrastructure, among others. 

As a defensive play, stocks in the pharma and IT sectors could continue their revival as they are fairly underinvested (despite the rally over the last few months) and provide comfort in case of any significant market volatility. 

The PSU banks could also be a joker in the pack as these are near the period of maximum pessimism. Positive news from the NCLT and respite from the rising interest rates could add the necessary trigger for these stocks to continue to add to the bounce that they have had in the past few weeks.

Which sectors are possible candidates for earnings upgrade?
PSU banks and pharma could have possible upgrades going forward as the markets seem to have priced in severe pessimism in these sectors. 

The bounce-back in prices of these sectors could be followed by earnings upgrade in specific companies in these sectors. 

Textile sector

FY18 has been one of the worst years for the textile companies. The poor performance of the textile companies have been due to the headwinds faced by the sector, such as GST, high raw material costs (cotton prices) and reduction of government incentives.

Besides these headwinds faced by the industry, the sub-sector in textile faced de-stocking of terry towels in the US, which impacted the fortunes of home textile players. Brexit was another major event which affected apparel exports to the United Kingdom. All these negatives were seen affecting the textile sector at the same time in FY18. Hence, the textiles stocks are trading at low P/E multiples. Usually, the textile stocks do trade at low P/E multiples. 

The earnings for the textile companies were seen slowing down in almost all the quarters in FY18. The currency appreciation in FY18 was also seen as a dampener for the textile manufacturers. 

The competitors of Indian textile manufacturers from Bangladesh were able to grab market share even as the government incentives were reduced for the sector in FY18. India’s share in world terry towel exports to the US was seen at 38.2 per cent in March 2018, which is significantly down from 40.5 per cent which has been the average run rate. 

The textile stocks are reeling under pressure also because there is lack of earnings visibility for FY19 and FY20.Going forward the situation may improve for the textile stocks and the business environment can be expected to improve in the coming two years. 

In the textile sector, 36 per cent (70 out of 194) companies have hit their 52-week lows in the last one month, whereas only 5 per cent companies could hit their 52-week highs during the same period. 

Saravana Kumar 
Chief Investment Officer, LIC MF. 

In regards to the textile sector, the currency depreciation would benefit export-oriented textile companies. Textile companies focusing more on the building brands would be able to improve the margins and do business from the long term point of view. The US trade war regarding US import restriction on garments and textile goods make marginal adverse impact from the short term point of view. 

Which sectors in your view will outperform in the coming quarter?

We believe India’s macroeconomic position will be under pressure at high levels of oil prices. The high oil prices will affect India’s current account deficit (CAD), inflation and fiscal deficit. This would eventually lead to the rupee weakening against the US dollar and other leading global currencies. The export-oriented sectors like pharma, IT, agrochemical, etc would do better due to currency depreciation and are likely to outperform the markets. 

The market will increasingly focus on the possible outcomes of the next general elections (due in April/May 2019) and the electoral prospects of the BJP and the ruling-coalition (NDA). The likely increase in government spending on the rural economy through an expansion of the MSP programme (resulting in increase in consumer prices of most of the farm crops) and recovery in volumes led by a steady economic recovery would see growth in domestic consumption sectors like automobiles and consumer staples. 

After a relatively weak performance in the last two years, we also expect a sharp decline in loan-loss provisioning for banks and improvement in RoEs for some banks. The increasing cost of borrowing would make marginal lower earnings for the NBFC which is depending on wholesale borrowing. The NCLT outcome would benefit marginally the PSU banks. Retail lending focused private sector banks valuations at the current levels look expensive. At corrections, retail lending-focused private sector banks may be added in the portfolio. 

Which sectors are possible candidates for earnings upgrade? 

The sectors with high exposure to exports like pharma, IT, agrochemical would do better, largely due to low base and currency depreciation benefits and would likely see earning upgrades in the future. The strong order book in the infra space could lead to earnings upgrades in infra stocks with strong execution capabilities. A higher-than-expected demand revival may lead to upgrades in consumer staple companies. 

However, there could be some risks to margins if commodity prices continue to rise. Having said that, the consumer staple companies have a fair degree of pricing power and, thus, these companies can increase prices to offset any increase in input prices. It is expected that well-managed corporate lending focused private bank’s space is likely to do well.

Conclusion : 

It is often difficult to catch any stock at the bottom. However, an investor may stand a chance to beat the markets if sectors that are close to bottoming out are identified. In our view, both cement and textile sectors are close to bottoming out in the coming quarters. Investors can look at quality stocks in these beleaguered sectors for long term investments. The investment horizon can be deliberately kept longer for stocks from these sectors. Buying into cement and textile stocks should be strictly done in a staggered manner as the bottom is near and we cannot confidently say that these sectors have already touched their bottoms.