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HindustanTimes Fri,22 Aug 2014

Threadbare valuations

Udayan Mukherjee   June 03, 2007
First Published: 23:06 IST(3/6/2007) | Last Updated: 23:11 IST(3/6/2007)

Every vendor on Dalal Street knows how the rupee’s recent surge to 40 has knocked the stuffing out of exporters. It is not just IT that has got hammered, as a consequence. The less oft-discussed whipping boy has been textiles. Most textile stocks are languishing very close to their 52-week lows and no one wants to touch them.

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It is not my favourite sector but when everyone begins to hate a sector, as was the case with sugar a while back, stocks sometimes stop falling. The classic bottoming out process happens when there is all round despair without even a glimmer of hope. So, textiles have my antennae up.

It is true that the rupee is hurting textile companies. Most of them derive a large chunk of revenues from exports and the weak dollar erodes their margins. While IT companies, which work on 30 per cent plus margins, can absorb this, textile margins are far thinner and thus the ability to absorb is far lower.

So the despair is not unfounded. Any investment call here thus has to be based on rock bottom valuations and a leap of faith that eventually these companies will be able to counter the currency by improving productivity, higher realisations and improving business cycles. True, it is a contrarian call and therefore may test one’s patience.

Arvind and Alok are the liquid stocks here. Both are trading just 10 per cent off their 52-week lows. Alok at a PE of 5 and Arvind at 10, both with market caps just under Rs. 1,000 crore. Sure, they are hurting but any positive trigger can lead to an upturn. Vardhman Textiles is down 45 per cent from its year high and trades at 5 times 2007-08 earnings. Some of the quality exports plays like Welspun and Gokaldas have been battered out of shape.

Raymond, despite a strong domestic brand franchise, has seen its market cap dip below Rs. 2,000 crore. They appear cheap. But you may ask, if IT with such strong business momentum is underperforming how can textiles do better? It truly is difficult to argue fundamentally in favour of textiles now. They may take two years to move, and when they do they will double. A doubler in two, even 3 years, is not too bad, is it? Tough call, but think about it. 


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