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There is a strong rising trend in the shares of companies of retail, apparel and fashion sectors in the Indian stock market. Amid the surge in domestic consumption, strong demand for weddings and the upcoming festive season, major retail companies selling textiles and readymade garments are witnessing a sharp improvement in their performance. Meanwhile, leading brokerage house Motilal Oswal Financial Services has reiterated its bullish view on a leading apparel retail stock. Despite giving explosive returns of more than 60 percent to its investors in recent months, the brokerage believes that the stock still has strong potential to generate even higher earnings from the current levels.
Motilal Oswal’s ‘BUY’ rating and new target price
Brokerage firm Motilal Oswal, in its latest research report, has underlined the strength of the business model and balance sheet of this apparel retail company. The brokerage has set an attractive upside target price while maintaining the BUY rating on the stock. According to the report, the rapidly expanding network of modern retail stores in Tier-2 and Tier-3 cities, better product mix and continued improvement in operating margins (EBITDA Margin) will enable the company to grow at a faster pace than the industry average in the long run.
Store network expansion and strong demand from Tier-2/3 cities
The biggest contribution to the company’s growth story is considered to be its aggressive store expansion. While the demand for premium and value fashion remains stable in metro cities, consumer inclination towards branded clothing has increased rapidly in smaller towns:
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Rollout of new retail stores: The company plans to open a record number of new flagship and franchise stores in the current financial year.
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Dominance in value fashion segment: Based on its portfolio of affordable and fashionable clothing, the company is rapidly increasing its market share among the youth and middle class families.
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Improvement in Inventory Turnover: With the help of digitalization of supply chain and modern warehousing management, the company has been successful in reducing its inventory days, thereby strengthening the working capital cycle.
Expected increase in revenue due to demand of festive season and weddings
The second half is always considered to be the highest earning period for the Indian textile industry. Clothing sales historically witness a double digit surge due to Rakshabandhan, Ganeshotsav, Navratri, Diwali and the long wedding season that begins thereafter. Analysts at Motilal Oswal believe that the company’s balanced collection of ethnic and western wear is all set to cash in on the festive demand, which will have a direct impact on the company’s financial results and top-line revenue for the next two quarters.
Why fundamentals are strong even after 60% rally
After the sharp rally of 60 percent in the stock, questions may arise in the minds of many investors regarding valuation. However, the brokerage report clarifies that this rally is not based only on sentiment, but there are solid fundamental factors behind it:
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Strong Free Cash Flow: Due to strong cash flow from operations, the company is completing its expansion plans (Capex) without incurring huge bank loans.
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Increasing margins from private labels: The company has recorded significant improvement in gross margins by increasing the share of its in-house private brands.
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Online and Offline (Omni-channel) Models: Direct-to-consumer (D2C) sales through e-commerce platforms, quick commerce and mobile apps are seeing strong year-on-year growth.
Strong breakout signals on technical charts
On the technical front, the stock has completed a healthy consolidation after a return of 60% and is making a breakout of ‘Bullish Flag’ pattern on the charts. The stock is trading well above its 20-day, 50-day and 200-day exponential moving averages (EMA). The Relative Strength Index (RSI) is indicating a strong uptrend and the On-Balance Volume (OBV) shows that large institutional buyers are accumulating on every small dip.
Take these precautions while investing in retail and textile sector
Although the outlook from brokerage houses is positive, investors investing in the fashion and garment sector should also be mindful of certain risks. Unexpected fluctuations in raw material (cotton and yarn) prices and increased competition may put mild pressure on margins. Therefore, before making any new purchase, buy systematically in installments (Buy on Dips) instead of lump sum investment, maintain proper diversification of your portfolio and follow the stop-loss disciplinedly.