Why textile stocks will make a strong comeback in 2023

In baniya language it means’Bhaav Bhagwan Hain’.

The Indian stock markets have proved this by disappointing both, the optimists as well as the pessimists.

Let me tell you why…

The pessimists predicted doom at the start of 2022, with Nifty targets ranging from 12,000-15,000.

On the other hand, if you were an optimist and invested in small and mid-cap stocks, 2022 disappointed you.

While the year was very average for the benchmark indices, India was one of the top-performing markets relative to global indices.

I mean, who could have imagined that when Nasdaq and Dow Jones along with its European siblings were down anywhere between 20-30% in a year, we touched all time highs a month ago.

However, a common complaint which I hear from retail investors who have invested in small and mid-cap stocks is that while the market is hitting all time highs, their portfolios are still at least 15-20% below the peak of 2021.

You might be feeling the same.

In stock markets, past glory has no relevance on future performance. There are no fixed ideas and everything is worth something at a price.

To make money, it’s important to find either emerging trends and ride on them or buy stocks at very cheap valuations which are not in favour.

So let me tell you how the duds, the laggards, and the losers of 2022 could be the stars of 2023.

My first set of stocks are the ones where people have had a very sour taste over the past two years.

The newly listed tech stocks or the platform companies.

As you are aware, most of the stocks are down by 50-60% from their peak. In fact, most of them are trading below their listing price and some below their IPO price too.

My point is very simple, the past is past. Price changes perception.

For instance, when Zomato was at ₹150, I recommended subscribers to stay away from it.

In fact, when it corrected 40% to ₹80, I still said it wasn’t the right price to buy.

However, at ₹50, it was clear that value had started emerging.

The rationale why I liked Zomato at ₹50 was….

The stock had already fallen by 60% i.e. it was cheap on a relative basis.

Most of the supply overhang was gone or about to go. This meant the PE funds sold their stake to strong domestic institutional investors.

A lot had changed in terms of operating dynamics leading to lower cash burn and adjusted EBITDA breakeven was in sight.

Hence the same Zomato which was a big red flag at ₹150 became an attractive bet at ₹50.

Price does change perception.

I believe, stocks like Paytm, Nykaa, and Car trade too have started to become attractive.

Now that doesn’t mean you can jump in to buy them. My point is this untouchable space has started to emerge in value.

While growth was never a problem, it was always about valuations.

I believe these shunned new tech platforms have all the right ingredients to make money in 2023.

My pecking order of preference would be as follows:

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Another sector which has been away from limelight over the past year is the textile sector.

Majority of the stocks are down by 30-40% from their peaks.

The sector is in doldrums as majority of textile players export their products to US and European markets. With a recession and global slowdown looming, demand will definitely be hit.

The same textile sector at the end of 2020 and during 2021 was hustling at full capacities while some textile mills were in fact expanding capacities.

Every time cotton prices were rising, the integrated mills who had a yarn manufacturing capacity made a killing. Passing price hikes was very easy.

Today, the demand is down at least 30% from the peak with additional capex falling flat on these companies.

However, all of this is just a cycle.

In 2023, textile companies are poised to make a comeback. Some of them have the added advantage of domestic demand too which is still robust.

With input cotton prices on a decline, the lost flavour in the textile sector could get back sooner than you can probably anticipate.

To end this piece let me also interest rates mention by mid of 2023 across the globe.

As investors it is prudent not to put your eggs in one basket.

The next 3-6 months could be the best time to lock in your 3 and 5-year fixed deposit rates or to allocate some money to debt funds.

Trust me, while 2023 will be a stock pickers market and debt is likely to do well too.

Here is wishing everyone Happy Holidays.

​​Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com