In this episode, we spoke about the characteristics of the textiles business, the ecosystem i.e. the process right from spinning the yarn to stitching/designing the fabric. We also covered the subject of why companies like to get listed on the stock exchanges.
#1 The Textiles Industry
A. Industry Characteristics
One of the most important things before analyzing a company, is to understand the ‘industry’ in which it operates.
For eg. Let’s say you want to invest in SpiceJet. Before you do that, you need to understand how the Airline industry works. Once you dig deep - you’ll understand that it’s pretty difficult to make money in the airlines biz. Even Warren Buffett - the Oracle of Omaha, got his fingers burnt in airline stocks.
Also, when you study the industry - you find out who the market leaders are. Which companies have a competitive edge. It helps you make a better investing decision.
A few things that characterize the textiles business - is heavy capital investment. You need to put a lot of money upfront to set up your manufacturing capabilities. The payback period is also quite long - as it takes time to streamline your operations and to scale your business.
Plus, it’s a cyclical business. The demand fluctuates throughout the year - with peak demand witnessed during the festive seasons. So, businesses have to be very smart about Inventory management & reducing dead stock.
Therefore, to be successful in the textiles industry, businesses have to be great allocators of capital. If you over-invest or over-produce, you can put yourself in a very dangerous situation.
B. Market Potential
The Textile industry contributes nearly 12% of India’s total export earnings and directly employs 45 million people in textile manufacturing activities.
Exports in textiles & apparels are projected to reach $300bn by FY25 and to facilitate this the GoI proposed a scheme for setting up mega textile parks in the country in the next 3 years - to become globally competitive, attract more FDIs into the sector & boost employment.
Also, this is an industry ripe for disruption. A lot of innovative concepts are making way into the Indian landscape & companies that innovate and iterate their business models could find themselves in a position to capitalize on this opportunity.
#2 The Ecosystem
Do you ever wonder how the t-shirt you are wearing right now was made? What happens after cotton is plucked to turn it into a piece of cloth?
Here’s what happens behind the scenes:
First, the cotton fibers are converted into a yarn - through a process known as ‘spinning’.
Next, the yarn goes through a process called ‘sizing’ which increases the durability & the strength of the yarn.
Third, the yarn is converted into fabric either by ‘weaving’ or ‘knitting’. There are various ways to convert a yarn into fabric - and the method used usually depends on the end application of the fabric.
Fourth, the fabric is dyed or printed. For eg. a plain black T-shirt has been dyed, whereas a bedsheet is probably printed.
The final step - is designing and converting the fabric into different shapes. It can be a T-shirt, or a table cloth. That’s where the ‘fashion designer’ comes into play.
As you can see, the textile ecosystem is HUGE - with hundreds of companies operating in each part of the eco-system.
#3 Why Companies get listed?
Now, this discussion was a little off topic - given that the episode was on the Textile Industry & it’s eco-system & the reasoning behind a company getting listed is generic in nature - but we decided to cover some ground on it anyways.
So, why do companies get listed?
That is the essence of why companies list on the stock exchanges. You can’t take a bank loan every time you want to expand your business - so, you open the gates to your company & raise money from the public (i.e. FIIs, DIIs, QIBs, Retail investors etc.)
However, raising capital may not be the primary objective of a company getting listed. Giving the existing investors a [sweet] exit is also one of the reasons why companies go public.
We’ve also seen a recent phenomenon, where companies go for something called as a ‘direct listing’ - where no new shares are offered to the public. Instead, the company is listed on the stock exchanges & it gives the existing shareholders the liquidity to sell their shares to the public ‘directly’ on the stock exchange.
One other reason that companies get listed, is to increase the credibility of the company itself.
A listed company needs to be more accountable & transparent with it’s operations, has to release quarterly earning reports, answer investor questions, follow additional compliances of the market regulators.
Are you someone interested in fashion or textiles? Do follow Aman’s podcast TexWired