Softening cotton prices turning tides in favor of textile players: Analysts

Increased capacity utilisation, softening cotton prices set to help sector: Analysts

Analysts foresee a silver lining emerging for the textile sector with prices of cotton softening 41 per cent from last year's high of Rs 50,530 per bale to Rs 29,910 per bale. That apart, they say that improved capacity utilisation, lowering of domestic cotton premium over international prices, and demand rebound would act as tailwinds for the sector.

"Cotton prices have corrected 38-40 per cent from their all-time high levels. This, along with fall in freight rates, augurs well for textile companies over the medium term to long term. We expect margins of textile companies to improve gradually in the quarters ahead. Moreover, the decline in cotton prices will help Indian players become price-competitive in global markets," said Kaustubh Pawaskar, deputy vice president, Research, Sharekhan by BNP Paribas.

Last month, knitwear exports from Tiruppur, which comprises 50 per cent of India's export hub, rose 1.5 per cent in dollar terms and 11.6 per cent in rupee terms. The rise came after an average 20 per cent drop in the past five months as the sector stormed through twin challenges of Covid-19 pandemic and the Russia-Ukraine war.

According to Vinit Bolinjkar, head of research at Ventura Securities, global importers have started to move away their sourcing from China to India, on the back of China+1 policy, and hence, this move will provide impetus to the Indian textile industry. Analysts also assert that unstable political scenarios in Sri Lanka and Pakistan — and wage issues in Bangladesh — will shift export demand from these economies to garment players in India. The three countries command over 7 per cent of the global export pie.

Besides, they also believe that free trade agreements (FTAs) with Australia, UAE, and UK — which allows up to 90 per cent of India's exports to enter duty free in these countries — will improve India's position in the global market. With such FTAs, Indian textile companies will get a price advantage due to no import duties in these countries. "The textile companies are likely to report improved profitability going ahead, as cost structure gets aligned with global peers. Inventory clearance at major retailers' end, consumer resilience, and demand pick-up are likely to bolster export demand. Additionally, reopening of China, and correction in Indian cotton prices, will help push demand for yarn. We remain positive on KPR Mills, Arvind, and Vardhman Textiles for the long-term,” wrote analysts at Elara Securities.

Financial report card

During the October-December quarter of the 2022-23 financial year Q3FY23, the textile sector's earnings were below Street estimates. Though domestic demand was resilient, export markets exhibited subdued trends. While unfavorable cost structure weighed on Q3 margins of spinning companies, a leaner cost structure helped home textile companies witness sequential improvement in profitability. Analysts, however, believe bullish commentary by several textile players on upbeat capacity utilisations in Q3FY23 (around 80 per cent) versus Q2FY23 (50-60 per cent) shows signs of improvement.

At the bourses, shares of textile firms have exhibited mixed trends over the past one month. While shares of Gokaldas Exports, KPR Mills, SP Apparels, and Vardhman Textiles have risen up to 12 per cent; Arvind, Welspun India, Dollar Industries, and Bombay Dyeing have lost up to 19 per cent.