Headwinds loom over Textile Industry
Elevated cotton prices have been the pain point for Indian textile exporters. The main reason for the significant increase in cotton prices has been lower production estimates by industry bodies like the Cotton Corporation of India (CCI) and increased consumer demand. In 2020-21, India's total cotton lint fiber output was 353 lakh bales (lb) of 170 kg each.
For 2021-22, the production estimate released by CCI in May 2022 has estimated cotton production at 323.63 lb, an 8% lower YoY. Also, CCI is expecting the consumption of cotton to increase to 345 lb in 2021-22 compared to 334.87 lb in the year 2020-21, a 3% higher YoY. Lower cotton availability for the mills has led to spiraling of cotton prices, which have almost doubled over the last year.
Higher cotton prices subdue demand
Owing to a decline in cotton production by about 8% YoY domestic cotton prices have risen by 90% YoY to Rs.272/kg. Correspondingly yarn prices, which were already trading at higher levels, inched up further by 38% YoY to an all-time high of Rs.385/kg in May-June 2022. Yarn players who had recorded one of their best EBITDA margins in FY22 are now reeling under pressure as yarn spreads have shrunk from an all-time high of Rs.110/kg to Rs.40/kg. This is expected to negatively impact margins for yarn players in H1FY23 as cotton prices are expected to remain elevated owing to supply deficit till the start of the next cotton season which begins in October 2022. While domestic demand for yarn remains stable, volume for yarn exports has been impacted. The majority of ready-made garment exporters were able to pass the increased input cost initially as demand was healthy post lockdown relaxations. However, increased inflation has led to a slackening of demand, and reluctance from global retailers to accept further price hikes can negatively impact the volume growth of Indian ready-made garments players going ahead.
Bulging inventory may slow order book momentum in the near term
The recent event/news flow suggested that major US retailers (like GAP, Target, and Walmart) were grappling with excess inventory issues owing to lower-than-expected demand and delayed deliveries due to port congestion resulting in seasonal and occasion-specific products remaining unsold. Global retailers have significantly trimmed down their profit projections sighting RM inflation and removal/reduction of stimulus.
DisclaimerInvestment/Trading is subject to market risk, past performance doesn’t guarantee future performance. The risk of trading/investment loss in securities markets can be substantial. Also, the above report is compiled from data available on public platforms.
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