India spinning sector is seeing heightened demand due to the prohibition on Xinjiang cotton made products and higher captive consumption of yarn in Bangladesh and Vietnam, says a report of Motilal Oswal Financial Services Limited.
India’s home textile industry is facing headwinds due to shortage and unavailability of shipping containers, increase in freight costs, and longer transit duration, according to the textiles report of Motilal Oswal Financial Services Limited (MOFSL). While there may be some headwinds, companies remain positive on demand scenario in the mid to long run on account of the China Plus One strategy, US prohibition on Xinjiang cotton made products, and the government’s steps to support the Indian home textile export market.
Steady demand outlook
As per OTEXA data, India’s market share in US cotton sheets imports rose to 57% in CY21 (v/s 52% in CY20), whereas China lost ~2% share. In the Terry Towels segment, India’s share has risen by 200bp to 44% in CY21 (v/s 42% in CY20), while China’s share has fallen by 200bp. India spinning sector is seeing heightened demand due to the prohibition on Xinjiang cotton made products and higher captive consumption of yarn in Bangladesh and Vietnam.
International cotton prices: The following is expected to impact cotton prices going forward: i) the US ban on products manufactured from cotton obtained from China’s Xinjiang region, and ii) this region accounting for one-fifth of the global cotton production. As a result, other cotton supplying countries are likely to face added pressures.
Domestic cotton prices: Cotton arrival in the market till date is ~10.8m bales v/sn ~26m bales at the same time last year. Cotton arrivals to the market are slower this year, even as consumption remains high. Import has fallen due to a change in duty. As a result, domestic prices continue to remain high. Prices of cotton rose 71% to INR207.8/kg in Nov’21 from INR121/kg in Oct’20. Itn surged 8% MoM to INR217/kg in Jan’22. As cotton prices are at their peak, yarn and fabric prices are rising in tandem.
The China Plus One strategy is further accentuating growth as US and European clients n look to increase their sourcing from other countries.
Inflation impacts margin: Margin in 3QFY22 was suppressed due to the significant rise in cotton/energy prices. Companies are focusing on passing on the increase in material cost to customers via price hikes in finished products.
In 3QFY22, major home textile companies – Welspun Indian (WLSI), Indo-Count Industries (ICNT), Trident (TRID), and Himatsingka Seide Ltd (HSS) – reported cumulative revenue growth of 25% YoY and 5% QoQ. TRID led the pack with 52% YoY and 18% QoQ revenue growth in 3QFY22.
The home textile segment of TRID and WLSI (excluding Carpet) grew 29% YoY and 5% QoQ. All players reported strong YoY growth, led by an increase in realizations and revival in demand, while it was a mixed bag in terms of QoQ growth. Major Home Textile players (TRID, WLSI, ICNT, HSS) reported a revenue growth of 52%/19%/2%/16% YoY. On a sequential basis, TRID/ICNT reported a revenue growth of 18%/8%. The same declined by 3% for WLSI/HSS.
Valuation and view
The home textile segment witnessed a strong demand revival in 9MFY22. Despite shortages and the unavailability of shipping containers, higher freight cost, and longer transit duration, a better demand scenario is likely to continue in the mid to long run on an increased consumption due to hygiene-related factors, and market share shift from China due to ban on imports of cotton made products from Xinjiang.
MOFSL expects gross margin pressures to subside in upcoming quarters with price hikes. However, it will remain under pressure till the next cotton season. The outlook for the Home Textile business remains positive, with short term risk to margin. Indian Textile players are best placed to utilize this opportunity. The outlook for Yarn and Garment players also remains positive due to higher demand for Apparels from the US and Europe (from retailers) on account of the China plus One policy and the US ban on imports of cotton made products from Xinjiang.