3Q revenues to remain subdued; margin pressure could likely ease off
Indian cotton sheet exports to US increased 35.4% MoM in Sep’22 while terry towel increased 25.4% MoM. Market share across a) cotton sheet stood at 46% in Sep’22 up 11.2ppt MoM b) terry towel stood at 47% in Sep’22 up 7.1ppt MoM. China witnessed market share loss during Sep’22 to the tune of 3.6ppt / 0.3ppt across cotton sheets /terry towel. Despite improved trade in Sep’22, demand for home textile is expected to remain subdued in the near term given weak consumer sentiment and significant inventory build-up in key markets. Global retailers witnessed softness in demand across home and apparel segments during the quarter as customers became increasingly cautious towards their spending in these categories. Inventory correction efforts continued during the quarter with inventory position expected to likely improve at the end of 4QCY22 (Walmart/Target). Indian home textile and apparel companies have highlighted near term demand uncertainty on account of inflation, recessionary sentiments and inventory pile up at global retailers level. However, the companies believe recent decline in cotton prices (-8.1% MoM) will likely ease margin pressure on the textile value chain. The textile sector continues to be well placed given a) raw material security b) GOI’s focus on developing the textile ecosystem c) likelihood of market size increase via FTAs with UK/EU over time d) market share gains as world looks for an alternate production base other than China. Gokaldas Exports remains our preferred pick in the space, while Welspun India stands to benefit from lower cotton prices in 2H.
* Home textile demand expected to remain under pressure in the near term: Global cotton sheet export volumes to the US decreased MoM by 4.3% (-11.9% YoY) to 74mn sq mtrs in Sep’22. Terry towel volumes increased MoM by 12.4% (-12.2% YoY) to 23mn sq. mtrs. In Sep’22, India’s volume share in Cotton sheet / Terry towel exports to the US stood at 31% (+3.7ppt MoM; -6.9ppt YoY) / 42% (+8.3ppt MoM; +1.8ppt YoY) respectively.
* India’s share in US imports of cotton sheets stood at 46% in Sep’22: India’s cotton sheet export vols. to the US increased by 8.8% MoM (-28.0% YoY) in Sep’22 to 23mn sq mtrs. Export value increased by 35.4% MoM (-21.3% YoY) to USD56mn in Sep’22. India’s market share (in value terms) stood at 46% in Aug’22 (+11.2ppt MoM; -3.2ppt YoY).
* India’s share in US imports of terry towels stood at 47% in Sep’22: India’s export volume of terry towels increased by 40.1% MoM (-8.2% YoY) to 10mn sq. mtrs in Sep’22. Exports in value terms increased by 25.4% MoM (-11.9% YoY) to USD59mn. India’s market share (in value terms) stood at 47% in Aug’22 (+7.1ppt MoM and +2.2ppt YoY).
* India’s total home textile exports to the US at USD239mn in Sep’22: India’s home textile exports to the US (sum of all products) increased 19.2% MoM (-11.3% YoY) to USD239mn in Sep’22. India’s markets share (in value terms) for Sep’22 stood at 39%, up 7.0ppt MoM (+0.6ppt YoY).
* Cotton surplus expected for India in 2022-23: The USDA projects 2022-23 global cotton production to marginally increase 0.6% YoY to 25.4mn tons while global consumption is estimated to decline 2.1% to 25.0mn tons. For China, cotton production is expected to increase by 4.5% YoY to 6.1mn tons while consumption is expected to increase 4.3 % to 7.9mn tons. This should lead to a 1.9mn tons deficit. For India, production is estimated to increase by 12.2% YoY to 6.0mn tons while consumption is expected to decline 4% to 5.2mn tons, leading to a surplus of 0.8mn tons vs deficit of 0.1mn tons in CY21.
* Cotton prices witness decline amidst anticipation of higher production: Cotton prices decreased 8.1% MoM in Nov’22 amidst anticipation of higher production of the crop as well as low demand from the textile industry. Meanwhile, yarn pries decreased 2.4% MoM in Nov’22. Yarn – cotton spread increased 10.1% MoM to INR98/Kg.
* Global retailers continue to reduce inventory backlog: Global retailers continued their inventory correction efforts during the quarter. Walmart witnessed low single digit decline in sales of home and apparel on account of rising cost for essential goods. The company continued to take corrective measures for rightsizing of inventory during the quarter and expects inventory position to improve at the end of 4QCY23. Meanwhile, Target witnessed softness in demand across apparel and home segment as customers became increasingly cautious in their spending in these categories. Target expects an improved inventory position by year end.
* Management commentary from Indian companies post 2QFY23 results: Indian home textile companies expect near term demand to remain adversely impacted given subdued consumer sentiment and significant inventory build-up in key markets. Margins are expected to improve from 3Q given decline in cotton price and easing of supply chain. Apparel companies also expect near term uncertainties on account of inflation and recessionary sentiments. While margin pressure are expected to ease on the back of decline in cotton prices
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