China+1 theme to drive earnings; covid resurgence a threat

Strong global recovery backed by vaccine support and strengthening economic activity has been driving India’s home textile exports. During Sep’21, Cotton sheet / Terry towel exports declined 11.8% / 2.3% MoM from a high base in Aug’21 but were up 24.5% / 28.1% YoY. India’s Sep’21 market share in Cotton sheet / Terry towel exports to the US increased to 49% / 45% vs 48% / 42%. YTD’21 market share increased to 58% / 44% vs 50% / 43% for the same period YTD20. We believe structural uptick in home textile demand owing to increased ‘work-from-home’ period, higher emphasis on health & hygiene driven by pandemic, duty reimbursement by GOI and market share gain on China+1 theme will drive earnings trajectory going forward. Our channel checks suggest healthy order book for exporters, given the strong demand from US / EU markets. Spread between Yarn and cotton prices continue to remain high and should enable yarn producers to report strong earnings for 3QFY22. Integrated players – Trident and Welspun India and apparel exporter Gokaldas Exports continue to be our preferred picks. Resurgence of Covid cases in the developed world remains a key risk to our thesis.

* India’s market share in total home textile exports to the US increased YoY for Sep’21: Home textile players witnessed MoM decline in overall exports to the US for Sep’21. Global cotton sheet export volumes to the US declined MoM by 13.8% (+8.2% YoY) to 84mn sq mtrs in Sep’21. Terry towel volumes declined MoM by 9.0% (+4.7% YoY) to 27mn sq. mtrs. In Sep’21. India’s volume share in Cotton sheet / Terry towel exports to the US stood at 38% (-2ppt MoM; flat YoY) / 40% (+2ppt MoM; +3ppt YoY) respectively.

* India’s share in US imports of cotton sheets reached 49% in Sep’21: India’s cotton sheet export volumes to the US declined by 19.2% MoM (+7.8% YoY) in Sep’21 to 31mn sq mtrs. Exports value declined by 11.8% MoM (+24.5% YoY) to USD71mn in Sep’21. India’s market share (in value terms) stood at 49% in Sep’21 (-3ppt MoM; +1ppt YoY).

* India’s share in US imports of terry towels stood at 45% in Sep’21: India’s export volume of terry towels declined by 2.7% MoM (+15.2% YoY) to 11mn sq. mtrs in Sep’21. Exports in value terms declined by 2.3% MoM (+28.1 YoY) to USD67mn. India’s market share (in value terms) stood at 45% in Sep’21 (+2ppt MoM and +3ppt YoY). For Oct’21, Trident reported Bath linen volumes of 5.4mn kgs (+3% MoM; +11% YoY) and Bed linen volumes of 3.8mn mtrs (+12% MoM; -10% YoY).

* India’s total home textile exports to the US at USD270mn in Sep’21: India’s home textile exports to the US (sum of all products) declined 3.6% MoM (+21.4% YoY) to USD270mn in Sep’21. India’s markets share (in value terms) for Sep’21 stood at 39%, down by 31pt MoM (+2ppt YoY).

* Sector witnessing structural uptick in demand: US / EU witnessed a post pandemic recovery in the home textile sector, with structural uptick in demand owing to ‘work from home’/hygiene ascribing more relevance to bed sheets/towels use. Home textile manufacturers have been operating at higher capacity as orders continue to galore.

* Deficit expected for world cotton in 2021-22: The USDA projects 2021-22 global cotton production to increase by 8.6% YoY to 26.5mn tons while Global consumption is estimated to increase by 2.7% YoY to 27mn tons, implying global deficit of 0.5mn tons. For China, cotton production is expected to decline by 9.3% YoY to 5.8mn tons while consumption is expected to remain flat YoY to 8.7mn tons. This should lead to a 2.9mn tons deficit in CY22E. For India, production is estimated to remain flat YoY at 6.1mn tons while consumption is expected to see an uptick of 3.2% YoY to 5.6mn tons, leading to a surplus of 0.5mn tons (down c.26% YoY). Ending stocks in India are expected to decrease by c.18% YoY to 2.5mn tons.

* Duty benefits to drive profitability; prefer integrated names: Home textile players remain key beneficiary of higher in-home consumption due to increased work-from-home period and higher emphasis on health & hygiene driven by the pandemic. Further, revival in hospitality sector due to increased spending on travel & holidays in Euro & US region would continue to drive demand for Home textile. Duty reimbursement by GOI and market share gain on China+1 theme will drive earnings trajectory going forward. Spread between Yarn and cotton prices continues to remain high and should enable yarn producers to report strong earnings for 3QFY22. Integrated players – Trident and Welspun India continue to be our preferred picks in Home Textile space.

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