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Cotton price inflation to impact margins; long term prospects intact

Indian cotton sheet / terry towel exports to US increased 4.9%/9.3% YoY during Feb’22. India’s market share during Feb’22 improved MoM as Jan’22 was impacted due to the emergence of third wave. Market share across a) cotton sheet stood at 54% vs 44% in Jan’22 – China’s market share decreased by 540bps b) terry towel stood at 44% vs 35% in Jan’22 – China’s market share decreased by 1000bps. Fears of lower cotton output during the 2021-22 season caused cotton prices to double YoY in Apr’22. However, government's decision to remove import duty on cotton is likely to help in bringing down cotton prices, thereby easing margin pressure on textile companies eventually and lowering pressure on garment/fabric makers to take price hikes. Despite the near-term uncertainty on account of raw-material cost inflation, sectoral tailwinds of a) GOI focus on developing the textile ecosystem – government approves 61 applicants for the PLI scheme towards man-made fiber and technical textile which shall lead to proposed investment and projected turnover of ~INR191bn/~1,850bn b) likelihood of further increase in addressable market size via FTAs with UK/EU over time c) market share gains as the world looks for an alternate production base other than China augurs well for the space. Apparel exporter Gokaldas Exports remains our top pick in the apparel sector as the company fits twin criteria of addressable market size being huge and top-notch management leading the business.

India’s volume market share improves on MoM basis: Global cotton sheet export volumes to the US decreased MoM by 11.3% (+6.2% YoY) to 77mn sq mtrs in Feb’22. Terry towel volumes decreased MoM by 15.4% (-9.1% YoY) to 25mn sq. mtrs. In Feb’22, India’s volume share in Cotton sheet / Terry towel exports to the US stood at 40% (+9ppt MoM; -6ppt YoY) / 37% (+6ppt MoM; +4ppt YoY) respectively

India’s share in US imports of cotton sheets stood at 54% in Feb’22: India’s cotton sheet export volumes to the US increased by 16.1% MoM (-8.4% YoY) in Feb’22 to 30mn sq mtrs. Export value increased by 28.1% MoM (+4.9% YoY) to USD71mn in Feb’22. India’s market share (in value terms) stood at 54% in Feb’22 (+10ppt MoM; -6ppt YoY).

India’s share in US imports of terry towels stood at 44% in Feb’22: India’s export volume of terry towels increased marginally by 2.5% MoM (+1.4% YoY) to 9mn sq. mtrs in Feb’22. Exports in value terms increased by 13.9% MoM (+9.3% YoY) to USD67mn. India’s market share (in value terms) stood at 44% in Feb’22 (9ppt MoM and 1ppt YoY). China’s market share (in value terms) declined 10ppt MoM and 4ppt YoY to 16%

India’s total home textile exports to the US at USD260mn in Feb’22: India’s home textile exports to the US (sum of all products) increased 9.4% MoM (+14.1% YoY) to USD260mn in Feb’22. India’s markets share (in value terms) for Feb’22 stood at 38%, up by 5ppt MoM (flat YoY).

Deficit expected for world cotton in 2021-22: The USDA projects 2021-22 global cotton production to increase 7.5% YoY to 26.2mn tons while Global consumption is estimated to increase 2.5% YoY to 27.0mn tons, implying global deficit of 0.8mn tons. For China, cotton production is expected to decline by 8.5% YoY to 5.9mn tons while consumption is expected to decline 2.5% YoY to 8.5mn tons. This should lead to a 2.6mn tons deficit in CY22E. For India, production is estimated to decline 4% YoY to 5.8mn tons while consumption is expected to see an uptick of 4.0% YoY to 5.7mn tons, leading to a surplus of 0.1mn tons (down c.80.7% YoY)

Increasing cotton prices to put pressure on margin: Cotton prices have increased substantially over CY21 and CYTD22, this is likely to impact margins of textile players. Cotton prices have doubled YoY and grew 14.8% MoM in Apr’22 as cotton output is expected to come lower in the 2021-22 season.

Long term growth prospects intact: Home textile players remain key beneficiary of higher in-home consumption due to increased work-from-home period, higher emphasis on health-hygiene driven by the pandemic. Duty reimbursement by GOI, market share gain on China+1 theme and US ban on Xinjiang cotton will drive earnings trajectory going forward. Despite near term impact on margins on account of inflation in cotton prices, long term growth prospect for the sector are intact. Gokaldas Exports remains our top pick in the apparel sector as the company fits the twin criteria of addressable market size being huge and top-notch management leading the business.

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