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* Cotton prices ease, though cotton-yarn spread still distant from earlier highs: Cotton prices have stepped down from their all-time highs of Rs1.1 lakh per candy (356kg) to Rs62,500 at present. During 3QFY23, cotton-yarn spread (~Rs90/kg) had improved compared with 1HFY23 (~Rs75/kg), but 4QFY23 spreads (~Rs80/kg) have narrowed a bit. Indian cotton-price premium over international cotton slid, from ~36% in 2QFY23 to ~24% in 3QFY23. For 4QFY23, the premium fell to ~14%. In the last one week, the premium – which had dwindled to almost a single digit – has inched up, with international cotton price having further corrected. Domestic news indicating hoarding by farmers in order to rake in higher profit from cotton has led to further price-correction halting.

* Improvement in Capacity Utilization and Capex: : Commentary by several players indicates an improvement in utilization in 3QFY23 (~80%) over 2QFY23 (50-60%). Utilization at Vardhman touched almost 100% capacity during the second half of Q3 FY23. During the current fiscal, the company is adding 1 lakh spindles to meet the potential growth in demand going ahead. Nitin Spinners saw 80% capacity utilization in Q3 and is undertaking Rs9.5bn capex, which will increase its capacity by 40%. Similarly, Indo Count is expanding its spindle capacity, along with bed-sheet and top-of-the-bed capacity

* Demand scenario: : During 3QFY23, several players in spinning pointed to enhancement in demand on the back of China opening up. A few textile companies did indicate that some retailers have seen higher demand with reduction in inventory. We believe that while the textile sector is facing tough times, there are some signs of improvement. Although muted demand from the USA and UK remains a key concern, correction in domestic cotton price, expanding yarn-cotton spread, initiation of demand from some retailers, better demand from China, and lowering of premium of domestic cotton over international cotton prices are key positives

* Vardhman Textiles – – The company reported a sharp drop in EBITDA for the quarter (down 73% YoY and 52% QoQ) on account of high-cost cotton inventory at the end of Q2FY23 and correction in yarn prices in Q3FY23. We maintain our BUY recommendation, with Dec-23E TP of Rs440, as we believe earnings have bottomed out.

* Nitin Spinners – The company reported 6% sales growth QoQ due to increased utilization, with a slight improvement in the demand scenario. Correction in domestic cotton price, lower differential between domestic and international cotton, and gradual improvement in the demand scenario point to improving fundamentals for the industry as well as the company. We maintain our BUY rating on the stock, as the improving sector fundamentals and capacity addition of ~40% would lead to re-rating of the stock.

* Gokaldas Exports – Gokaldas posted flat YoY sales for Q3FY23, but the higher EBITDAM resulted in ~7% growth in EBITDA. The impact of the slowdown due to higher inventory at retailers has led to sequential decline in revenue, from Rs6.1bn in Q1FY23 to Rs5.2bn in Q3FY23. We maintain BUY on Gokaldas, with unchanged Dec-23E TP of Rs575/share, based on 18x PER.

* Welspun India – Although its topline stood at Rs19,040mn, down 22% YoY and 11% QoQ, the company registered its first double-digit margin (10.4%) of the year in Q3, on the back of correction in cotton & logistics costs

* Indo Count – – Mgmt anticipates revenue to have bottomed out in Q3 FY23, down 13% YoY and 22% QoQ. Mgmt has brought down its production guidance, from 75mn meters to 73mn meters for FY23; nevertheless, it is optimistic about maintaining current margin level for full-FY23.

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