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Mixed performance

Q3E to see 1.8% YoY revenue growth led by volume recovery…

Expect Elara Textiles universe to post a revenue growth of 1.8% YoY (2.6% QoQ) in Q3FY24E, led by volume recovery on favorable base, which may be offset by price deflation. KPR Mill may lead the pack, with the sharpest increase of 8.4% YoY in revenue. Volume growth may be muted YoY for garment players, whereas spinning volumes may inch up. A sequential improvement in volumes is expected with orders kicking in from export markets, as India cotton prices turn favorable against international prices and domestic demand remains resilient. Q3E EBITDA may grow 19.9% YoY (up 5.1% QoQ), led by favorable cost structure compared with Q3FY23. Q3E APAT may improve 23.8% YoY (up 4.2% QoQ), percolating from EBITDA growth.  

Slight improvement in margin sequentially

In Q3FY24, average cotton prices declined 14.7% YoY and 4.5% QoQ to INR 160/kg and average yarn prices declined 18.1% YoY (flat sequentially). Cotton yarn spread declined 23.5% YoY but rose 11.0% YoY to INR 93/Kg. EBITDA may grow 19.9% YoY on favorable base for spinners. Overall demand recovery was soft on account of continued uncertainty in consumption outlook for the US/EU markets. We expect Vardhman Textiles to post an EBITDA margin of 9%, on improved utilization in both fabric and yarn segments. KPR Mill may witness 20% margin, led by improved revenue mix and favorable input costs.

Textiles: Long-term stance positive; KPR Mill, Arvind, our top picks

Expect mixed performance in Q3 as garment demand was muted, yarn demand improved slightly sequentially on favorable cost structure, and home textiles continued to perform well. Expect Q3 profitability to improve led by slight demand improvement amid sharp correction in cotton prices and Indian cotton turning competitive in the global market. Further, green shoots in export demand and decline in input cost inflation may aid performance. Domestic demand started improving as at end-Q3.

India cotton is trading at a discount to Chinese/US cotton since mid-Q1FY24. Indian companies turned competitive in the global markets led by stable demand scenario and gradually improving cotton price scenario. We prefer integrated firms in the sector, with ability to cushion profitability via aggressive cotton buying at lower prices and currency movement. KPR Mill and Arvind are our top picks in the sector. Key monitorables are cotton price movement, domestic and exports demand, debt reduction and execution/announcement of capex plans.

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