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Mid-single-digit retail growth has been observed across the US, Europe and the UK on a YTD basis (Apr-Jul), while imports declined by mid- to high-single digits, indicating a limited inventory overhang. If demand remains healthy, we expect imports to rebound as inventory replenishment picks up. Spinning companies are likely to report stronger near-term earnings, supported by healthy yarn spreads. We expect margins to peak in 2QFY27 as the arrival of the new cotton crop from October should improve supply and ease cotton prices. Most large apparel exporters have strong order books and are targeting mid-teen growth in FY27, while elevated domestic cotton prices remain a near-term challenge.

Spinning to deliver robust growth in 2Q

* Cotton spinners are expected to deliver one of its best quarters in recent years, supported by healthy yarn demand, limited capacity additions and stronger buying from China. The combination of higher cotton prices and cotton yarn realizations has improved cotton yarn spreads from ~INR130 per kg in FY26 to INR148 per kg in 1HFY27 (up 14%), while cotton prices increased from INR149 per kg in FY26 to INR180 per kg in 1HFY27, up 20%. We expect yarn spreads to peak in 2QFY27 and then moderate by ~5-10% due to new cotton arrivals. Despite the duty waiver, Indian cotton is ~6-8% above US futures, keeping the domestic cost disadvantage elevated. The industry has sought an extension of the zero-duty cotton import window beyond 31st Oct’26; however, we expect the waiver to lapse as scheduled.

Consolidation to drive volume growth for listed players

* Clothing retail store sales across the US and UK increased by ~5% during AprJul’26. At the same time, apparel and HT imports in the US and UK declined by ~5% and ~4%, respectively. EU retail store sales also grew ~2-3%, while imports declined 13%. Retailers have been selling through inventory without proportionately increasing imports amid inflationary concerns. 2H is seasonally stronger, driven by Thanksgiving, Christmas and other holidayrelated consumption, and so imports of apparel and home textile should improve in the US, EU and the UK. If retail sales maintain their current 2-5% growth trajectory, inventory replenishment should eventually translate into higher imports.

* The Indian textile industry is undergoing a structural consolidation, with global buyers increasingly preferring larger suppliers that can offer scale, compliance, multiple product categories, shorter lead times and integrated sourcing capabilities. Going forward, while overall Indian textile exports may not maintain mid-teen growth, we expect the top 4-5 players to continue delivering mid- to high-teen growth over the next five years, driven by market-share gains and industry consolidation.

India export trends: Upstream momentum ahead of apparel

* India’s apparel and home textile exports declined 7% YoY during Apr-Jul’26, led by an 11% decline in apparel exports, while home textiles grew 2%. The weakness in apparel was broad-based across key markets, with India’s apparel exports to the US and EU declining 21% and 22%, respectively, reflecting subdued retailer inventory levels and a seasonally stronger 2H ahead. In contrast, upstream textile exports have shown stronger momentum, with yarn and fabric exports delivering high-single-digit growth during the period. This trend strengthened further in August, with MMF yarn, fabrics and made-ups exports rising 20% YoY, while apparel and home textile exports remained broadly flat. We expect that upstream players could see a faster improvement in export volumes than downstream apparel exporters.

Outlook and valuation

* The textile sector has outperformed the broader market in the past six months, and we expect industry demand to grow in the mid-teens for the full year, supported by a favorable low base. Key monitorables include cotton prices, government export incentives, freight and fuel costs, the deadline for duty-free cotton imports, and incremental order flows from the US and Europe.

* Historically, our textile coverage universe has traded at a 10-year mean (30% premium) valuation of 24x P/E and 14x EV/EBITDA, despite revenue, EBITDA and PAT growth of only 6%, 4% and 3%, respectively. With improved growth visibility, we expect our coverage universe to deliver a CAGR of 14% in revenue, 27% in EBITDA and 38% in PAT over FY26-28E.

* Within our coverage, we prefer Gokaldas Exports, Pearl Global & Arvind in apparel, and Indo Count in home textiles. While we remain positive on the sector's long-term fundamentals, we expect the broader textile space to remain range-bound in the near term, with performance likely to remain stock-specific. We see scope for renewed sector momentum once the IndiaEU FTA is finalized, given the potential improvement in India's export competitiveness and market access.

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