High cotton prices to spoil apparel stocks' outlook in near-term: Analysts

At the bourses, shares of textile stocks like KPR Mills, Welspun India, and Vardhman Textiles have tumbled up to 45 per cent so far this year.

Extreme weather conditions, coupled with lower crop yield, have triggered a sharp rise in cotton prices. So far, in the month of August, the prices of this commodity have surged over 11 per cent to Rs 50,600 per bale from Rs 45,297 earlier.

Domestic spinning mills have either trimmed production or have started to use existing inventories to meet domestic demand. This is due to higher yarn prices, pest infestation and excessive rainfall patterns.

The highest cotton-producing states like Gujarat, Tamil Nadu, Andhra Pradesh and Maharashtra have lowered or ceased their production due to low demand and elevated commodity inflation.

While this may put margin pressure on textile companies in the near term, the ones with steady inventories may benefit from this crisis in the long run, believe analysts. They suggest investors stay cautious on cotton-yarn players and apparel makers if the prices of natural fibre continue to remain in the upward trajectory in the near term.

“Within the textiles industry, the cotton-yarn manufacturers will face the worst wrath due to margin squeeze and lower profitability. Cloth-sellers, too, shall remain under pressure. However, garment manufacturers would be able to pass on the price rise to apparel makers. Hence, we recommend that investors hold stocks of garment manufacturers or exporters like KPR Mills and Gokaldas Exports,” said Deepak Jasani, head of research, HDFC Securities.

At the bourses, shares of textile stocks like KPR Mills, Welspun India and Vardhman Textiles have tumbled up to 45 per cent so far in calendar year 2022.

In comparison, frontline indices Nifty50 and the Sensex climbed over 0.8 per cent each.

Globally, most countries have been hit by an acute cotton production due to dry spells and intense heat waves.

The drought has not spared the US — the world’s largest exporter of cotton. Industry experts estimate production to plummet to 28 per cent, the lowest seen since 2010. Other countries like China, Brazil and Australia, too, remain vulnerable.

Despite the huge cotton shortage across the country, analysts believe India stands to storm through the crisis once prices ease.

Vinit Bolinjkar, head of research, Ventura Securities, is bullish on the long-term prospects of companies with steady inventory like KPR Mills and Vardhman Textiles. Moreover, the finance ministry extended the exemption of Customs duty on raw cotton imports till October 31 as domestic production takes a hit.

The exemption from duty would benefit the textile chain — yarn, fabric, garments and made-ups and provide relief to consumers. Against this backdrop, though minimal meaningful recovery is anticipated for the textiles sector in the near-term due to elevated prices, the long-term bet looks profitable, believe analysts.

Gaurang Shah, investment strategist at Geojit Financial Services, expects value buying to emerge after a fall in the prices of cotton.

“As India has battled high cotton prices in the past, we remain optimistic on the textiles sector in the long haul as well. Hence, we recommend that investors hold on to companies like Vardhman Textiles and Raymond,” he added.