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TEXTILES: Macro headwinds to keep near-term demand muted for Home textiles

TEXTILES: Macro headwinds to keep near-term demand muted for Home textiles

We have analyzed the performance of key Textile players in 1QFY23 and highlighted the key trends in the sector.

• Sluggish demand, destocking, a higher inflationary environment, and supply-chain issues continue to hamper margin.
• Cotton prices touched a record high in 1QFY23, but have cooled significantly since then. Companies expect prices to stabilize with the onset of the new cotton season in Oct’22.
• USDA’s cotton report in Aug’22 has predicted a global production for the upcoming season at 117m bales (down by 3.1m bales from its Jul’22 estimate). It has raised its cotton season 2022-23 average farm price forecast to 97 cents per pound in Aug’22 from 95 cents per pound in Jul’22.
• KPR/VTEX has outperformed among other Textile players, with an EBIDTA growth of 64%/10% YoY.
• The mid to long-term outlook remains intact due to various government initiatives and higher export opportunities with the signing of Free Trade Agreements (FTA) between India and the UK and a few more in the pipeline.

Lower volumes and rising input cost further hamper industry margin

• The Home Textile industry continues to face several headwinds in the form of sluggish demand, destocking, higher inflationary environment, supply-chain issues, and geopolitical concerns resulting in margin pressures.
• Aggregate Textile margin declined by 720bp YoY to ~16% on account of an increase in cotton prices and lower volumes in 1QFY23.
• While there are significant headwinds in the near term, a downward trend in cotton prices, easing of the supply chain, and measures taken by government to tackle inflation suggests a much better 2HFY23 for the industry. Further, companies expect to reduce their inventory backlog in the forthcoming holiday season.
• Managements remain positive on the demand scenario in the mid to long run, given the government's strong focus on the industry, as reflected by its various initiatives, coupled with export opportunities on account of the FTA signed by India with nations such as Australia and the UAE. An FTA with the UK is expected to be finalized by the end of Dec'22. Discussions on a FTA with the EU began in Jun'22. Such FTAs, along with the government's steps to boost India's Textile exports, reflects positively on the long-term outlook for the industry.

Global Textile market dynamics

• As per data from OTEXA, India's market share in US Cotton Sheets imports fell to 56% in 1QFY23 from 63% in 1QFY22, whereas China/Pakistan gained a market share of ~1%/~5%. In the Terry Towels segment, India's share has fallen to 39% in 1QFY23 (v/s 45% in 1QFY22), China's share has remained constant at 20%, while that of Pakistan has improved by 200bp (refer Exhibit 14 and 15).
• Depreciation in the USD:PKR (refer Exhibit 11) helped Pakistan gain market share in the US and Europe as buyers see better pricing for its products. The USD:PKR depreciated by 47% as against a 7% depreciation in the USD:INR from Jul'21 to Jul'22.
• International players are looking for a stable supply source as the economy of other supplier nations seems weak. India will be the prime beneficiary of this, as it is the largest producer of cotton and a few other fibers.
• Cooling down of cotton prices: As per World Bank, the international price of cotton grew 80% YoY to touch a peak of USD3.6/kg in May'22. However, it declined by 20% from its peak to USD2.9/kg in Jul'22. Similarly, Indian wholesale cotton prices doubled on a YoY basis to INR11,359 per quintal in May'22, but fell 43% to INR6,428 per quintal in Aug'22. (refer Exhibit 18 and 19).
• At present, cotton prices remain volatile. However, managements expect it to stabilize after the upcoming cotton season starting from Oct'22.
• As per the USDA report on cotton in Aug'22, global production is lower by 3.1m bales to 117m bales, with the decline attributed to the US. India's cotton production in the upcoming season is expected to grow by 12% YoY to 27.5m bales. The USDA has increased its cotton season 2022-23 average farm price forecast to 97 cents per pound in Aug'22 from 95 cents per pound in Jul'22.