Q2 may be worst quarter for textile firms; Elara prefers these 3 stocks amid gloom

Elara Securities is of the view that textile companies in India are likely to log the worst second quarter with sales seen to rise by just 4.5% YoY. This is because cotton prices have logged a 23.7% YoY increase in prices. Also, volume growth shall remain under pressure as global retailers have resorted to order cuts and there is inventory constraint.

Unfavourable cost structure

The domestic brokerage said during the September quarter of FY23, cotton as well as yarn prices climbed over 60% and 23%, respectively, YoY. Also, the brokerage emphasised that players in the industry weren’t able to transmit the high cost to customers across the value chain as Indian cotton was expensive compared to global variants.

The brokerage sees pressure across the yarn, fabric, garment, and home textile segments, led by lower utilisation and an unfavourable cost structure.

Maintaining a cautious stance, the brokerage said owing to high-price cotton inventory, muted exports demand as well as input cost inflation not being absorbed, it sees textile companies to report the weakest quarter.

Nonetheless, the brokerage forecasted the second half of FY23 to be the recovery period for textile majors as cotton prices begin to soften from October with new arrivals. “The premium of India cotton to international prices has reduced meaningfully and is likely to revert to a discount as arrivals gain pace. We expect H2FY23 to be a recovery period for India’s textile firms as cost starts to revert to adequate levels and companies become competitive in the global markets,” added the brokerage.

Also, the brokerage sees US retailers’ inventory to come down with increased efforts through deep discounting as well as festival sales that shall offer a boost to India demand.

Amid such an environment, the brokerage prefers integrated players within the space that can protect their profitability despite currency headwinds and adverse cotton prices, including KPR Mill, Vardhman Textiles and Arvind.

However, the factors to keep a track on include cotton prices, domestic and foreign demands, capex plans and debt structure.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)