Domestic apparel firms can absorb higher costs, provided demand recovery sustains
ICICI Securities estimates domestic apparel companies such as Arvind Ltd, Page Industries Ltd, and Rupa and Co. Ltd to register double-digit revenue growth in the June quarter over a year ago
The current market price of cotton is already higher than the minimum support price (MSP) announced by the government. Therefore, the hike in MSP may not have much of an impact immediately for cotton farmers. But the government-determined rate can emerge as a floor price, if the MSP mechanism is implemented well. This may drive up costs of textile and apparel makers over a longer period.
Ratings agency Icra Ltd warns that elevated cotton prices can drive up working capital requirements of textile companies and will “warrant a sustained calibration in pricing for end products”.
This can worsen the scenario for textile exporters, who are on the back foot due to rationalization of export incentives, slow tax refunds under the goods and services tax (GST), and churn in the US, a large market for home textile exporters.
Home textile companies have sufficient cotton inventory till October, providing a cushion from the price increase, points out JM Financial Institutional Securities Ltd. But high prices in the coming season can be a headwind given that US exports are already facing pricing and demand pressures. “Marketplace disruption (online vs. offline) and high cotton prices remain key concerns,” JM Financial said in a note last month.
But everybody is not as precariously placed. Apparel companies in India are on the recovery path, thanks to stabilization of trade channels post- GST-related disruption, ICICI Securities Ltd said in a note. The companies also have high cotton inventories, which should aid profitability in the near term, added the brokerage firm. If the recovery in their business continues, then they will be in a better position to pass on higher costs once they begin to buy raw material at higher rates.
ICICI Securities estimates domestic apparel companies such as Arvind Ltd, Page Industries Ltd, and Rupa and Co. Ltd to register double-digit revenue growth in the June quarter over a year ago. A favourable base is expected to aid Rupa and Co., while Arvind is expected to benefit from healthy growth in brands and retail segment.
On this front, the situation is not very encouraging for home textile exporters. Data from JM Financial and ICICI Securities shows a softening of textile exports to the US in January-April this year. The June quarter results should reflect this. Analysts’ estimates of revenue growth for home textile companies are not yet available.
Of course, both businesses—domestic apparel and textile exporters—have different dynamics. The domestic apparel sector is returning to normalcy after GST disruption. Also, home textile exporters do have a silver lining in the depreciating rupee acting as a cushion against rising cost pressures.
Even so, in a rising raw material-cost environment, sustained demand recovery is crucial to pass on the costs. Companies with more exposure to the domestic market are better placed now. How strong or durable the recovery will be is the question. The June quarter results and management commentary should provide some clarity.
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