The textile industry had a great run in FY22, which led to many companies in the industry rising multi-fold in just over a year. The industry overall was the biggest gainer over the past year, growing 818.1% till October 12. This is mainly due to both domestic and international demand surging as Covid-19 restrictions were lifted. Apart from rising demand, the China + 1 strategy and the Centre's initiatives also contributed to the uptrend. Given the  demand surge and healthy business conditions for the textile industry, all the companies in focus rallied, with most touching their all-time highs in FY22.

However, during Q1FY23 the price of cotton in India traded at very high levels amid macroeconomic headwinds and high inflation. Bad weather conditions and lower-than-expected crop yields led to a sharp increase in cotton prices. This coupled with high energy and freight costs significantly increased input costs for textile companies. The inflationary environment also led to a fall in export demand for textile products. According to Vardhman Textiles’ management, the export of yarn from India fell by around 80% due to the inflationary environment.

Most textile companies in focus lose share price gains made in FY22

Despite the unfavourable conditions impacting the textile industry over the past few months, the industry still maintains its gains. The growth in the industry has mostly been driven by small-cap companies surging multi-fold over the past year. In comparison, the Nifty 50 has not performed particularly well over the past year, as it declined by 4.8% till October 12, and the largest textile companies also delivered a weak price performance. 

Vardhman Textiles and Welspun India have fallen significantly from their highs, and are trading lower now than they used to a year ago. Raymond leads the pack with year gains of  173.2%. 

None of the companies in focus beat the industry’s growth over the past year

The growth in the industry was mostly driven by a sharp uptrend in the share prices of small-cap and micro-cap companies. The two companies which rose by the greatest margin over the past year are SEL Manufacturing Co and Raj Rayon Industries, which grew by 51,807.4% and 4762.5% till October 12, respectively. Interestingly, both these companies have been loss making companies for many quarters till now.

This massive change in price skewed the overall industry growth rate, given that SEL Manufacturing Co and Raj Rayon Industries have a market capitalisation of approximately Rs 2,400 crore and Rs 1,100 crore, respectively. Among companies in the industry with a greater market capitalisation than Rs 5,000 crore, Raymond saw the biggest jump in share price in the last year followed by Jindal Worldwide.

All textile companies see revenue growth except Welspun India

Raymond leads the pack in revenue growth in Q1FY23 among the companies in focus. Its revenue growth was led by the branded textile, garment, and branded apparel segments, which rose by 129%, 153%, and 251%, respectively. These three segments contributed nearly 66% of the company’s total revenue. The management attributes this growth to robust wedding season demand, higher sales of premium products, resumption of offices, and high demand for garments from the US and European markets.

KPR Mill’s revenue surged this quarter, driven by its garment and sugar segments. Within the company’s textile business, the garment segment’s revenue grew 83% YoY led by higher realisations, strong demand for garments in export markets, and price hikes. The firm’s yarn and fabric segment grew slower at 42% YoY due to a slowdown in demand and higher captive utilisation. 

While Vardhman Textiles’ revenue grew, the management said there was a slowdown in demand due to the high prices of cotton.

Home Textile players like Trident  and Welspun India did not fare as well as the other companies in focus. The two companies were hit by a slowdown in demand, destocking, supply chain issues, and a fall in exports. Trident’s exports in revenue terms declined by 22 percentage points to 51%. Its revenue from the home textiles segment rose slightly by 4.8% YoY, whereas revenue from its paper segment rose 65.9% YoY boosting the overall revenue. Trident’s home textiles segment contributes 81% to the total revenue and the rest comes from its paper segment. 

Welspun India on the other hand, saw its total revenue fall as the home textiles segment declined by 13% YoY and the segment contributed 94.6% to the total revenue. The company’s management attributes the slowdown in export orders to discretionary spending falling due to high inflation, particularly in the US which is a major market for the company.

Profit impacted as prices of key commodities rise

Home textile companies – Trident and Welspun India – also saw a decline in profits, due to very high input costs and lower demand for bedsheets and towels. Welspun India’s management said that the slowdown in demand due to lower discretionary spending came alongside high cotton prices due to elevated energy and freight costs. The combination of low demand and high input costs impacted the profitability of the two companies in Q1FY23.

On the other hand, Raymond was back in black in Q1FY23 on the back of strong demand for its branded textile products, garments, and apparel. The company also focused on cost optimisation which enabled it to remain profitable despite the high raw material costs and supply chain disruptions. KPR Mill’s profit rose as its garments segment benefited from robust export demand, price hikes, and higher realisations. Vardhman Textiles was able to lower its costs as it had low-cost cotton available which offset the impact of high input costs on profitability.

High demand and low crop yield push cotton prices

A combination of high demand and lower-than-expected crop yield resulted in cotton prices shooting up. This also caused procurement issues for textile companies as they expected higher cotton production. 

The situation was further exacerbated by the import duty on cotton the government has put in place in 2021, according to the management of Vardhman Textiles. With import duties in place, it was hard to import cotton in India, which made the shortage of cotton more severe. This was at a time when international cotton prices were also increasing, and the shortage in India led to Indian cotton prices being 15-20% higher than the international cotton price, according to the management of Welspun India. 

In May 2022, international cotton prices jumped 80% YoY to touch a decadal high of $3.61 per kg. During the same period, Indian wholesale cotton prices doubled to Rs 11,359 per quintal. After peaking in May, cotton prices have started to decline since. The wholesale price of Indian cotton declined by 43.4% in August from May, according to Motilal Oswal.

High cotton prices impact EBITDA margins for most textile companies

Among textile companies, Raymond’s EBITDA margins sharply increased as all its segments saw profit growth. The management also attributes the margin growth to its focus on efficient cost management. 

However, all the other companies’ EBITDA margins declined due to high cotton prices and elevated energy and freight costs. Welspun India and Trident’s margins declined the most among companies in focus due to a decline in export orders amid inflationary pressures.

On the bright side, most companies in the industry expect margins to improve from H2FY23 onwards as they expect cotton prices to decline and demand to improve. They are optimistic about cotton prices falling from October onwards with the arrival of fresh cotton, as this year the yield is expected to be higher and of better quality than last year.

Trendlyne’s Forecaster estimates revenue growth in FY23 for most textile companies

The outlook for revenue growth is positive for FY23, as managements expect demand to recover as cotton prices are expected to stabilise in H2FY23. They also expect EBITDA margins to improve from Q3FY23. According to Trendlyne’s Forecaster, KPR Mill will see the biggest rise in revenue among the companies in focus. There is no consensus on Raymond’s revenue growth for FY23 as not enough analysts have covered the stock.

Welspun India expects an increase in the availability of cotton from September onwards, due to the 5-7% higher planting and a higher yield on account of better weather conditions compared to last year. Motilal Oswal expects India’s cotton production to increase 12% YoY, which will lead to better availability of cotton, thus lowering prices. 

The president of the Cotton Association of India, Atul Gantara also echoes this optimism, and expects cotton prices to reduce given the lower rates of December futures of cotton at the intercontinental exchange, according to reports. He sees Indian cotton trading between Rs 62,000-67,000 per candy (356 kg of cotton make up one candy).

All the companies share a positive outlook on the long-term prospects of the textile industry. Other than a drop in cotton prices and a recovery in demand, various government initiatives and the China +1 policy are expected to boost growth. The government signing Free Trade Agreements (FTAs) with Australia and the UAE will improve export opportunities, and the Centre is also in the process of signing FTAs with the UK and the EU. 

Other initiatives like PM MITRA (mega integrated textile region and apparel parks) and PLI (production-linked incentive) schemes are expected to enhance manufacturing capabilities and scalability, thus aiding in the industry’s growth. Overall, the companies in focus believe the worst is past them and expect major industry tailwinds to propel future growth. 

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.