India: Garment, textile makers and spinners to make gains

The ban on cotton exports will act as a double-edged sword for the textile sector. While farmers, exporters and ginners will be an unhappy lot, the move will prove fruitful for garment and textile makers and spinning companies. Apart from increasing availability for the domestic market (and curtailing hoarding in international markets), the ban is likely to bring down cotton prices in the short term, given the increased production. Deepak Prajapati, assistant general manager, CARE Ratings, said: “Cotton prices are expected to be stable, albeit with a moderate decline, and vary between Rs 31,000 and Rs 34,000 per candy (356 kg).”

Subdued global demand, along with higher cotton prices (earlier), have hit spinners and garment makers. Most players witnessed a substantial squeeze in their earnings before interest, taxes, depreciation, and amortisation margins during the nine months to December 31, 2011. A higher debt burden, which remains an acute problem for some companies, especially for spinning firms, also impacted net profit. But the outlook for garment and textile markers as well as spinners is looking better on soft cotton prices. Also, a pick-up in domestic demand in the recent past, an increase in Chinese manufacturing cost and a stable exchange rate are some macro positives for the sector.

In terms of gains for individual companies, the ban will be more beneficial to players who secure raw material on a short-term basis, say analysts. In other words, companies having lower raw material inventories are likely to gain more from the fall in domestic cotton prices. Standalone yarn makers also stand to gain, as analysts expect them to register higher yarn exports.