After a bad FY04 (poor operating margins due to high cotton prices), textiles companies are looking forward to grab the opportunities that are expected to come in post quota regime. The table below shows the buying interest witnessed by the textile stocks in last 6 months despite indices losing ground.
Cotton is the most important raw material for textile companies (around 30% to 50% of the sales). Thus, it is very important to take a view on the cotton prices before considering investment in textile stocks. In this article, let's have a look at the cotton production across the globe and analyse the likely impact on the textile sector.
World cotton cultivation area is estimated at 34.5 million hectares for FY05, up 8% from the previous season (Source: US department of agriculture USDA). Supported by other factors like better productivity and favorable monsoon conditions, the overall cotton production of the world is likely to increase by around 10% during FY05. However, the demand is likely to witness just around 1% growth, resulting in an over supply of around 0.8 million tonnes (last year, due to poor crop worldwide, there was a deficit of 0.7 million tonnes resulting into sky-high cotton prices). Coming to India, we are the third largest producer of cotton in world (China is leader followed by US) with around with around 18% of the share. As far as Indian crop for the season is concerned, the cotton arrival is expected to grow from 2.8 million tonnes to more than 3 million tonnes for the year (up 8% YoY).
How do textile companies benefit?
As we have mentioned above, cotton prices to great extent decide the performance of textile companies at the operating level. International cotton prices continued to decline, as the Cotlook-A Index (one of the benchmark indices as far as cotton prices are concerned) has fallen by 24% since the beginning of 2004.
Raymond is planning 1-m pieces of jeans manufacturing capacity, 1-m pieces of trouser capacity and 0.5 m pieces of suit manufacturing capacity at Banglore (operation commenced). With these facilities, the company will be able to become a one stop shop to its international clients. This will help Raymond improve its export potential post 2005. The company is also planning to jack up its denim manufacturing capacity by 10 million metres at a cost of over Rs 1.3 bn.
Denim major, Arvind Mills, one of the biggest denim producers in the world, has recently added 2.4-million ready-to-wear shirt capacity in Bangalore. The company plans to increase its garment manufacturing capacity from the current around 7 m pieces to 14 m pieces by the end of this year.
We would like to conclude by saying that there is a huge opportunity lying ahead for Indian textile manufacturers in post MFA era, as the markets will no longer be restricted. Though softening cotton prices will help companies to improve margins, there will be competition from countries like China, Sri Lanka and Bangladesh. But when it comes to fashion trends, we believe Indian companies will have an advantage. As far as cost competitiveness is concerned, the larger players in the Indian textile sector are well placed to compete.