October 17 2016
INDIA: High cotton prices to affect apparel company margins
Cotton prices increased by 30 per cent year-on-year in Q2FY17 and it is likely to have a negative impact on margins of apparel companies, says a recent report. Prices of cotton went from Rs 95/kg in March-April 2016 to Rs 125-130/kg in September 2016. Vardhman Textiles is the only company in the coverage universe that is likely to report a margin expansion.
Unlike the other apparel companies, Vardhman Textiles buys its yearly cotton requirement in March-April every year. Thus, the company will report a margin expansion of 16 basis point (bps) YoY, says the ICICIdirect.com research. However, EBDITA margins of Arvind, Page Industries, Kewal Kiran and Rupa are likely to decline 70 bps, 108 bps, 84 bps and 100 bps YoY, respectively.
The report predicts EBDITA of its coverage universe to remain flat with a growth of merely 0.2 per cent YoY to Rs 735 crore. Coverage universe profit after tax (PAT) growth including exceptional income would be around 70 per cent YoY. Excluding exceptional income, it will grow by 6 per cent YoY. Coverage universe PAT growth (including exceptional income) is expected to be driven by higher net profit of Vardhman Textiles owing to extraordinary income of Rs 210 crore on stake sale of Vardhman Yarns and Threads.
Cotton Association of India has predicted that cotton output in the country will decrease by close to 10 per cent due to the white-fly attack on the crop in the northern states. However, cotton prices will reduce gradually as the new crop arrives in Q3FY17, says the report.
The new report also states that the revenue growth of apparel companies is likely to be moderate due to subdued consumer behaviour at the retail level. Except for Page Industries and Kewal Kiran, all other companies in the coverage universe are likely to register single digit growth. Page’s revenue growth is expected to be driven by 17.2 per cent YoY volume growth and 5.4 per cent YoY realisation growth. Kewal Kiran, Arvind and Rupa are likely to register YoY revenue growth of 10 per cent, 9 per cent and 7 per cent, respectively.
“In the last two years, Arvind’s brands business has been growing in excess of 20 per cent. We expect the momentum to continue and the brands and retail business to grow 25 per cent YoY due to new store addition and product basket extension. Vardhman Textiles is expected to register a revenue decline of 8.8 per cent YoY on account of sale of stake in Vardhman Yarns and Threads. We expect our overall apparel coverage universe to post YoY revenue growth of 4.2 per cent,” says the report.
India’s textile exports to USA continued their disappointing performance with YTD CY16 textile exports to US declining by about 1 per cent YoY compared to a growth of 8.2 per cent YoY in CY15. However, with government focus on boosting employment generation, it recently provided a financial assistance package for supporting the exports in garmenting sector. (KD)