Textile Sector

Textile firms may not be immediately able to take advantage of the fall in cotton prices as most of them are under pressure to dispose off existing inventory bought at higher rates, said industry experts. In the past three months, cotton prices (Shankar-6 variety) have fallen by about 32%.

Currently, the Shankar-6 variety is trading at about Rs 114 per kg, according to Textile Corporation of India. The inventory pile up will force companies to extend end-of-sale period and give further discounts, experts said. Companies may increase discount to 50-60% from 30-40% in a bid to clear off their inventory. Thus, the June 2012 quarter would be a subdued one for textile companies with slow growth in sales and net profit.

Textile companies would be able to take optimum advantage of the fall in cotton prices only from the beginning of the December quarter, experts said.

Currently, there are about 25-30 lakh bales of cotton in the country. Forward prices of cotton are lower than spot rates on NYMEX, an indication of further fall in prices. Also, crop size of cotton this season is bigger than the previous season. There is a difference of 20% in spot and forward prices of cotton on NYMEX.
 
These factors indicate that there is still scope for further decline in cotton prices in the coming months. While a few companies, which have three to four months of order book, are accumulating cotton prices at the current market prices, most companies, especially fabric and garment manufacturers are grappling with overstock situation.


This is the right time for investors buy into textile stocks, experts said. Once demand picks up from the beginning of the December quarter, orders would be placed from buyers (fabric and garment manufacturers) to suppliers (spinning and trading firms). This would generate overall interest across the stocks of textile companies.

Source - Economic Times