Cotton spinning mills are poised for a good run ahead. A good global cotton crop, firm yarn prices both at home and overseas, driven by demand from garment manufacturers and a depreciating rupee that leads to revenue accretion, all augur well for the mills.
Since April, international cotton prices are down around 7.3%. Though domestic cotton prices are still higher than international prices, they are unlikely to head further north in the longer term. According to the US department of agriculture, global cotton inventories are expected to reach about 93.8 million bales in the 2013-14 season—9% higher than the year before period. This is largely because China’s pile of cotton inventory is expected to rise to 62% of global stock in the next cotton season. One bale equals 170kg in India and 218kg globally.
Meanwhile, global demand for cotton textiles is expected to look up as the US and Japanese economies improve. Therefore, demand for yarn is expected to rise and may be more pronounced than demand for raw cotton. One reason is that Chinese import of yarn is replacing import of raw cotton as cost of spinning is increasing in China and the quota restrictions make imports of raw cotton less economical compared with yarn. A report by Karvy Stock Broking Ltd points out that China imported 8 million bale-equivalents of yarn in 2012-13, which is twice that of 2010-11. India and China are the key beneficiaries of this. Hence, while yarn prices could increase further, all pointers indicate a stable cotton season.
Spinners like Vardhman Textiles Ltd, Ambika Cotton Mills Ltd and KPR Mill Ltd are leading listed firms who could gain from exports after several dull quarters. Meanwhile, other niche garment makers like Arvind Mills Ltd and Page Industries Ltd could gain from rising revenue and lower raw material prices.
Spinners and textile exporters will, of course, have the advantage of a depreciating rupee that will boost revenues.