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Ventura Wealth Clients
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Kotak Mutual Fund
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The world is lamenting over Russia’s invasion of Ukraine. Humanitarian crises, indeed, are always difficult to deal with. Today, we’re writing about a commodity which became one of the reasons for some European nations to invade India and making it a colony. That’s right—we are referring to cotton here!

Cotton is the key raw material for the textiles sector. Historically, India has been a large source of raw material as well as a big market for the finished products. Even today, the textiles sector is export-intensive and creates jobs on a mass scale.

In the present times of Atmanirbhar and China Plus One—a jargon used to indicate an alternative manufacturing source to China—the textiles  sector has attracted the eyes of stock market investors.

While the sector has long-term tailwinds, you can’t take anything for granted. And before you get swayed by any story on Dalal Street, it’s imperative to revisit some basics.

Like in any other commodity-dominated business, purchasing decisions in the textiles sector are as crucial as those pertaining to selling. For natural or blended fibre, cotton prices, demand forecasts, price trends, etc., become crucial factors. They help not just to get the costing of the finished product right, but also to maintain its quality.

India is the largest cotton producer of the world and enjoys the market share of 25%. However, the yield/per hectare in India is approximately 33% lower than the global average of 759 kgs/hectare.

Production and consumption trends have been going neck-and-neck of late. The inventory in the crop year 2021-22 is expected to be at a 3-year low. As a result, the cotton prices have been rising. The duty of 11% on imported cotton makes textiles manufacturers rely chiefly on domestic produce.

Now let’s get into some technical aspects

Maturity and fineness are two important parameters to decide the quality of cotton.  In technical lingo it’s called micronaire. If the cotton is too thin or too thick or has too much of water content, it disturbs the spinning process.

Cotton with a moisture content of less than 8.5% and a micronaire value of 3.8 to 4.2 fetches a premium. So we can assume that for any premium brand, this qualifies as the desired variety of raw material.

In Indian markets, sourcing top-grade cotton which has consistent quality is a tough task. Prices are rising unprecedentedly and there are limits to the extent of price hikes yarn manufacturers can endure.

Who’s to blame?

  • Industry players have often blamed the ‘speculative demand’ for cotton (in the futures market) and hoarding by stockiest for massive rises in the cotton prices.
  • Gaps between estimated production and output also affect the expected price trends.
  • Rising cotton prices push the demand for Man-Made Fibre (MMF) higher and here India is in danger of losing its advantage to China.
  • Recently, the prices of cotton candy (356 Kg) surpassed the Rs 80,000 mark (Rs 38,000/bale). According to industry estimates, a rise of Rs 1,000 in candy prices pushes yarn prices higher by at least about Rs 4 kg.

Besides cotton prices, energy price inflation and transportation costs might inflate the production costs further.

Where are we headed?

First and foremost, if India wants to make its mark in the global exports market, it must ensure raw material availability and quality consistency. Farm outputs are low in India, primarily due to two factors—the rain-fed nature of cotton farms, by and large, and spurious or inferior quality of seeds that offer cost advantages.

However, there’s a silver-lining to every cloud.

When the underlying sentiment denoted by the price trends is so strong, it usually translates into higher plantation in the nearing season. You might want to keep an eye on branded seeds companies and fertilizer and pesticide companies catering to cotton crops. For instance, cotton crop contributes ~35%-40% to the top line of Kaveri Seeds.

You may also like to read: Can fast-food companies make you a quick buck?

Disclaimer

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.

We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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