After witnessing a slump in the early part of the year, cotton prices seems to have stabilized in recent months. This is despite re-emergence of global economic slowdown, credit crunch situation in China and surplus global cotton inventories (approx 9.8mn bales). Contributing factors to prices stability are China ’s reserve program for cotton procurement and expected switching from cotton to high yielding soybeans and corn crops. Overall, lint prices during last couple of months have remained in the range of $0.9-1.10/lb and we expect the same trend to prevail in next couple of months.
Being hurt by inventory losses by carrying high priced cotton lint, the outgoing quarter was one of the toughest for local spinners. This one timer loss severely damaged the gross profitability of the textile sector specially spinners. However stabilization in the commodity prices during ongoing quarter has reduced the risk of another round of inventory losses, thus normalizing the gross margins scenario from here onwards.
Being hurt by inventory losses by carrying high priced cotton lint, the outgoing quarter was one of the toughest for local spinners. This one timer loss severely damaged the gross profitability of the textile sector specially spinners. However stabilization in the commodity prices during ongoing quarter has reduced the risk of another round of inventory losses, thus normalizing the gross margins scenario from here onwards.
Though lately monetary tightening has become a major concern for entire industrial sector in China , but promising export pattern of textile industry, the demand for the crop seems stable. This is evident from the fact that government of China has shown fair consideration to buildup their depleted inventories only a few cents below current price levels. With cotton consumption in China expected to remain firm at 45.5mn bales (39% of global consumption) cotton lint prices are anticipated to stand firm in upcoming months. Moreover, change in supply side dynamics as farmers have started to rate soybeans and corn crop over cotton for next sowing season in China would also stand as a major prices supporter in long run.
Unexpected slow down in volumetric sales in both exports and local markets during FY11 on account of record (post US civil war) cotton prices made spinners to carry forward huge inventories procured at higher prices. This made local spinning sector realize huge inventory losses in 1QFY11, shrinking gross margins to unsustainable levels. However amid stabilization in cotton prices due to aforementioned reasons, we believe spinners would see their gross margins recovering in 2QFY12 and onwards.
With party seems over for the textile sector specially spinning segment as we don’t expect any upside movement in lint prices, we maintain ‘Market-weight’ stance on the Textile sector. Despite having strong support from dividend income and stable operating profits we maintain ‘Hold’ on Nishat Mills as we expect investors would associate higher discount to its portfolio; the major value contributor looking at current market scenario.
With party seems over for the textile sector specially spinning segment as we don’t expect any upside movement in lint prices, we maintain ‘Market-weight’ stance on the Textile sector. Despite having strong support from dividend income and stable operating profits we maintain ‘Hold’ on Nishat Mills as we expect investors would associate higher discount to its portfolio; the major value contributor looking at current market scenario.
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