Textile companies to see revival in profit margins in second quarter

Profit margins of textile companies after remaining under pressure in the first quarter of the current financial year due to traders’ destocking ahead of the GST implementation effective July 1 are expecting a revival in their profit margins in the second quarter (July-September) on a rebound in customer footfalls and restocking by traders following GST compliance.

Not only small players but large ones, too, saw profits being squeezed in the quarter ended June. Primary textile players had stocks returned to them amid fears of the GST’s burden on unsold inventory.

Vardhman Textiles and Welspun Industries witnessed decline in the net profit by 7.19 percent and 38.39 percent, respectively, during April-June. Grasim Industries reported a 9.48 percent rise in its net profit, which according to a Motilal Oswal report, was driven by improvement in realisation from the VST segment. Overall volume growth from the textile business remained flat for Grasim Industries, the report said.

C S Nopany, chairman, Sutlej Textiles and Industries said that following the disruption due to demonetisation, the imminent introduction of the GST dampened demand during this quarter. The implementation of the GST has disrupted the unorganised sector, which has been demanding its removal on fabrics and resolution of the inverted duty structure.

According to analysts, business would become normal with a resumption in demand from the domestic and export markets. Apart from that, cotton prices, which remained elevated last year on low output, are expected to decline this year on expectations of a bumper crop.

The Cotton Advisory Board estimated India’s cotton output at 34.5 million bales in 2016-17. The output is likely to be higher in 2017-18 on an increase in acreage.

Sumant Kumar, an analyst with Emkay Global Financial Services, said in a report that adverse rupee movement against the Chinese yuan is affecting textile players. In addition, high cotton prices have posed a challenge. With supplies likely to rise in the upcoming season, cotton prices are expected to moderate by 5-10 percent.

As per analysts, textile companies with low debt and a better product mix were likely to perform better.