Better realisations help larger denim makers tide over cotton blues

Raw cotton prices have more than doubled since mid-2020, leading to consolidation with the larger players banking on international business

Listed Gujarat-based denim majors such as Arvind, Nandan Denim and Jindal Worldwide have benefited from healthy exports and consolidation in the domestic market to negate the pressure from skyrocketing input costs, particularly cotton prices.

Surging cotton prices, coupled with other raw materials, have meant that input costs have gone up by 30 per cent.

Raw cotton prices have more than doubled from Rs 35,000 per candy of 356 kg to over Rs 75,000 per candy now since mid-2020. With the denim industry consuming at least 10 per cent of the country’s cotton, the rise in prices has impacted all kinds of players.

But while this has led to consolidation of the industry with several unorganised domestic market-focused players fading away, the larger players have either enhanced their exports or continued to depend on international business to tide over the rising costs.

One of the reasons for such companies to post better realisations — despite rising costs and headwinds of the Covid-19 pandemic — has been the ability to pass on the burden to their international clients.

“Over the last three years, our exports business has grown from zero to around Rs 400-500 crore on an annual basis. We now export to 26-28 countries and are one of the leading denim makers working directly or indirectly with international brands,” said Gaurav Davda, head-Corporate Finance & Strategic Initiatives, Jindal Worldwide Ltd, a leading denim manufacturer with an annual capacity of over 140 million metres.

“Given the cotton price hike, denim makers like us should have been impacted but we have been able pass on the burden to these brands who have then passed it on to end users,” Davda added.

Similarly, Nandan Denim Ltd (NDL) registered a 546 per cent jump in its net profit to Rs 19.72 crore in the third quarter ended December 31, 2021. The company’s net profit for the third quarter ended December 31, 2020, was Rs 3.05 crore.

Profit after tax (PAT) margins for Q3 FY22 stood at 3.38 per cent against 0.98 per cent in Q3 FY21, which NDL attributed to an increase in operating margins coupled with decline in depreciation.

According to Managing Director Jyotiprasad Chiripal, the figures were achieved on the back of an increase in capacity utilisation of denim and shirting division combined with rationalisation of cost that helped NDL sustain operating margins.

On the other hand, Arvind Limited has seen price realisations in denim go up by 23 per cent on a year-on-year (YoY) basis from Rs 183 per metre in Q3 of 2020-21 to Rs 226 per metre in Q3 of FY 2021-22. Similarly, denim volumes have grown by 43 per cent to over 25 million metres, resulting in a 71 per cent jump YoY in revenues from Rs 336 crore last year to Rs 576 crore this year in the third quarter.

According to Arvind Limited, too, cotton prices rose sharply and other input costs remained high in the quarter, but these were mostly offset by improved price realisation and higher efficiencies.

Davda said that organised large denim players such as Jindal Worldwide will continue to focus on exports, where order books and payment cycles are more reliable even as the domestic market recovers.

“The international markets also give us the convenience of hedging cotton prices. However, going forward, cotton prices are likely to stabilise even as cotton acreage increases as the economy opens up after the third wave of the pandemic,” he added.