Neutral rating on Arvind: SSKI

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Research analyst at SSKI Chirag Shah believes that cotton prices have been moving up but globally cotton prices have moved up by 10 - 15%. Indian cotton prices have moved up by 7 - 8%.

Excerpts from CNBC-TV18's exclusive interview Chirag Shah:

Q: How are you viewing this sector especially Arvind and Aarvee, have they been beaten down too much? Purely on valuations, how are they looking and what's the outlook for the sector?

A: Yes, cotton prices have been moving up but globally cotton prices have moved up by 10 - 15%. Indian cotton prices have moved up by 7 - 8%. Adjusted for contamination, Indian cotton prices are still lower by 3 - 4% compared to international prices.

Looking at segmentwise impact of cotton price rise, I still believe that yarn manufacturers are still not impacted. One, yarn prices have moved up. Second, yarn demands continues to remain very strong. Third, China, which is basically the second largest cotton producer globally, will this year import something like 40% of their requirement from US. So in that sense, yarn margins would remain pretty much stable.

The problem comes for denim manufacturers because denim prices have been moving down very sharply. They are alredy down by 8 - 10% for the export market. Indian domestic prices are still been holding steady. They are down just Rs 2 - 3, this is what I have confirmed from lot of distributors in domestic market. But it is just time before domestic prices would also start falling because Arvind would start selling a larger quantity in the domestic market.

Q: What sort of rating do you have on these denim companies, Aarvee and Arvind? Have you downgraded them and what is your 12 month price target on them?

A: For the last three quarters, we have been having a neutral rating on Arvind. We really don't have a rating on Aarvee.

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