Rising cotton prices are expected to reduce operating margins of spinning companies by 2.5 per cent in 2010-11, Crisil research said in a report.
Cotton prices have surged almost 80 per cent in the last one year and by 65 per cent between October and February as exporters had a deadline till February.
Cotton procurement cost for spinning mills is also expected to move up by 30-35 per cent. Textile manufacturers, however, say their margins are protected as they are in a position to pass on the increasing cost.
“We have procured cotton at low prices and charge our customers according to the current raw material rate. This will, thus, not increase our procurement costs,” said CFO of a leading textile company.
Cotton prices on domestic and international markets are expected to ease taking cues from a fall in global prices of the commodity. Cotton yarn prices may not move up drastically, the report said.
“So far, strong demand growth has enabled spinning companies to pass on the rise in cotton prices to buyers. Cash accruals for players have, therefore, jumped by more than 65 per cent year-on-year in 2010-11. Spinners, however, will not be able to increase prices significantly in the coming months, as downstream fabric and garment companies would find it difficult to get similar increases from their consumers. This would affect profitability,” said Sridhar C, head, Crisil Reasearch.
