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Facing with weak demand overseas and slow growth in the domestic garment sector, profitability of the Indian spinning industry is likely to stay under pressure in the near term, says rating agency ICRA.
Growth in domestic yarn consumption was the lowest in four years during 2015-16, at 0.8 per cent for cotton spun yarn and 2.5 per cent for total spun yarn. Spun yarn production also remained flat in the first quarter (April-June) of FY17.
“The domestic cotton shortage, subsequent to weak production and higher export, has resulted in a steep increase in domestic prices, to a level higher than abroad. This has adversely impacted the competitiveness of spinners in the export market, as reflected by the 14 per cent decline in export volume in April– July. Given the tepid rise in domestic consumption and weak prospects of textile export, yarn demand is unlikely to get any support. Thus, spinners will need to sacrifice profitability to maintain capacity utilisation,” said Anil Gupta, vice-president at ICRA.
The benchmark Shankar-6 variety of cotton has seen a 24 per cent surge in price in six months, from Rs 9,223 a quintal on April 1 to Rs 11,445 a quintal at present. The price is up on lower output estimates and less carryover stock this season as compared to the previous one.
Despite the good monsoon and high price, cotton sowing is expected to fall for a second year, by 12 per cent in the coming calendar year, following a seven per cent decline this calendar year (to a six-year low). Even a recovery in yield is unlikely to lift production, says ICRA.
Thus, apart from profitability pressure, high cotton prices will translate into higher working capital requirement and, hence, borrowing. So, ICRA has cut the outlook on the cotton spinning industry from stable to negative.
However, some of the stronger entities, which had stocked prior to the increase in cotton prices, might see better profitability driven by inventory gain during the September quarter. Even so, profitability is expected to decline from the December quarter.
Historically, high cotton price has not benefited the spinning industry — it impacts demand, reduces competitiveness, and increases the risk of inventory loss, beside resulting in higher funding requirement. Hence, accuracy in crop production estimates remains crucial for the industry.
