The performance of domestic cotton spinners is likely to weaken in the current financial year following a brief recovery in FY19 as they are grappling with the twin challenges of weak export demand and uncompetitive cotton prices, investment information firm ICRA said on Monday.
The de-growth in volumes due to lower export demand and a sharper decline in realisations vis-a-vis cotton prices because of higher minimum support price (MSP)-led floor price for cotton are expected to result in a decline in turnover and an estimated 100 to 150 basis points compression in operating profitability of domestic cotton spinners, it said.
Cotton yarn realisations (for the 30s carded yarn) averaged at Rs 212 per kg in July 2019 as compared to Rs 225 per kg in Q1 FY19 and Rs 220 per kg in the previous 12 months. With India exporting roughly one-third of its cotton yarn production every year, trends in export demand play a crucial role in determining the overall performance of the domestic spinning sector.
"Based on emerging trends, we have revised the credit outlook on Indian cotton spinning industry to 'negative' as the profitability and debt coverage metrics are expected to moderate from the current levels," said Jayanta Roy, Senior Vice-President and Group Head of ICRA Corporate Sector Ratings.
"The impact is likely to be more pronounced for leveraged companies, that have undertaken a sizeable debt-funded capital expansion in the recent years and have higher repayments scheduled in the near term," he said in a statement.
Besides uncompetitive cotton prices, other factors which have been affecting cotton yarn exports from India include duty-free access provided by China to Pakistan from July 2019 onwards, continued competitive pressures from nations such as Vietnam, and higher cotton fibre imports by China which is keeping its cotton availability comfortable and cotton fibre prices competitive.
In addition, the imposition of tariffs by the United States on garment exports from China is affecting China's apparel exports, in turn slowing down the demand for cotton yarn.
"The pressure is primarily originating from higher cotton prices in the domestic market, which has made Indian yarn manufacturers uncompetitive in the international markets. As a result, the near-term outlook on Indian cotton yarn exports is quite weak at present," said Roy.
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