The domestic cotton prices expected to decline to Rs 105-110 per kg in cotton season (CS) 2017-18, from Rs 117 per kg in last season, due to 11 per cent increase expected in cotton production, a report said.
"The 11 per cent jump expected in cotton production at 375 lakh bales may bring down cotton prices to Rs 105-110 per kg in cotton season (CS) 2017-18, from Rs 117 per kg in CS 2016-17. The acreage has also risen as farmers have switched back to cotton following the price surge witnessed in the last season," Crisil Research said in its report here.
According to estimates, the planted area under cotton has increased 19 per cent to 123 lakh hectares compared with 103 lakh hectares in CS 2016-17. It is also 7 per cent higher than the 5-year average of 115 lakh hectares.
However, overall yield is expected to fall 7 per cent to 520 kg per hectare due to erratic monsoon rains and anticipated pest-related losses, Crisil said.
A sharp increase in cotton production in CS 2017-18 will be a shot in the arm for spinners in the last two quarters of this fiscal. Also, demand normalisation after demonetisation and GST-led disruptions will improve utilisation.
The rating agency said that the falling cotton prices will also improve prospects for cotton yarn exporters in the second half of this fiscal. India is the largest producer of cotton, which improves competitive advantage of local mills for fibre procurement. Further, rising synthetic fibre prices amid inflationary pressure on crude oil will drive substitution demand towards cotton yarn manufacturers.
The second quarter of fiscal 2018 was the least profitable in five years for cotton yarn mills as their margins touched 10.3 per cent as compared with a peak of 18.8 pe cent in the corresponding quarter of fiscal 2014.
Nearly 70 per cent of the cotton produced in CS 2017-18 are expected to be used in the next financial year by spinners, giving confidence that raw material cost would remain low in fiscal 2019, Crisil said.
This, coupled with stabilising cotton yarn prices amid better demand both in the domestic and export markets, and higher crude oil prices on average compared with the past fiscal will widen the differential between cotton yarn and cotton and support EBITDA margin improvement.
While domestic demand will be supported by a consumption recovery for the Indian economy, a better economic outlook for most textile trade partners and restoration of export incentives, though lower than the pre-GST period, would also support higher growth and firm up yarn prices next fiscal, the report said.
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