Cotton spinners are likely to recover their profits in the March quarter as domestic demand has started showing signs of restoration, said a report.
Even as the cotton prices are expected to remain firm, rating agency Icra in its report said domestic demand has started showing signs of improvement because of transition to GST and changes in export incentive structure subsiding.
"The domestic demand for cotton yarn has shown a good recovery in the recent months, reporting an annual 14 per cent growth during October 2017-January 2018," said Jayanta Roy, senior vice-president and group head, corporate sector ratings, Icra.
Spinners have witnessed a multi-year low profitability in the last two quarters due to demand-side pressures and high cotton fiber prices.
The agency said even though the expectations of a healthy crop remain for calender year (CY) 2018 with an estimated annual growth of 5 per cent, slower pace of arrivals and mounting concerns on fiber quality have encouraged pre-emptive stocking by mills.
"This in turn has prevented the domestic cotton prices from stabilising and the expected rise in the minimum support price (MSP) next year will keep it firm to around Rs 115 per kg," it added.
The price expectations are reinforced further by increasing likelihood of a lower output next year.
After growing at 14 per cent to a five-year high in CY18 supported by improved acreage and yields in all major cotton-producing countries, Icra estimates the global cotton crop to decline by 4 per cent in CY19.
The decline is likely to be driven primarily by lower acreage, as pest attacks reported in some key cotton growing regions this year are expected to deter sowing in those regions next year.
"Even though the crop output in CY19 will continue to be higher than the lows witnessed during CY15 and CY16, it is expected to fall short of consumption. This will result in a decline in cotton stocks to a seven-year low level next year. Correction in stocks is expected to keep the cotton prices firm over the next 12-18 months," said Roy.
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