The spurt in domestic cotton prices, which have now surpassed international rates, will adversely impact yarn demand and profitability of spinning companies in the second quarter of this fiscal, ratings agency Icra said.
Domestic prices of ginned cotton have increased significantly from Rs 90-92/kg in April 2016 to Rs 122/kg currently.
"The spurt in cotton prices is beyond expectations and points to a severe shortage of cotton in the domestic markets.
"Slower cotton sowing and decline in cotton sown area, apart from cotton stocking by intermediaries, could have led to this sharp rise in prices. However, the recent increase in cotton prices can motivate the farmers further and the cotton sowing area can improve in the coming months," Icra VP, Corporate Sector Ratings, Anil Gupta said.
As per its estimates, in the near term, profitability of spinning industry will be adversely impacted because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports.
With domestic cotton prices higher than international rates, export prospects for the spinning industry also pose a challenge.
"Both the above factors are a challenge for the mills to sell their production and one can see a decline in capacity utilisation and also contribution margins, to prevent inventory build-up," Gupta added.
The spinning players, who may have stocked inventories for four to five months in March 2016, may witness improved profitability as they are likely to gain from higher yarn prices, he said.
However, many spinning companies had expected cotton prices to be stable in CY2016, and the cotton inventory stocking was not beyond two months in March 2016.
In Icra's view, stability in cotton prices is most critical for a profitable textile industry as it minimises the risks of inventory losses and the need for a price hike for the existing and future orders.
