Domestic rating agency Icra today cut the outlook for India's spinning industry to negative from stable on account of high cotton prices, low consumption growth and weak export prospects.
As per the Icra research, cotton availability is likely to remain tight in 2017 and the prices will remain elevated on a year-on-year basis during the second half of 2016-17.
On the financial health of the Indian spinning industry, the rating agency said that apart from profitability pressure, high cotton prices will translate into higher working capital requirements and hence borrowings, and will translate into weaker credit metrics.
"Icra cuts the outlook of Indian cotton spinning industry from stable to negative," the rating agency said.
It noted that while the profitability for the industry is expected to come under pressure, some stronger players who had stocked cotton prior to increase in prices may see improved profitability driven by inventory gains during July-September.
However, Icra predicted that from the third quarter onwards, the profitability will decline.
Historically, high cotton price has not benefited the cotton spinning industry as it impacts demand, reduces competitiveness and increases risk of inventory losses, besides resulting in need for higher funding requirements. Hence, accuracy in crop production estimates leading to stable raw material price remains crucial for the industry.
"The domestic cotton shortage, subsequent to weak production and higher exports in 2016, resulted in a steep increase in domestic prices to a level higher than the international prices," said Anil Gupta, Vice-President, Corporate Sector Ratings, ICRA Ltd.
"This has adversely impacted the competitiveness of Indian spinners in the export market, as is reflected by the 14 per cent decline in export volumes in the first four months (April-July) of 2016-17."
Further, despite the good monsoons and high cotton prices, the cotton sowing has been unencouraging wherein the area under cotton cultivation is expected to decline for the second consecutive year by 12 per cent in 2017, following 7 per cent decline in 2016.
Even a recovery in yields is unlikely to lift production from six-year lows witnessed in 2016, the rating agency said.
Given the tight opening stock position and unlikely rise in crop size, cotton export levels will determine its domestic availability and prices in April-September of 2017-18, it added.
The pressure on yarn exports and tepid domestic consumption remain a challenge for the Indian spinning industry, Icra said.
The growth in domestic yarn consumption hit the lowest in four years during 2015-16 (0.8 per cent for cotton spun yarn and 2.5 per cent for total spun yarn), and the spun yarn production stayed flat in the first quarter 2016-17 on-year.
"Given the tepid domestic consumption and weak prospects of textile exports, yarn demand is unlikely to get any support. Thus, spinners will need to sacrifice profitability to maintain capacity utilisation," Icra said.
"The measures to absorb excess liquidity, first the
temporary CRR hike, and later, the increase in the MSS ceiling, helped to stabilise bond yields," the report said.
With the Monetary Policy Committee (MPC) of the RBI, not only refraining from cutting rates in two consecutive policies, but also changing the policy stance from accommodative to neutral, the 10-year g-sec yield has reverted to the level seen before the note ban.
Srinivasan said despite the hawkish stance of the policy document, the MPC members' verbal comments emphasised that the policy stance is flexible.
This suggests that one last rate cut of 25 basis points to bring the repo rate to 6 per cent should not be ruled out, given the stance that real interest rates may need to be around 125-175 basis points, although the likelihood of further easing appears low, he said.
"A rate cut would dampen bond yields, as well as foreign institutional investors' (FII's) interest in Indian debt, particularly in the light of the expected rate hikes by the US Federal Reserve," he said.
The rating agency said banks interest in investing in bonds is expected to remain high, given subdued demand from the private sector for bank credit, in light of sluggish capital spending and less attractive bank lending rates.
"While we expect bond yields may soften from current levels in the event of a rate cut, higher supply of SDL and corporate bonds may widen their spreads relative to g-sec," he said.
