Even as spinners are facing challenging times on the back of weak exports and slowdown in demand in the domestic market, improved supply of cotton is expected to provide them respite during the second half of this fiscal, according to ICRA in a report.
"The level of global cotton production in this cotton year is estimated to exceed consumption, after two consecutive years of shortfall. The resultant cotton surplus, therefore, will create a downward bias in prices which, besides easing pressure on contribution margins of the spinners, is likely to bring down their working capital requirements," ICRA Senior Vice-President and Group Head, Corporate Sector Ratings, Jayanta Roy said.
This augurs well for the domestic cotton spinning industry, he added.
The rating agency said, India's spinning sector has been witnessing challenges on multiple fronts over the past few quarters.
As per a recent report, while exports continue to fall due to weak demand from one of the key markets, China, domestic demand also slowed down in the first quarter of 2017-18 amid focus on inventory clearance prior to GST implementation, which affected offtake and, hence, production volumes.
ICRA said, however, there has been a 12 per cent increase in sown area in Cotton Year (CY) 2018, driven by firm cotton prices, which made it remunerative for the farmers to choose cotton against competing crops.
The cotton crop output is expected to grow by 5 per cent to 36 million bales in CY2018.
Further, it said, while the cotton-yarn prices were holding firm till August 2017 despite demand-side pressures, the same have corrected by 5 per cent in September 2017 in light of sustained demand-side pressures as well as in anticipation of softening of cotton prices.
This has resulted in a contraction in contribution margins of the spinners during the month, as cotton prices did not correct correspondingly, it added.
"Decline in yarn realisations has preceded a decline in cotton-fibre prices, which has affected contribution margins of spinners in recent weeks and is likely to reflect in second-quarter performance of the spinners.
"However, with further correction in cotton prices expected with the commencement of harvest season in October 2017 onwards, we expect the spinners' profitability to improve during the second half of the current financial year," Roy added.
Cotton stocks in China continued to be higher than historical averages, it said.
As per the estimates, it will take about 2-3 years for excess stocks to reach historical average levels, and therefore, for imports by China to revive, it added.
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