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The Indian cotton-yarn industry faces a ‘challenging environment' yet again as cotton prices continue the slide that began after April 2011 and interest rates rise, said credit rating agency ICRA Ltd.
The recent crash in cotton prices right after the end of peak-supplies season has raised questions on the practice of procuring raw material in bulk during the period, an ICRA statement has said. During 2010-11, cotton prices more than doubled to Rs 176 a kg in April 2011 from Rs 74 a kg in March 2010 on the back of robust demand because of unfavourable weather in main producing countries, like China, Pakistan and the US, and constrained supply.
Rising yarn prices coupled with low cost of stocks procured from October 2009 to March 2010 had enabled spinning mills to increase average operating profit margins to 17.5 per cent in 2010-11 from 14.5 per cent in 2009-10. Profits, however, dropped in the fourth quarter of 2010-11 after exports of cotton yarn were banned from January 15 to March 31 this year. While there was no export of cotton yarn for over two and a half months, the industry continued to produce yarn using costly cotton procured during this period in anticipation of strong realisations from global markets after the export ban was removed.
Stocks were also piled up during March-April 2011 as demand weakened in the domestic market following closure of dyeing units in Tirupur, a hub for hosiery exports, and a 10 per cent excise duty was levied on branded garments. Currently, spinners are loaded with costly cotton procured during the last season and a large stock of finished yarn that is waiting to be picked up: both are likely to squeeze their profitability over the next two to three quarters.
No improvement
Rising interest rates are likely to aggravate the situation. A highly leveraged capital structure along with rising interest rates exposes the industry to higher risk of defaults. Mr Rohit Inamdar, Senior Vice-President, ICRA, said spinners may find it difficult to recover costs in the second quarter of 2011-12, as yarn would be produced utilising costly cotton procured from October 2010 to March 2011. To sustain a healthy balance sheet, gradual improvement in the spread between yarn and cotton prices and optimum capacity utilisation will be critical for cotton-spinning mills in the short to medium term.
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