Spinning mills have had an extraordinary year this fiscal, getting a higher price for yarn spun from cotton inventories bought at a lower price. But after the windfall, the operating margin of spinning mills are expected to come under pressure next fiscal as they may not be able to pass on the higher cotton cost to fabric and garment makers.

Mr Sunil O. Khandelwal, Chief Financial Officer, Alok Industries, said: “The expected drop in operating margins next fiscal will bring margins of spinning mills back to normal level. Fabric and garment companies are willing to absorb hike commensurate with cotton price.”

Domestic cotton prices, after looking to soften around Rs 56,000 a candy (of 356 kg), are ruling at Rs 60,000-60,500.

Most spinning mills have procured three-fourths of cotton required for next fiscal at a higher price that may average 80 per cent higher at Rs 140 a kg for the remaining period of this cotton season (October-September).

The increase in cotton prices this season will push up spinners' procurement cost by 30-35 per cent for 2011-12 fiscal, said a Crisil report. In contrast, cotton yarn prices will rise about 20 per cent in the same period, with domestic fabric producers likely to resist any sharp spike in prices.

Crisil, therefore, expects the operating margins of spinners to drop 2.5 per cent in 2011-12.

Mr Sridhar C., Head, Crisil Research, said strong demand growth has enabled spinning companies to pass on the increase in cotton price to buyers. Cash accruals for these companies have, therefore, jumped more than 65 per cent year-on-year in 2010-11.

“Spinners, however, will not be able to increase prices significantly in the coming months, as downstream fabric and garment companies would find it difficult to get similar increases from consumers. This would impact profitability of spinners,” he said.

Cotton prices have surged in the global and domestic markets on increased demand from China and cap on Indian cotton exports.

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