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Weak export, high cotton prices to dent spinners' profitability

The improved domestic mill consumption in China has reduced its dependence upon imports, adversely impacting yarn exports from India.

, ET Bureau|
Updated: Dec 30, 2016, 12.29 PM IST
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While the commencement of the cotton harvest season has been accompanied by a softening of the domestic cotton price, however, it remains 17% higher year-on-year.
While the commencement of the cotton harvest season has been accompanied by a softening of the domestic cotton price, however, it remains 17% higher year-on-year.
HYDERABAD: Weak export demand coupled with high cotton prices are expected to hurt the profitability of domestic cotton spinners, according to rating agency ICRA.

While the commencement of the cotton harvest season has been accompanied by a softening of the domestic cotton price, however, it remains 17% higher year-on-year.

The firmness in cotton prices is driven by a hangover of cotton shortage in India earlier in the year, slower cotton arrivals amid the demonetisation drive and uncertainty related to the extent of improvement in domestic crop-size against a backdrop of superior yields but lower sown area, the note said.

Besides, weakness in export demand poses challenges for the domestic spinning industry. Cotton yarn exports have been under pressure due to lower demand from China amid improved local mill usage.

The cotton yarn export quantity was 23% lower YoY during 7M FY2017. The improved domestic mill consumption in China has reduced its dependence upon imports, adversely impacting yarn exports from India. China’s yarn import quantity declined by 20% (YoY basis) during 7M FY2017 with a steeper decline in imports from India, which have fallen by 54% YoY.

“While the impact of the steep fall in exports has been cushioned by an estimated recovery in domestic consumption from a four-year low growth in FY2016, a sustained revival remains to be seen and will be challenging due to the adverse impact of the demonetisation on disposable incomes and hence consumer spending .” Mr. Roy added.

The growth in spun yarn production slowed further to 1.1% in H1 FY2017 from the slowest growth in four years (3.2%) witnessed in FY2016. In addition, given the increased share of non-cotton yarn, aided by improved competitiveness of PSF vis-à-vis cotton, the cotton yarn production witnessed a 1.8% de-growth in H1 FY2017.

In ICRA’s view, overall yarn demand is unlikely to get immediate support amid low exports and curtailed consumer spending amidst the demonetisation drive. Accordingly, spinners will have to sacrifice capacity utilisation or contribution, and hence profitability is likely to remain under pressure. Apart from profitability pressures, high cotton prices will translate into higher working capital requirements, and hence higher borrowings and weaker credit metrics of players.

While the contribution margin was under pressure during Q2 FY2017, ICRA notes that stronger players had stocked cotton prior to the hike in cotton prices, which supported profitability. However, from Q3 FY2017 onwards, profitability is likely to decline.

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