"Yarn prices are expected to be range bound given moderate utilization levels and soft cotton prices. Spinning mills that were facing a problem during the first half of FY17 due to rising prices of cotton are soon set to see a U-turn in their fortunes. In the last two months, news of good monsoon, higher acreage under cotton cultivation and better output expected for the 2017-18 season are harbingers of stable, if not higher profitability."

Yarn prices are expected to be range bound given moderate utilization levels and soft cotton prices. Spinning mills that were facing a problem during the first half of FY17 due to rising prices of cotton are soon set to see a U-turn in their fortunes. In the last two months, news of good monsoon, higher acreage under cotton cultivation and better output expected for the 2017-18 season are harbingers of stable, if not higher profitability.

Cotton prices soared from Rs 90 per kg to around Rs 140 per kg from April to November 2016. Lower crop and tight inventory levels fuelled prices in the domestic market. Meanwhile, news of China’s lower stock inventory led to hope that China’s cotton imports will resume again. This too supported the high cotton prices. Spinning mills therefore bore the brunt of the high prices impacting operating margins during the last two quarters.

Yarn prices yet to revive

But softer cotton prices in the last two months bring hope for mills. Experts forecast a 10 per cent increase in acreage in the 2017-18 season after a similar decline in the previous season. Also, international prices are unlikely to firm up given the robust harvest in US and Australia. Domestic prices being linked to global indicators, they should therefore stay soft in the coming months.

The key, however, is for yarn demand to increase. India’s total yarn production declined to a five-year low in FY2017. The demand from mills was weak during 2016 primarily due to a steep decline in cotton yarn exports (due to weak Chinese imports), which comprises a third of the country’s output. Although exports have revived in the last few months, analysts believe that it is insufficient to offset the steep decline earlier.

Mills are also hopeful of higher off take by domestic fabric weavers given the festive season ahead and the pent-up demand following a near freeze in off take due to demonetisation and the uncertainty linked to the new goods and services tax (GST).

In the meantime, there is not much hope for mills in terms of realization on sales as yarn prices are expected to be range bound given moderate utilization levels and soft input (cotton) prices. Icra forecasts profitability of spinners to remain range-bound at a modest level sustained during the past three years.

Meanwhile, although the 5 per cent GST is a welcome step for the cotton textile industry, issues and costs related to compliance may lead to disruption in the supply chain for some more quarters, given the small and medium scale nature of spinners and weavers. A true picture on operating performance would be seen only from the second half of FY2018.