With domestic cotton prices exceeding international cotton prices, the profitability of spinning companies in the second quarter of 2016-17 likely to get hit. This would adversely impact the yarn demand and export prospects of the spinning industry, a report of ratings agency, Investment Information and Credit Rating Agency of India (ICRA) said.
Domestic prices of ginned cotton have increased significantly from about Rs 90-92 per kg in April to around Rs 122 per kg now. Slow growth in domestic consumption and stagnation in exports are likely to negatively impact demand and export competitiveness of the Indian yarn, the agency added.
According to Anil Gupta, VP, corporate sector ratings, ICRA, slower cotton sowing and decline in cotton sown area apart from cotton stocking by intermediaries could be the reason that has led to this sharp rise in prices.
As per ICRA estimates, the profitability of spinning industry will be adversely affected because of the price rise as it faces challenges of slow growth in domestic consumption and high reliance on exports. ICRA points out, the stability in cotton prices is most critical for a profitable textile industry as it minimizes the risks of inventory losses and the need for a price hike for the existing and future orders. Gupta further said that both the factors are a challenge for the mills to sell their production. One can also see a decline in capacity utilization and also contribution margins to prevent inventory build-up.
The spinning players, who may have stocked inventories for four to five months from March this year, may witness improved profitability as they are likely to gain from higher yarn prices.
