The cotton yarn industry is pinning its hopes on a fall in raw material (cotton) prices, after having had its margins squeezed in the past couple of quarters owing to dwindling yarn exports and excess spinning capacity.
According to cotton yarn spinners, margins were hit when the price of cotton went up, leading to lower demand from fabric and garment manufacturers, as well as dwindling yarn exports.
Spinners are hoping that margins will improve in the last quarter of the current fiscal year on the back of an uptick in demand and improved yarn exports.
However, in the interim, the industry is also expected to see a bumper crop, which could bring down cotton prices to some extent.“Raw materials have been high whereas the forward integration value chain has seen sluggish demand.
Hence, margins have been squeezed for cotton spinners,” said Jyotiprasad Chiripal, director at Chiripal Group.
Chiripal said margins had fallen 7-10 per cent recently.
According to CRISIL, margins fell to a 20-quarter low in the second quarter of 2017-18.“The second quarter of fiscal 2018 was the least profitable in five years for spinners, or cotton yarn mills. Margins touched 10.3 per cent, compared with a peak of 18.8 per cent in the corresponding quarter of fiscal 2014,” CRISIL stated in its report recently.
According to CRISIL, among other issues, disruptions stemming from the roll-out of the goods and services tax took a toll on margins.“As such, excess spinning capacity in the past two years (2.5 million spindles added over fiscal years 2016 and 2017) anticipation of expiring textiles policies in Maharashtra and Gujarat had affected the pricing flexibility of mills. Further, a decline in yarn exports, induced by reduced sourcing from China (accounting for 36 per cent of India’s exports), also impacted the margins,” CRISIL said.
Spinning units such as those of Chiripal Group and Balkrishna Textiles are hoping that increased arrivals might bring down cotton prices.
Crisil has pointed towards a sharp increase in cotton production, expected at 37.5 million bales, in cotton season (CS) 2017-18 which would be a shot in the arm for spinners in the last two quarters of this fiscal year.
Crisil says it could “thwart further drop in margins … Also, demand normalisation after demonetisation and goods and services tax- or GST-led disruptions would improve utilisation”.
However, the research firm is of the view that the Ebitda (earnings before interest, taxation, depreciation, and amortisation) margin profile is different for large organised players owing to efficient procurement practices as well as benefits accruing from economies of scale.