Volatility in six months distorted business strategy, margins to improve post March quarter
Synthetic textile manufacturers are set to see their profit margins improve in the January–March quarter, due to a sharp fall in the price of crude oil, the key raw material used extensively to produce industrial inputs like man-made fibre, yarn, fabric and textiles.
Brent crude oil prices have risen by 22.5 per cent to $86 a barrel in October from the level of $66.72 a barrel in March. Brent has declined by 37 per cent from its peak to stabilise at this year’s low of around $60 a barrel in December, resulting in huge volatility following political instability in Saudi Arabia and a cut in output from Opec members. Experts believe that the volatility has disrupted the business strategy of synthetic textile makers more than any other factor, including the ongoing working capital squeeze, resulting in weak financial performance across the sector the past few quarters. But the profit margins are set to begin improving from the later part of March 2019 quarter with its full reflection June quarter onwards.
“Crude oil prices are back to the level from where they started moving up a few months ago. In between, they went up by around 35 per cent, which damaged the industry in terms of business strategy. With crude prices at normal levels, things are gradually stabilising. High crude oil prices would have hurt the synthetic textile business badly. At current prices, however, things have started stabilising with its impact in January–March quarter onwards,” said O P Lohia, Managing Director, Indo Rama Synthetics (India) Ltd.
Volatility in crude has impacted the financial performance of synthetic textile manufacturers in the last two quarters of the current financial year. Indo Rama, for example, posted a net loss of Rs 326.20 million on a total income of Rs 3,955.9 million in the September quarter. The company has been incurring losses for the several quarters in a row.
Similarly, JBF Industries posted losses of Rs 495.7 million and Rs 4,323.5 million in the June and September quarters, respectively. “Crude oil prices have been increasing consistently over the last few months. In addition, the rupee has been depreciating rather rapidly. Both these factors pose a double whammy for fuel inflation in India,” said Madan Sabnavis, Chief Economist, Care Ratings.
While the increase in crude prices tends to affect fuel prices in India, rupee depreciation against the dollar also exerts pressure on these prices. Thus, there is a two-fold impact on domestic fuel prices.
Crude oil is the major raw material for synthetic textile manufacturing. Prices of man-made fibre (MMF), yarn and fabric move in tandem with the movement in crude prices. While upsurge in crude impacts synthetic textile inputs with a lag of a month or even more, its decline affects demands as consumers await a price cut of final products.