“The domestic cotton shortage, subsequent to weak production and higher exports in CY2016, resulted in a steep increase in domestic prices to a level higher than the international prices. This has adversely impacted the competitiveness of Indian spinners in the export market, as is reflected by the 14% decline in export volumes in 4M FY2017”, says Anil Gupta, VP, Corporate Sector Ratings, ICRA Ltd
Further, despite the good monsoons and high cotton prices, the cotton sowing has been unencouraging, wherein the area under cotton cultivation is expected to decline for the second consecutive year by 12% in CY2017, following 7% decline in CY2016. In ICRA’s view, even a recovery in yields is unlikely to lift production from six year lows witnessed in CY2016.
Given the tight opening stock position and unlikely increase in cotton crop size, the cotton export levels will determine the domestic cotton availability and prices in H1 Fy2018. The pressure on yarn exports and tepid domestic consumption remain a challenge for the Indian spinning industry. The growth in domestic yarn consumption stood at the lowest in four years during FY2016 (0.8% for cotton spun yarn and 2.5% for total spun yarn), and the spun yarn production remained flat in Q1 FY2017 on a YoY basis. Given the tepid domestic consumption and weak prospects of textile exports, yarn demand is unlikely to get any support. Thus, spinners will need to sacrifice profitability to maintain capacity utilisation.
Commenting on the financial health of the Indian Spinning Industry, ICRA says, apart from profitability pressures, high cotton prices will translate into higher working capital requirements and hence borrowings and will translate into weaker credit metrics. ICRA cuts the outlook of Indian cotton spinning industry from stable to negative. While the profitability for the industry is expected to come under pressure, ICRA notes that some of the stronger players, who had stocked cotton prior to increase in cotton prices, may witness improved profitability driven by inventory gains during Q2 FY2017. However, from Q3 FY2017 onwards, the profitability will decline. Historically, high cotton price has not benefited the cotton spinning industry as it impacts demand, reduces competitiveness, and increases risk of inventory losses besides resulting in need for higher funding requirements. Hence, accuracy in crop production estimates leading to stable raw material price remains crucial for the industry.
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