Cotton spinning industry in tailspin: ICRA
ICRA has come out with its report on Cotton spinning industry. According to the research firm the industry is facing a challenging environment yet again due to the steep fall in cotton prices since April 2011 along with rising interest rates.
August 11, 2011 / 16:46 IST
ICRA has come out with its report on Cotton spinning industry. According to the research firm the industry is facing a challenging environment yet again due to the steep fall in cotton prices since April 2011 along with rising interest rates.
After a brief but sharp upturn, the Indian cotton yarn industry is facing a challenging environment yet again. This time, due to the steep fall in cotton prices since April 2011 along with rising interest rates. Recent crash in cotton prices right after the end of peak supplies has questioned the practice of procuring raw material in bulk quantities during the season. During 2010-11, cotton prices more than doubled to Rs 176 per kg in April 2011 from Rs 74 per kg in March 2010 on the back of a combination of robust demand and constrained supply because of unfavourable climatic conditions in main producing countries like China, Pakistan and the United States. Rising yarn prices coupled with utilisation of low-cost inventory procured from October 2009 to March 2010 enabled spinning mills to post an increase in their average operating profit margin to 17.5% in 2010-11 from 14.5% in 2009-10.The buoyancy in profitability was, however, deflated in Q4 of 2010-11 due to the ban on export of cotton yarn which lasted from 15 January 2011 until 31 March 2011. While there was no export of cotton yarn for over two-and-a-half months, the industry continued to produce yarn using high-cost cotton procured during this period in anticipation of strong realisations from the global markets after the removal of the export ban. The pile-up in inventory towards the end of March/April 2011 was also due to subdued demand in the domestic market following closure of dyeing units in Tirupur, which is a leading hub for hosiery exports, and levy of 10% excise duty on branded garments. Currently, spinners are loaded with high-cost cotton procured during the last season and a large stock of finished yarn that is waiting to be picked-up, which is likely to squeeze their profitability over the two-to-three quarters of 2011-12. The rising interest rates in the domestic markets are likely to aggravate the situation further. The highly leveraged capital structure along with rising interest rates exposes the industry to higher risk of defaults.ICRA spokesperson Mr. Rohit Inamdar, Senior Vice President, ICRA, said,
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