Cotton Shortage Pays Off

Updated: Dec 22 2002, 05:30am hrs
Indo Rama Synthetics (IRS) is increasing its polyester staple fibre production capacity to 5,00,00 tonne per annum (tpa) from 3,00,00 tpa. The project scheduled to go on stream by the first half of 2004 involves an investment of around Rs 500 crore.

Poor cotton production has rubbed off well on IRS performance for the quarter to September 2002. Cotton production during the Kharif season fell a hefty 24 per cent to 89 lakh bales from 117 lakh bales in the previous Kharif season.

Higher cost of cotton has resulted in synthetic yarn being substituted for the former. According to available data, the output of cotton yarn fell by around 3 per cent during April-August 02 over comparable period of last year. In contrast, production of synthetic yarn rose by around seven per cent.

Hence, IRS posted a hefty 41 per cent growth in revenue to Rs 555 crore for the quarter to September. In IRS Rs 1,909 crore sales income in the year to March 2002, polyester staple fibre and partially oriented yarn, its main products, contributed 38 and 29 per cent, respectively.

Operating expenditure during the quarter to September 2002 was up 37 per cent to Rs 373 crore. Hence, operating profit went up by 31 per cent to Rs 100 crore. Interest was 43 per cent lower to Rs 16 crore. As part of restructuring exercise IRS repaid Rs 189 crore high cost debt in the year to March 2002.

Lower interest has helped net profit to soar by 163 per cent to Rs 34 crore. However, despite this steep rise the net profit margin stood at seven per cent. While raw material costs have gone up in sync with income, rising crude oil prices could put pressure on margins unless the additional cost is passed on to the consumer. Crude oil price in New York has risen 12 per cent this month to more than $30 a barrel. Removal of quota restrictions by developed countries on garment exports post-WTO 2005 may enhance the prospects of the synthetic yarn industry. Hence, IRS will benefit from its expansion.

Yet, a stronger rupee may reduce competitiveness of Indian exporters. The rupee has appreciated from around Rs 49.05/$ in May 2002 to around Rs 48/$ currently. Experts expect the rupee to touch Rs 47 against the dollar in the near future. As a result, other countries such as China, Bangladesh, etc may nibble away at Indias share in the garment exports market.

IRS may also suffer indirectly from low cost dumping of manufactured cloth from countries such as South Korea. Indian consumers prefer imported cloth to Indian because of competitive cost and quality. Hence, Indian cloth manufacturers will have to live up to consumers expectations to be successful. Only then will IRS be able to make the most out of its expansion, as domestic offtake accounts for around 90 per cent of its total revenue. The companys restructuring exercise of demerging its spinning division into a subsidiary will also help focus attention.