Textile firms grapple with losses, default on loans

Written by Neha Pal | Neha Pal | New Delhi | Updated: Sep 30 2011, 07:36am hrs
More than 60 textile companies, including biggies such as Vardhaman, Raymonds, Lakshmi Mills, Nahar Mills, have reported net loss for the first time in the wake of fall in cotton prices and sluggish demand in domestic as well as global markets. Whats worse, they dont expect the situation to be any better this quarter either.

The number of companies defaulting in payments has gone up and are in talks with banks for restructuring their loans. Textile companies and Confederation of Indian Textile Industry (CITI) are in talks with VG Kannan, CGM, State Bank of India (SBI), TCA Ranganathan, CMD, Exim Bank and RM Malla, chairman, IDBI bank for restructuring of loans, said a press note by CITI.

SP Oswal, chairman of Vardhman Group of Companies, told FE, The number of companies defaulting in making payments to banks has gone up. The ban (on export of) cotton yarn wasnt the right step. There has been an erosion in value due to the accumulated stock.

According to textile players, the $62-billion (R2.75-lakh crore) Indian textile industry is in deep crisis and needs an immediate relief from the government.

Mukund Choudhary, managing director, Spentex Industries, said, Spinning mills are suffering huge losses due to lack of demand, coupled with governments flawed policies.

According to Dinesh Oswal, MD, Nahar Spinning Mills, the fluctuation in cotton prices from R62,000 to R38,000 has resulted in huge stocks lying unsold with the textile units, prompting them to sell at a loss.

Shishir Jaipuria, president, CITI, said that efforts for reviving the markets for textile products have to start with encouraging higher consumption of fibres. For this, he said, the working capital position of textile units has to improve substantially in terms of availability and cost.

Some adjustments will be necessary on the repayment of term loans by units in all segments of the industry in order to avoid NPAs, said Jaipuria.

CITI has also requested for a moratorium for repayment of loans and interest, conversion of eroded working capital into working capital term loans (WCTLs), and relaxation in margin money and interest rate for working capital for purchase of cotton.

A delegation led by DK Nair, secretary general, CITI, recently met Anand Sinha, deputy governor, Reserve Bank of India and apprised him of the crisis in the industry and the need for a relief package.

With losses amounting to over R11,000 crore, the working capital of textile units has been eroded significantly and they are not able to meet their loan repayment obligations, said Nair.

CITI has also sent a representation to MD Mallya, chairman of Indian Banks Association, and it is understood that IBA has already circulated this representation to various banks, said Nair.

Cotton prices went down from R63,000 in March to R32,000 in July. At present, they are hovering between R39,000 and R40,000. Vardhman Textiles reported net loss of R43.08 crore in Q1 June 2011 as against a net profit of R78.72 crore in Q1 June 2010. Cotton prices in the domestic market had increased from R35,000 per candy (356 kg) to R62,500 between October 2010 and March 2011.

A premature announcement of cotton exports and lower stock- to-use ratio pushed up the domestic prices, in addition to unfavourable global trends. Experts say international and domestic cotton prices crashed from April 2011 and, within three months, domestic cotton prices declined to R32,000 per candy.

Mills normally stock 3-4 months requirements of cotton. The sudden fluctuation in cotton prices led to around 65 lakh bales of high cost cotton getting stuck with the mills and the losses on account of their devaluation are estimated at around R6,000 crore. Similar trends occurred in man-made fibres leading, to a further loss of R500 crore to spinners, raising the loss of the spinning industry to R6,500 crore on raw material stocks alone.